credit restrictions under section 17(5) of the cgst...

Sujit Ghosh

Advocate, Supreme Court of India

Chambers of Sujit Ghosh

May 14th, 2020

1

CREDIT RESTRICTIONS UNDER

SECTION 17(5) OF THE CGST ACT, 2017

© 2020 Chambers of Sujit Ghosh. All rights reserved.

Index

2

S.No. Topic Slide No.

1. Setting the context 3 - 4

2. Section 17 (5) (a) - Motor Vehicles, Aircraft & Vessels 5 - 16

3. Section 17 (5) (b) - Food, Catering, Club, etc. 17 - 22

4. Section 17 (5) (c) - Works contract services 23 - 31

5. Section 17 (5) (d) - Receipt of goods & services 32 – 38

6. Section 17 (5) (g) - Supplies for personal consumption 39 - 41

7. Section 17 (5) (h) - Lost/stolen/destroyed/Written Off 42 - 46

8. Section 17 (5) (h) - Gifts and Free Supplies 47 - 50

Setting the context


Setting the context

4

• Under GST - input tax credit eligibility widened - “use in course or furtherance of business”

➢ Per contra – Earlier regime – specific to use in manufacture/provision of service etc

• Section 17 (5) of the CGST Act – Specifies restrictions on ITC – Key situations :

➢ Motor Vehicles, Vessels & Conveyances

➢ Food & Beverages, Catering, Club, etc

➢ Works contract services and goods/ services received for creation of immovable property

➢ Specified Goods/ Services received for personal consumption

➢ Goods Lost/ Stolen/ Destroyed/ Written Off or disposed off by way of gift or free sample

• Various writ petitions filed across High Courts challenging some of these restrictions

• Several Advance Rulings on the subject

• This presentation seeks to reflect upon the law and key legal issues

Section 17 (5) (a) -Motor Vehicles, Aircraft & Vessels


ITC : Restrictions under 17(5)(a)

6

• ITC shall not be available in respect of :-

➢ Pre 01.02.2019 (for the period from 01.07.2017 to 31.01.2019)

❑ Motor vehicles and other conveyances except when used for making

▪ certain taxable supplies (further supply, passenger transportation and imparting

training);

▪ for transportation of goods

➢ Post 01.02.2019 – Categories where no ITC available, subject to exceptions (exceptions

discussed subsequently)

❑ Motor vehicles for transportation of persons < seating capacity of 13 persons

including driver [‘Specified Motor Vehicles’]

❑ Vessels and aircraft

❑ Services of general insurance, servicing, repair and maintenance relating to motor

vehicles, vessels or aircrafts

❑ Leasing, renting or hiring of motor vehicles, vessels or aircraft

❑ Exceptions qua above categories stipulated where ITC available


ITC : Exceptions to 17 (5) (a) –Motor Vehicles

7

• ITC on Specified Motor Vehicles for transportation of persons admissible when used for

making following taxable supplies

➢ further supply of such motor vehicles; or

➢ transportation of passengers; or

➢ imparting training on driving such motor vehicles;

• Sequitur to the above provision – ITC available in following additional cases:

➢ Motor Vehicles other than Specified Motor Vehicles i.e. having seating capacity > 13 persons

(including driver)

➢ Anything that is not a motor vehicle under 2 (76) of CGST Act read with Section 2 (28) of

M.V Act – Blanket restriction on ‘conveyance’ in general removed

➢ Motor vehicles for transportation of goods, in all cases



8

• Vexed Issues and Views of AAR

➢ Cars purchased and provided to customers under lease on which GST charged – ITC

admissible under Section 17 (5) (a) [2019 (23) G.S.T.L. 495 - AAR]

❑ Whether ITC to be reversed on termination of the lease agreement – AAR says

yes

▪ However, in the absence of provision akin to Rule 3 (5A) of CCR, 2004 requiring

payment of an amount equal to CENVAT credit taken on removal of capital goods

after use by applying percentage deduction –

▪ Therefore is the Finding of AAR questionable ?

❑ Whether condition has to be satisfied only on threshold or at all times

continuously?

❑ In any case, can the entire quantum be required to be reversed ?

➢ Earth moving machinery eligible for credit [2018 (18) GSTL 641]



9

• Vexed Issues and Views of AAR (contd.)

➢ Motor vehicles purchased and converted to ‘cash carry vans’ for transportation of money

❑ In pre-amended era credit available for further supply of motor vehicles for

transportation of passengers and goods

❑ 2018 (15) GST: 727 – AAR denies credit on the ground that money is not ‘good’ –

❑ Remanded by Bom. HC for non consideration of submission that money is a good in

the business of cash carry van - 2019 (28) G.S.T.L. 27 (Bom.)

❑ In the post-amended era, credit should be available since restriction only applicable to

transportation of persons


ITC : Exceptions to17 (5) (a) –Motor Vehicles

10

• Vexed Issues and Views of AAR (contd.)

➢ Demo vehicles used for sales promotion by autmotive dealers and sold at a written down

value after 2 years on which GST charged

❑ ITC Admissible [2019 (27) G.S.T.L. 272]

❑ Because cars used in course or furtherance of business

❑ Because no time limit prescribed as to by when supply has to be made

❑ Essnetially the test for credit eligibility is being postponed ( by AAR) at a later date

❑ Which appears to be problamatic line of thinking and makes availability and utilization

as a single concept

➢ Antecedent Issues

❑ Ambit of the term ‘further supply’

▪ Supply defined expansively under CGST Act to include lease, license, rental or

disposal, etc. – Will ‘disposal’ as scrap or waste tantamount to ‘further

supply’? – As long as disposal not by way of gift or free sample


ITC : Exceptions to 17 (5) (a) –Vessels and Aircrafts

11

• ITC on Vessels and Aircraft (post amendment era) admissible when they are used for

➢ making specific taxable supplies namely

❑ further supply of such aircraft or vessels; or

❑ transportation of passengers; or

❑ imparting training on navigating such vessels; or

❑ imparting training on flying such aircraft

➢ Transportation of goods, per se

• In the pre-amendment era, the term conveyance subsumed vessels and aircraft and

similar restriction and exceptions applied

➢ Section 2 (34) of CGST Act defines ‘Conveyance’ to include a vessel, aircraft and a vehicle


ITC : Common Exception – Motor Vehicles, Vessels & Aircrafts

12

• Pre-amended era

➢ Credit on motor vehicles and conveyances per se denied unless used for making

permissible taxable supplies and transportation of goods

➢ Mode of procurement of motor vehicle and other conveyance wholly irrelevant

• Post-amended era

➢ Credit on motor vehicles, vehicles & aircrafts per se denied unless used for permissible

purposes ( ie Eligible Criteria) regardless of the mode of procurement continues

➢ Credit also denied where such motor vehicles, vessels & aircrafts procured by way of lease,

rental or hiring unless used for permissible purposes

➢ As such, the amendment is inconsequential and merely clarificatory

➢ Vide a proviso provided that credit of ITC on inward supply of leasing, renting or hiring of

motor vehicles/ vessels/ aircraft available so long as the recipient makes a further supply of

the same services

❑ By implication such leased, rented or hired motor vehicle does not have to satisfy the

Eligible criteria test


ITC : Rent a cab

13

• Pre- amendment

➢ Input credit specifically denied in respect of outward supply of rent a cab; except

❑ Where the government notifies the services which are obligatory for an employer to

provide to its employees under any law for the time being in force; or

❑ Where rent a cab services procured for onward rent a cab services

➢ Ambiguity existed w.r.t. whether the government notification referred to above meant

❑ A specific GST notification indicating services which are obligatory for an employer to

provide; or

❑ The obligation for an employer to provide such services to the employee emanated from

a notification issued under the parent non GST law imposing such obligation

❑ What if, the general law perse provided the mandate and no notification was ever

required?

• Post – amendment

➢ Restriction on rent a cab entirely withdrawn


ITC : Rent a cab

14

• AAR in the case of Mohanna Ghosh 2019 (26) GSTL 365 AAR

➢ Inward supplies of cabs used for providing rent a cab services

➢ Held basis facts that it was not a contract for transportation of passengers (Entry 9964 SAC -

which is permissible for credit)

➢ Instead held to be a contract for renting of motor vehicle (Entry 9966 SAC)

➢ Accordingly credit denied

➢ Also observed that in renting of motor vehicle, recipient is not a passenger


ITC : Rent a cab

15

• Critique of the AAR

➢ As per Section 17 (5)(a)(A) - Motor vehicles meant for further supply of such vehicles are

an eligible category

➢ Phrase ‘further supply’ capable of including further supply by way of renting as well

➢ Above point of view entirely missed thereby the conclusion is wholly erroneous

➢ Rationale that renting does not involve passenger as a recipient is questionable

➢ Using of Rate Notification to interpret the main statutory provisions – contrary to settled law

➢ Went beyond the pleadings because none of the parties’ argued on the operation of the rate

notification


ITC : Exceptions to 17 (5) (a) –Insurance, repair or maintenance

16

• Pre-amended position

➢ Insurance, servicing and repair or maintenance of motor vehicles/ other conveyance

expressly not denied

➢ However, since credit on motor vehicles/ other conveyances was per se denied (unless used

for permissible activity), it was doubtful

❑ whether credit towards inward supply of insurance, servicing and maintenance or repair

for such motor vehicle (which were per se ineligible) could be claimed without restriction

• Post amendment

➢ ITC of Input services of insurance, repair and maintenance specifically allowed when:

❑ Motor vehicle/Aircraft/ Vessel is used for prescribed purposes; or

❑ Received by a person engaged in the manufacture of such motor vehicles, vessels or

aircraft; or

❑ Received by a person engaged in the further supply of general insurance services in

respect of such motor vehicles, vessels or aircraft insured by him

Section 17 (5) (b) –Food, Catering, Club etc.


Section 17(5)(b) – Food & Beverages, Catering etc.

18

• Pre- amendment (For the period from 01.07.2017 to 31.01.2019)

➢ Credit denied on inward supply of

❑ Food and Beverages, Outdoor catering, Beauty treatment, Cosmetic and plastic surgery

& Health services

➢ Credit allowed if these inward supply

❑ Used for making outward taxable supply of same category

• Post- amendment (For the period from 01.02..2019)

➢ Situation remains identical to pre-amendment though minor cosmetic and placement

changes


Section 17(5)(b) – Club Membership, Health & Fitness Centre, etc.

19


➢ Credit denied on inward supply of club membership and health and fitness centre

➢ No exception for credit permitted, unlike that for food, catering, etc. (refer prev. slide)


➢ Credit on these continue to be denied unless –

❑ Provision of such benefit is statutorily mandated on an employer


Section 17(5)(b) – Travel benefits

20


➢ Credit denied on inward supply of travel benefits extended to employees on vacation such

as leave or home travel concessions

➢ No exception for credit permitted, unlike that for food, catering, etc. (refer prev. slide)





Section 17(5)(b) – Life Insurance, Health Insurance

21


➢ Credit denied on inward supply of life insurance and health insurance unless

❑ Where the government notifies the services which are obligatory for an employer to

provide to its employees under any law for the time being in force; or

❑ Where life insurance and health insurance procured for onward supply of same

services

➢ Ambiguity existed w.r.t. whether the government notification referred to above meant

❑ A specific GST notification needed ? or

❑ The obligation for an employer to provide such services to the employee emanated from

a notification issued under the parent non GST law imposing such obligation

• Post- amendment (For the period from 01.02.2019)



➢ Ambiguity surrounding issuance of notification removed


Section 17(5)(b) – Life Insurance, Health Insurance

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• Violation of Article 14 ?

➢ Whether there exists a reasonable classification between:

❑ Travel benefits, membership to club, health and fitness centre - where credit has been

allowed in such cases where it is government mandated; and

❑ Outdoor catering, health insurance, health service, life insurance - where credit has

been denied even though in many cases these may be government mandated

▪ 2019 (28) GSTL 514 AAR - Medicines supplied to patients of in-house hospital of

applicant, mandated under Chennai Port Trust Employees Regulations denied on

the basis that the medicines were used are for personal consumption.

➢ Assuming there exists a reasonable classification, what is the object sought to be achieved

through such classification

Section 17 (5) (c) -Works contract services


Section 17(5)(c) – Works Contract services

24

• Credit denied on supply of works contract services for construction of immovable property

• Exception to the above -

➢ When supplied for construction of a plant and machinery

➢ When it is an input service for a further supply of works contract service

• Key points for consideration for availing credit under exception

➢ Claimant of credit should receive works contract services as defined and not pure service

➢ Such works contract service must be an input service for further supply of works contract

services (i.e. clear nexus warranted)

➢ Restriction only applicable when Works Contract Services are availed for ‘construction’ of

immovable property

❑ Construction defined to include reconstruction, renovation, additional alteration or repairs -

to the extent of capitalisation

➢ Plant & Machinery – A defined term and ingredients thereunder must be satisfied



25

• Plant & Machinery – Defined to mean

➢ Apparatus, Equipment & Machinery

➢ Fixed to earth by foundation or structural support

➢ Used for making outward supply of goods/services

➢ Includes such foundation and structural support

➢ But excludes -

❑ Land, building or any other civil structure

❑ Telecommunication Towers &

❑ Pipelines laid outside the factory premises


• Dictionary meaning of apparatus, equipment & machinery

➢ Apparatus-

❑ Advanced Law Lexicon by Ramanatha Aiyar, Fifth Edition - defines an apparatus as a

compound instrument designed to carry out a specific function or for a particular use.

❑ Commissioner of Customs v. C-NET Communication (I) (P) Ltd, (2007) 12 SCC 72 - The

word apparatus means the compound instrument or chain of series of instruments designed

to carry out specific function or for a particular use -,

➢ Equipment -

❑ Black’s Law Dictionary, Tenth Edition - defines ‘equipment’ to mean ‘articles or implements

used for a specific purpose or activity (esp. a business operation)’.

❑ V.K. Balachandran v. State of Kerala, AIR 2005 Ker 187 - Equipment are things used in

equipping or furnishing, and hence, in common parlance, petrol in a motor vehicle would not

qualify as equipment-


26


• Dictionary meaning of apparatus, equipment & machinery

➢ Machinery -

❑ Black’s Law Dictionary, Tenth Edition defines a ‘machine’ to be ‘a device or apparatus

consisting of fixed and moving parts that work together to perform some function’.

❑ Commissioner of Income Tax v. Mir Mohammad Ali AIR 1964 SC 1693“The term

‘machinery’ when used in ordinary language prima facie means some mechanical

continuances which, by themselves or in combination with one or more, other mechanical

continuances, by the combined movement and inter-dependent operation of their respective

parts, generate power, or evoke, modify, apply or direct natural forces with the object in each

case of effecting so definite and specific a result” –


27


• Critical test for eligibility to credit

➢ Must be P&M as defined (essentially functionality test) and

➢ Must be used for making outward supplies

• The phrase “used for” not explained under GST law – Therefore,

➢ Liberal interpretation accorded under erstwhile CCR regime may be adopted

➢ Tests laid down by judiciary (under erstwhile law) such as commercial expediency, quality

and efficiency, functional utility, nexus with the final product can be guiding principles

• Critical to note that the wide eligibility condition (i.e. use in the course or furtherance of business)

under Section 16 (1) cannot be adopted


28


• Exclusion to Plant & Machinery : Civil Structure

➢ Land, Building and ‘any other Civil Structure’ excluded from the definition of ‘Plant and

Machinery’

➢ Ambiguity w.r.t the scope of the term ‘Civil Structure’ as it is undefined and generic

➢ Similar phrase used in Notification No. 15/2017 dated 28.06.2017 denying refund of

unutilised ITC to supply of services for ‘construction of a complex, building, civil structure or a

part thereof’

➢ Recourse to the principle of ‘Ejusdem Generis’ in both the situations – however leads to

different interpretation -

❑ In the first case meaning takes colour from ‘land’ and ‘building’

❑ In the latter case, meaning takes colour from ‘complex’ and ‘building’


29


• Exclusion to Plant & Machinery : Telecommunication Towers

➢ As such construction of telecom towers – Credit denied

➢ This is predicated on the assumption that construction of telecom towers leads to creation of

immovable property i.e. works contract services

➢ If however, construction of telecom tower leads to creation of movable property, restriction

under Section 17 (5) (c) may not even apply

➢ Whether telecom tower movable or immovable?

❑ Telecommunication towers and pre-fabricated shelters are not per se immovable property

and ‘attached to the earth’- Delhi High Court in Vodafone Mobile Services Ltd v. CST

[2019 (27) GSTL 481 (Del)]

❑ Distinguished Bharti Airtel Ltd. vs. CCE, Pune – III 2014 (35) STR 865 (Bom) and relied

upon CCE, Ahmedabad vs. Solid and Correct Engineering Works & Ors. 2010 (5) SCC

122

❑ Both Vodafone and Bharti Airtel are pending before the Supreme Court- notice issued in

both Special Leave Petitions [2020(32) GSTL JI50(S.C.]; [2015(40) STR J229 (SC)].


30


• Exclusion to Plant & Machinery : Pipelines laid outside the factory premises

➢ Sequitur – Credit available to pipelines within the factory

➢ Is there a discrimination between pipelines within the factory and that which are outside –

Article 14 violation ?

➢ What happens where pipeline is partly within the factory and partly outside – Proportionate

credit?

➢ Is pipeline immovable property for its construction to qualify as works contract?


31

17 (5) (d) – Receipt of Goods and Services for construction


• Receipt of any goods/ services or both by a taxable person for construction of an immovable

property (other than P&M) on his own account – Credit denied

• Credit denial extended even when such goods/ services or both are used in the course or

furtherance of business

• Provision entirely vague in as much as

➢ On his own account – To be read with construction or receipt of goods’/ services ?

➢ Who should carry out the construction – i.e. the person who receives the goods/ services or

a third party

➢ The phrase “when such goods or services used in the course or furtherance of business” –

Does it attach to construction services or supply of any goods/services to the taxable person

• Most in the trade are interpreting this provision to mean –

➢ If you receive construction services

➢ Such construction service leads to creation of immovable property

➢ Credit will be denied (unless it is P&M) even where the property so constructed is used in

making further taxable supply/ furtherance of business

Section 17(5)(d)–Receipt of Goods & Services for construction

33


• Safari Retreats Private Limited v Chief Commissioner of CGST

➢ Sec 17 (5)(d) challenged on the count of being violative of Article 14 and Article 19(1)(g)

➢ Contention being that it discriminates between assesse leasing out property for rent vis- a

vis- assesse disposing off property before obtaining the completion certificate

➢ The Court read down the provision holding –

❑ Narrow interpretation by the Department cannot be accepted, as it frustrates the object of

the Act

❑ Relied upon Eicher Motors v UOI (1999) 2 SCC 361- the very purpose of the credit is to

give benefit to the assesse

❑ The assesse is required to pay GST on the rental income arising out of the investment,

should be entitled to utilise the credit on inputs under Section 17(5)(d)

❑ Assessee not retaining the property for his own purpose, but letting the property out

➢ The Department has filed an filed an SLP before the Supreme Court. Matter is sub-judice

(SLP No.37367 of 2019)

Section 17(5)(d) – Receipt of Goods & Services

34


• Safari Retreats Private Limited v Chief Commissioner of CGST

➢ Tamil Nadu AAR in Sree Varalakshmi Mahaal LLP (GST AAR Tamil Nadu) 03.01.2020)

refuses to follow Orissa High Court ruling in Safari Retreat

➢ To be decided on a case to case basis.

➢ Similar writ petitions in other High Courts –

Party Name Relevant High Court Writ Petition No.

DLF Cyber City v. UOI Punjab and Haryana High

Court

C.W.P 34660 of 2019

Riveria Commercial

Developers v. UOI

Delhi High Court W.P (C) of 11633 of 2019

R.R. Kabel Limited v. UOI Gujarat High Court Spl Civil Appln No. 16973 of

2019

Bamboo Hotel & Global Centre

(Delhi) Pvt Ltdv. UOI

Delhi High Court W.P. No. 5457 of 2019


35


• Time limit for availing credit under Section 16 (4) – A significant hurdle even if writs succeed

• Section 16(4), provides that no credit can be claimed -

➢ beyond the due date for furnishing the return for the month of September following the end

of the financial year to which the input tax credit relates;

➢ or furnishing of annual return, whichever is earlier

• What if writ petitions, if decided in favour – rendered post the 16 (4) time frame

• Unless Section 16 (4) per se challenged – It would be a case ‘Operation Successful Patient

Dead’

• Therefore in DLF Cyber City Developers Limited v. UOI CWP- 34660 of 2019

➢ Petitioner challenged Section 16 (4); and

➢ Punjab and Haryana High Court, issued interim direction vide order 28.11.2019 - if the

petition is allowed, the asseesee would be entitled to claim credit, even if the time limit has

lapsed


36


• Few AAR Rulings –

➢ M/s Konkan Energy Private Limited Order No. MAH/AAAR/SS-RJ/14/2019-20 dated

November 6, 2019

❑ Credit denied on construction of breakwater

❑ Reasoning for denial – Breakwater is a civil structure

➢ In Re Satyesh Brinechem Private Limited (GST AAR – Gujarat ) order dated 11.09.2019

❑ Credit allowed on construction of bunds which are constructed and used in the manufacture of

salt and bromine chemicals

❑ However the ruling permits credit subject to bund qualifying as P&M

➢ In re NMDC –

❑ Credit denied on inward supplies for supply and erection of Plant and Equipment for lighting of

Plant Road, Boundary Wall and Watchtower

❑ Reasoning for denial- Lighting system does not qualify as P&M & not used in making taxable

supply

37



AAR Particulars Fate

Nipro India

Corporartion Private

Limited (AAR, Mah

28.02.2018)

Overhead crane, sewage system,

sanitary ware, air, water, and oil supply

systems and electrical works

Allowed basis the same being

P&M

Tarun Realtors Private

Limited GST (AAR,

Karnataka 30.09.2019)

Lifts, air handling units, chillers,

sewage treatment plants and other

facilities

Disallowed as they form a part and

parcel of building and civil

structure

Bahl Paper Mills Ltd

(2018 – VIL- 43- AAR)

Uttarakhand

Sanitary fittings, office fixtures and air

conditioners

• ITC on sanitary fittings -

denied, being an integral part

of the building.

• Office fixtures and air

conditioners – Credit allowed

since the same were used “in

furtherance of business”.

38


Section 17 (5) (g) -Supplies for personal consumption

© 2020 Chambers of Sujit Ghosh. All rights reserved. 40

• No credit where usage is for personal consumption purposes

• Personal consumption v. Course or Furtherance of Business

• Test to be met at which stage – At receipt or eventual deployment

➢ Illustration 1– A.C purchased and installed at home and thereafter transferred to office

premise after a few months

➢ Illustration 2 – A.C purchased and installed at office but thereafter transferred to home after

few months

• Personal Consumption – Can it apply to consumption by corporates –

➢ Common Parlance – Personal usually attaches to individual

➢ However, person defined to mean juristic persons – Therefore qua such person = personal ?

➢ If yes, then consumption by such juristic person is nothing but for furtherance of business

➢ Rule 2 (l) and (k) under erstwhile CCR specifically provided for personal use or consumption

of any employee – This phrase conspicuously missing under GST

➢ Usage of guest house – Personal Consumption or Official ?

Section 17(5)(g) – Supplies for personal consumption

© 2020 Chambers of Sujit Ghosh. All rights reserved. 41

AAR Particulars Fate

In Re. General Manager

Ordinance Factory

Bhandara 2019 (26)

GSTL 423 (AAR-GST)

Supplies for maintenance

and upkeep of guest

houses maintained by

Applicant

-

ITC not admissible since guesthouse is perk

for the employees, and not in course or

furtherance of the business

In Re: Posco India Pune

Processing Center Pvt.

Ltd.

Rent free hotel

accommodation provided

to General Manager and

Managing Director of the

Applicant

ITC not admissible since:-

• Supplies are for personal consumption of

GM/ MD and not for furtherance of

business

In Re: Chennai Port

Trust 2019 (28) GSTL

600 (AAR-GST)

Medical equipment,

apparatus and

consumables used in the

in-house hospital and

their repairing

Supplies are for personal consumption of

employees and pensioners- Hence ITC not

allowed

Section 17(5)(g) – Supplies for personal consumption

Section 17 (5) (h) -Lost/stolen/destroyed/Written Off goods


ITC : Restrictions under 17 (5) (h)

43

• Section 17 (5) (h) prescribes ITC shall not be available in respect of :-

➢ Goods lost, stolen, destroyed, written off or

➢ Goods disposed of by way of gift or free samples

• Goods lost/ stolen/ destroyed

➢ Interpretation 1 - Is the restriction only where goods lost, stolen, destroyed, written off

pertain to outward supply? –

➢ ‘in respect of’ interpreted by SC in State of Madras v. Swasthik Tobacco Factory to

mean “on”

➢ Interpretation 2 - Is the restriction only where goods lost, stolen, destroyed, written off

pertain to inward supply?

➢ Interpretation 1 is reasonable construction

➢ Basis fundamental principle no credit where there is no taxable supply

➢ Interpretation 2 specifically rejected in In re General Manager Ordinance Factory (MAAR)

2019 (26) GSTL 423 (AAR-GST)


ITC : Goods lost, stolen & destroyed

44

• Goods Lost/Stolen/Destroyed –

➢ Destruction

❑ Due to natural cause ?; or

❑ Also includes destruction during manufacturing/ testing process

❑ In re General Manager Ordinance Factory (MAAR) 2019 (26) GSTL 423 (AAR-GST)

▪ Destruction comprises - natural and manmade situations such as flood, fire

▪ Expired goods also covered

❑ Correctness of the AAR interpretation ?

➢ Can the same interpretation apply to loss of goods –

❑ If yes, loss at what stage

➢ Similarly, theft at what stage for credit denial

➢ Perishable items/ Supplies expired on account of pandemics - ?


ITC : Goods lost, stolen & destroyed

45

• Goods Lost/Stolen/Destroyed –

➢ Treatment under earlier regime

❑ Rule 21 of C.E Rules – where goods have been lost or destroyed by natural causes or

by unavoidable accident – remission of duty on such goods,

❑ Rule 3 (5C) CCR, 2004 – Credit of inputs to be reversed on goods where duty

remitted


ITC : Goods written off

46

• Goods written off

➢ No clarity whether

➢ Write off should be actual or mere making of provision to write off is covered

➢ Write off could be partial or complete

➢ Whether write off should be prior to putting it to use or post usage

➢ Whether Credit can be claimed post write off on account of subsequent usage of the

goods

➢ Rule 3(5B) CCR, 2004 -

If the value of any, input, or capital goods before being put to use, on which CENVAT credit has been taken

is written off fully or partially or where any provision to write off fully or partially has been made in the books

of account then the manufacturer or service provider, as the case may be, shall pay an amount equivalent

to the CENVAT credit taken in respect of the said input or capital goods

Provided that if the said input or capital goods is subsequently used in the manufacture of final products or

the provision of output services, the manufacturer or output service provider, as the case may be, shall be

entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other

provisions of these rules.

Section 17 (5) (h) – Gifts & Free supplies


ITC : Gifts & Free Supplies

48

• Section 17 (5) (h) prohibits availment of input tax in respect of goods disposed off by way

of gift or free samples

➢ Circular No. 92/11/2019 dated 07.03.2019 :

❑ Inputs, input services and capital goods used in relation to gifts or free samples – No

ITC by virtue of Section 17 (5) (h)

❑ Buy one get one free –

▪ Not an individual supply of free goods but a case of two or more individual supplies

for a single price

▪ Taxability basis composite/ mixed supply principle

▪ ITC allowed

❑ Sectoral FAQ - Replacement of parts under warranty is a free supply still no

reversal required

▪ Since value of warranty services includes the charges to be incurred for parts

replacement during the warranty period.



49

• Issues surrounding gifts -

➢ AAR

❑ Gold coins given to dealers on the meeting of certain specified targets – treated as

gift from the applicant to the dealers (2019-VIL-60-AAR)

❑ Foreign / local trips, provided as incentives, to the dealers / painters etc. – Treated

as free supply and credit of input services not available (2019-VIL-308-AAR )

❑ Expenses incurred towards promotional schemes of Loyalty Program or goods

given as brand reminders - Treated as gift (2019-VIL-176-AAR )

➢ Sonia Bhatia v. State of UP 1981 (2) SCC 585 – To qualify as gift :-

❑ Given on a voluntary basis - As an act of generosity;

❑ Emotional consideration such as love and affection may be attached to the gift

➢ Commissioner of Taxation (Cth) v. McPhail [1968] 41 ALJR 346 – Donation tendered

to school in return for school charging less fees under contract was not a gift

❑ ‘Gift’ - property should not be transferred under contractual obligation



50

• Whether CSR is a free supply?

➢ AAR - CSR activity of supplying items for flood relief victims – Free supplies by the

applicant (2019-VIL-100-AAR)

• Critique on AAR

➢ CSR is mandatory in nature under Section 135 of the Companies Act, 2013

➢ CSR is undertaken in the course or furtherance of business

➢ Essel Propack v. Commissioner [2018-TIOL-3257-CESTAT-Mumbai] - CSR expenses

are in the nature of input service without which activities relating to business, production

and sustainability of the company itself would be at stake; Cenvat Credit allowed.

Disclaimer: Pursuant to the Bar Council of India rules, we are not

permitted to solicit work and advertise. You, the reader

acknowledges that there has been no advertisement, personal

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whatsoever from us or any of our members to solicit any work

herein. The information provided is solely available at your

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interpreted as soliciting or advisement. We are not liable for any

consequence of any action taken by the reader relying on

material/ information provided herein. In cases where the reader

has any legal issues, he/she must in all cases seek independent

legal advice. Any information obtained or materials used from this

presentation is completely at the reader’s volition and any

transmission, receipt or use of the contents of this presentation

would not create any lawyer-client relationship.


Preparation & research by lawyers

at Chambers of Sujit Ghosh

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