Whether Input Tax Credit Can Be Claimed on Debit Notes for Previous Financial Year in Current Financial Year?
Case Analysis: M/s I-Tech Plast India Pvt. Ltd
Debit notes were initially issued by the buyer to the seller, in order to indicate the incorrect or damaged goods received by him. Furthermore, debit notes were also issued by the buyer to the seller, in cases where he wanted to return the items or wanted to cancel the purchase.
Table of Contents
- Purpose of Issue of Debit Note
- Challenges in Issue of Debit Notes
- Analysis of Advance Ruling in case of M/s I-Tech Plast India Pvt. Ltd
- Facts of the Case
- Issues
- Held
- Case Laws
- M/s I-Tech Plast India Pvt. Ltd.
- Central Excise Shillong vs. Wood Crafts Pvt. Ltd.
Purpose of Issue of Debit Note
Thus, the main purpose which was served by the debit notes were that it was a mechanism for the buyer to intimate the seller to initiate the refund for the extra items not being availed by him.
Challenges in Issue of Debit Notes
However, the problem arises when tax credit were to be claimed on such debit notes. The invoice was initially raised by the supplier and the buyer used to claim input tax credit on such invoice. However, at a later stage, when buyer found out the discrepancies in the order, he used to approach the seller and issue debit note on pretext of such discrepancy. As input tax credit was to be claimed on the original invoice, the question that arises before the authorities and courts were whether buyer was eligible to claim input tax credit on the debit notes issued for the invoice raised in some previous financial year?
Analysis of Advance Ruling in case of M/s I-Tech Plast India Pvt. Ltd
To settle this case, Gujarat Authority for Advance Ruling in the case of M/s I-Tech Plast India Pvt. Ltd. held that buyer was not eligible to claim input tax credit for the debit notes issued in the year 2018-19, in the year 2020-21.
Facts of the Case
The facts of the case are that the applicant is engaged in the business of manufacturing and supplying of toys, which are made up of rubber or plastic, wherein plastic was the main component. Therefore, as per applicant the plastic toys would be eligible to be classified under the Chapter 9503.
Submissions by Applicants
It is further submitted by the applicant that vide notification no. 01/2017 Central Tax (Rate) shows that the goods in question i.e. plastic toys have to be first classified under the Customs Tariff Act, which is based on the Harmonized Commodity Description of Coding System.
Furthermore, Supreme Court in the case of Central Excise Shillong vs. Wood Crafts Pvt. Ltd., observed that the Central Excise Tariffs are based on the HSN and the internationally accepted nomenclature was taken into account to “reduce disputes on account of tariff classification. Accordingly, for resolving any dispute relating to tariff classification, a safe guide is the internationally accepted nomenclature emerging from the HSN.
It is further submitted by the applicant that the heading 9503 under the Customs Tariff Act, 1975 covers all range of toys for children. Therefore, applicant product i.e. plastic toy shall be covered under the Tariff item no. 9503 00 30 and would thus, attract CGST @6% and SGST @6% respectively.
Another question raised by the applicant for consideration was whether applicant is eligible for claiming the input tax credit for the debit notes issued by it for the year 2018-19?
It have been stated by the applicant that the applicant issued debit notes for the year 2018-19 at a lower price and now applicant would want to rectify the same and issue debit notes at a higher price, where CGST and SGST shall be reflected separately. It was further asserted by the applicant that vide notification no. 12 of the Finance Act, 2020 the assesse was allowed to claim input tax credit for the past periods as well.
Issues
The first and foremost issue was the classification of plastic toys and proportionately, what will be the rate of CGST an SGST to be applicable on plastic toys?
And the second question was whether the applicant claim Input Tax Credit in relation to CGST-SGST separately in debit notes issued by the supplier in current financial year i.e. 2020-21, towards the transactions for the period 2018-19?”
Held
Gujarat Authority for Advance Ruling observed that chapter 9503 under the Customs Tariff Act covers various kinds of toys for children, whilst heading no. 9503 00 10 covering toys made of wood, heading no. 9503 00 20 covering toys made of metal and heading no. 9503 00 90 covering toys made of other products except plastic.
Observing that heading no. 9503 00 30 covers the toys made up of plastic of various kinds such as scooters, tricycles, pedal cars, dolls and other toys made up of plastic, Advance Authority concluded that photographs shown by the applicant shows that the toys made by them are made up of plastic and are not electronic, therefore, would be covered under the heading 9503 00 30.
Advance authority further concluded that the rate of GST applicable on the product would be CGST @6% and SGST @6%.
On issue no. 2 advance authority observed that Section 16(4) of the CGST Act, 2017 contains the sentence “such invoice or invoice relating to such debit note pertains”, which is later or omitted by the Finance Act, 2020 and now the new sentence is read as “such invoice or debit note pertains”.
On comparing both the original sentence and the new one brought by the Finance Act, advance authority observed that the new Finance Act does not bring much change to the original CGST Act and thus, the debit note always remain connected to the invoice, which is issued in relation to change in the value of an invoice. It further observed that the Finance Act bringing change does not meant that the relation of the debit note with the invoice has been cut off. It further clarified that the intention of the Government, by omitting the words “invoice relating to such” from the words “invoice relating to such debit note pertains” in the sub-section (4) of Section 16, was not to disconnect the debit note from the original invoice so that the debit note gains an independent existence so as to entitle the applicant to claim Input Tax Credit in relation to CGST.
Therefore, observing that Finance Act does not intend to bring any change to the status of debit note being a part of invoice, advance authority holds that applicant was not entitled to claim input tax credit in relation to the financial year 2018-19, in the financial year 2020-21.