Senco Gold Ltd. (“the Applicant”) is engaged in the manufacturing and retailing of jewellery and articles made of gold, silver, platinum, diamonds and other precious stones under the brand name "Senco Gold & Diamonds". Apart from his own retail stores, the Applicant also maintains a network of franchisee-operated stores. He grants such a franchisee the right and license to operate a showroom and to use, in connection therewith, certain Proprietary Marks and System in accordance with a Franchise Agreement (“the Agreement”).
The Applicant raises tax invoices on the Franchisee for the supply of jewellery and other articles and also for Franchise Support Services in terms of the Agreement periodically. On its part, the Franchisee also raises tax invoices on the Applicant for the supply of old gold, silver etc., received from the customers. The Applicant intends to settle the mutual debts through book adjustments.
Issue involved: whether the input tax credit is admissible when he settles through book adjustment the debt created on inward supplies from the Franchisee?
Applicant’s Interpretation of law: The Applicant submits that, nowhere does the GST Act prescribe or restrict the mode in which the payment has to be made. The Applicant submits that payment through adjustment of the books of accounts is a prevalent commercial practice. Para 42 of lndian Accounting Standard 32 provides 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.
Observations and findings: The Authority for Advance Ruling, West Bengal (“AAR”) finds that ‘Consideration’ as defined under Sec 2(31) provides the scope and ambit for modes of payment and includes ‘in relation to the supply of goods or services, any payment, made or to be made, whether in money or otherwise, and also the monetary value of any act or forbearance’ and hence the definition of ‘consideration’ is wide enough to covers almost all form of payment and hence ‘reduction in book debt’ or ‘adjustment of book’ is also a valid 'consideration';
Held: The Hon'ble AAR vide order no. 02/WBAAR/2019-20 dated May 08, 2019 held that Unless the law specifically restricts the recipient from claiming the input tax credit when consideration is paid through book adjustment, credit of input tax cannot be denied on this ground alone.
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