Payment of Net Receivables by One GSTIN for Another GSTIN of Same Company is Not Supply: ITC can be Claimed If Done through Book Adjustment, AAR Rules in favour of Malabar Gold [Read Order]

The Kerala Authority of Advance Ruling (AAR), Thiruvananthapuram has held that the payment of net receivables by one Goods and Services Tax Identification Number (GSTIN) for another GSTIN of the same Company is not a Supply and the corresponding legitimate Input Tax Credit (ITC) can be claimed even if the payment is done through Book Adjustment.

The net off of receivables between different GSTINs within the same company and adjusting payments through book entries are deemed valid forms of payment.

It was clarified that the consideration through Book Adjustment Entries is a valid form of payment and Eligible for the legitimate ITC.

Additionally, such transactions do not qualify as “Supplies” under the Goods and Services Tax (GST) regime, except in specific outlined scenarios.

The applicant, M/s. Malabar Gold Private Limited, a jewellery retailer sought an advance ruling regarding the netting off of receivables between different GSTINs within the same company and whether such adjustments constitute a supply.

The applicant is engaged in various transactions, such as transferring gold bars to jewel makers and purchasing ornaments from them, where the value of gold bars is offset against the making charges. Similar adjustments are also made for the purchase of bullion, goods, and services from different vendors and for settling franchise fees.

The applicant argued that each Goods and Services Tax Identification Number (GSTIN) should be treated as a distinct entity under GST law and emphasized that payment made by one GSTIN on behalf of another should not be considered a supply as these transactions involve only the transfer of money and do not fall within the ambit and definition of goods or services.

The applicant contended that book adjustments and netting off receivables with payables fulfil the compliance requirements of Section 16(4) of the CGST Act, 2017.

The applicant emphasized that payment can be made by any person other than the recipient, and the CGST Act does not restrict payment to be made through cash, cheque, or online banking.

The applicant also referred to the Accounting Standards that allow for the offsetting of financial assets and liabilities when there is a legally enforceable right and intention to settle on a net basis.

The authority held that settling mutual debts through book adjustment is a valid mode of payment that satisfies the requirements of availing ITC under Section 16(2) of the CGST Act as well arguing that the GST Act does not prohibit the availment of ITC when consideration is paid through book adjustment.

The AAR held that net off of receivables between different GSTINs of the same company or net off of receivables with payables of the supplier can be considered as payment to the vendor, meeting the compliance requirements of Section 16(4) of the CGST Act.

It was also clarified that the settlements of dues/payments between GSTINs of the same company generally do not constitute supplies, except in specific scenarios outlined by the applicant, where separate supplies occur.

In conclusion, the AAR comprising of Dr. S.L. Sreeparvathy, IRS, Additional Commissioner Central Tax and Shri Abraham Renn S, IRS Additional Commissioner State Tax clarified that adjusting the payments through book entries meets compliance requirements and does not constitute a supply between the GSTINs involved and the assessee can avail ITC even when consideration is paid through book adjustment entries.

The decision by the AAR reaffirms the intention of the GST legislation to facilitate ease of doing business by recognising the validity of book adjustments and differentiating them from supplies which is very helpful for businesses engaged in complex transactions involving multiple GSTINs.

To Read the full text of the Order CLICK HERE

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