The West Bengal bench of the Authority for Advance Ruling ( AAR ) observed that Input Tax Credit ( ITC ) admissible on goods purchased from outsourced vendors for Sale and buy back transactions.
The applicant was stated to be engaged in the business of trading of footwear in the state of West Bengal in the brand name of ‘Paragon’. The applicant intends to manufacture footwear through independent outsource units under sale and buyback model where raw materials for production will be sold by the applicant to the outsourced vendors and the applicant will buy back the manufactured goods from the said vendors. The applicant expresses its willingness to settle these mutual debts through book adjustments and the net dues through bank transfer
The applicant submitted that in the proposed ‘sale and buyback model, the raw materials required for manufacturing of footwear will be supplied first by the applicant to the outsourced vendors against the issue of tax invoice. The vendors will manufacture footwear using the inputs received from the applicant along with other materials as may be purchased from other suppliers. Thereafter the finished goods, footwear will be supplied by the vendors to the applicant for which the vendors will also issue tax invoices. So, the business model will involve two distinct supplies. The first supply was to be made by the applicant to the outsourced vendors and the second supply will be made by the vendors to the applicant
The applicant submitted that payment through books of accounts was a prevalent commercial practice in the market. Banking on the para 42 of Indian Accounting Standard 32, the applicant states that a financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity (a) currently has a legally enforceable right to set off the recognized amounts; and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
The bench observed that the applicant intends to enter into agreements with different vendors to whom he outsources the process of manufacturing of footwear/parts of footwear. In this process, applicants procure raw materials and supplies to those outsourced vendors raising tax invoices. In return, vendors make outward supplies of finished goods to applicants for which payment is settled through book adjustment against debt created on the buyback model. In this proposed scenario, the applicant plays as supplier while supplying raw materials and emerges as recipient when purchasing finished goods from those outsourced vendors.
The bench contended that the term ‘consideration’ has been defined in clause (31) of section 2 of the GST Act in an inclusive manner that extends the scope and range for mode of payment. Further, as per the said definition, it was immaterial whether the payment is made by the recipient or by any other person. Further, when there was barter of goods or services, the same activity constitutes supply as well as a consideration. For example, when a barber cuts hair in exchange for a painting, hair cut was a supply of services by the barber. It was a consideration for the painting received. Similarly, supply of painting is supply by painter and the painting was the consideration for hair cut
Therefore it was held that settlement of mutual debts through book adjustment was a valid mode of payment under the GST Act. Recipients can pay the supplier by way of setting book debt since the provision of the Act has not put any restriction in this regard. Therefore, claiming credit of input tax cannot be denied on the sole ground that consideration was paid through book adjustment.
The two member bench of the tribunal comprising Dr Tanisha Dutta ( member ) and Joy Jit Banik ( member ) concluded that in case of sale and buyback transactions, the input tax credit was admissible in respect of goods purchased from outsourced vendors, when payment was settled through book adjustment against the debt created on outward supplies to those vendors.
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