AAR rules ITC admissible on sale and buyback transactions if payment is settled through book adjustment

AAR rules ITC admissible on sale and buyback transactions if payment is settled through book adjustment

Explains that the settlement of mutual debts is a valid mode of payment under the Goods and Services Tax Act

The West Bengal Authority of Advance Ruling (AAR) has held that in case of sale and buyback transaction, the Input Tax Credit (ITC) is admissible on goods purchased from outsourced vendors. That is when the payment is settled through book adjustment against the debt created on outward supplies to those vendors.

The bench of Joyjit Banik (Senior Commissioner) and Tanisha Dutta (Joint Commissioner) observed that the settlement of mutual debts through book adjustment was a valid mode of payment under the Goods and Services Tax (GST) Act. The recipients could pay the supplier by way of setting book debt since the provision of the Act posed no restriction. Therefore, ITC could not be denied because consideration was paid through book adjustment.

The applicant is in the business of trading footwear in West Bengal under the brand name 'Paragon'.

He considered manufacturing footwear through independent outsourcing units under the sale and buyback model. The raw materials for production would be sold by him to the outsourced vendors and he would buy back the manufactured goods from them. He expressed the willingness to settle the mutual debts through book adjustments and the net dues through bank transfer.

The applicant sought an advance ruling on whether the ITC was admissible on goods purchased from outsourced vendors when payment was settled through book adjustment against the debt created on outward supplies to those vendors.

He submitted that in the proposed 'sale and buyback model', the raw material required for footwear manufacturing would be first supplied by the applicant to the outsourced vendors against the issue of a tax invoice. Thereafter, the vendors would manufacture the footwear using the inputs received from the applicant along with the material purchased from other suppliers. The finished goods would then be supplied by the vendors to the applicant for which the former would issue tax invoices.

The business model would involve two distinct supplies - the first was to be made by the applicant to the outsourced vendors, and the second by the vendors to the applicant.

In Clause 31, Section 2 of the GST Act, the expression 'consideration' has been defined.

However, the applicant argued that the word 'consideration' cast the net so wide that almost no form of payment was excluded. For instance: a mix of money and the monetary value of the goods offered together was a valid 'consideration'. Similarly, if the payee owed the payer a debt and accepted a reduction as a valid form of payment, it also meant 'consideration' for a supply. It denoted that a reduction in book debt (an asset in the payer's books of accounts) was valid.

The applicant further contended that the payment through the books of accounts was a prevalent commercial practice in the market. Based on Paragraph 42 of the Indian Accounting Standard 32, he stated that a financial asset and a financial liability would be balanced by the net amount presented in the balance sheet. That was only when an entity had a legally enforceable right to set off the recognized amounts and intended to either settle on a net basis or realize the asset and simultaneously settle the liability.

The AAR held that it was immaterial whether the payment was made by the recipient or any other person. In the event of barter of goods or services, the activity constituted supply as well as ‘consideration’.

The bench explained further by citing an example: “If a barber cuts hair in exchange for a painting, the haircut is a supply of services by the barber. It is a consideration for the painting received. Similarly, the supply of painting is supplied by the painter, and the painting is the consideration for a haircut.”