Ownership and bearing of cost - whether relevant for availing ITC under GST?

This article is published at https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=12805

Remember this phrase ‘Input tax credit (ITC) is as good as tax paid’? This has been held by many Courts in the past and is now a settled principle. Also, taxpayers today have understood that steps need to be taken to safeguard this ITC, since it is equivalent to cash balance, because in case there are no sufficient evidence available to prove eligibility of ITC, it would require outflow of money to the exchequer along with interest and penalty.

Today there are many conditions that need to be satisfied to be eligible for ITC under GST. Over the period, the conditions have only been increasing to claim ITC.

Interestingly, Circular No. 217/11/2024-GST dated 26-06-2024 has come as a relief in this regard. This circular, even though issued in the context of the general insurance sector, the basis on which it is issued can be applied to all sectors.

Key points in the circular

The circular is issued in context of general insurance companies reimbursing cost of repairs for damages to insured vehicles. The insurance companies receiving a premium as per the policy, have the liability to bear the cost for repair in case of any damage to the vehicle.

However, under the reimbursement model, the vehicle owner first pays to the service station the cost for the repair and then gets reimbursement from the insurance company. Though a very important aspect is that the invoice of the repair station is raised on the insurance company.

On the aspect of whether the insurance company is eligible for credit, the following points are important to note from the circular basis which we can then analyse how it can be applied to other scenarios:

1. ITC will be available to the recipient of services.
2. Irrespective of whether payment to vendor is made first by the insurance company or by the vehicle owner, the insurance company being the person liable to pay or reimburse for the repair expenses, would be the recipient of the said services.
3. In case of part reimbursement, ITC may be available to the insurance company only to the extent of reimbursement of the approved claim cost to the insured, and not on the full invoice.
4. Where invoice is not issued by the service station to the insurance company, ITC would not be eligible to the insurance company since such company would not have a valid invoice or an entry in its GSTR-2B.

Thus, for being eligible for credit,

1. It does not matter who is making payment to the service provider,
2. What is important is, who is the person who is legally required to bear the cost of such expenses,
3. The GSTIN mentioned in the invoice can only claim the ITC, and
4. ITC is eligible to the extent of the cost borne by the person.

Ownership not a criteria

Services procured

Any services received, it is not necessary that the owner of the goods in respect of which services are received, would be eligible for credit.

That is, in case of the damaged vehicle, even though the insured/claimant is the owner of the vehicle, still the insurance company is eligible to claim credit since the insurance company is the person liable to incur such repair cost.

The fact that the said services are used by the insurance company to provide taxable services to the insured, is important and sufficient criteria to enable the insurance company to take credit.

Another scenario where a person other than owner will be eligible for credit would be a case where goods are taken on lease by a person and such person is require to incur repair costs during the tenure of the lease. In such case the lessee will be eligible for credit of any GST paid on any repair expenses incurred during the period of lease, in spite of the fact that the lessee is not the owner of the goods. Agreement terms would play a crucial role in this context to enable the credit without dispute from the department.

Goods procured

In a similar manner, for the goods procured, ownership is not a criteria to avail credit. In this context it would be relevant to see whether a person having a bill of entry (BoE) can avail credit even if he is not the actual owner of the goods.

It would be important to note here that under GST for an importer, BoE is the relevant document to take credit.

In this context, it would also be relevant to note that under the Customs law, importer is a person who files the BoE and even a person who holds himself out to be owner of the goals would be regarded as an importer i.e. a person need not be the actual owner of the goods to file a BoE.

An example could be a person who is providing repair or job work or testing services, etc. and the foreign customer provides certain goods to be used in such testing. This will require the Indian service provider to file BoE while importing such goods to India even though the owner of these goods would be the foreign customer.

Taking cue from the above circular, one can say that even though the importer is not the owner of goods, he being the person liable to pay the customs duty and IGST coupled with the fact that the BoE (valid document to take credit) is in his name, such importer should be eligible for the credit. This is in the backdrop that the said goods are being used for rendering his services and thereby used for his taxable business.

Criteria of cost required to be borne by the recipient

The next aspect is regarding credit being available only to the extent of the cost bone by the person who is taking the credit.

It was a settled principle under the CENVAT regime that credit would be eligible to the extent of cost borne by the entity. Further, in the case of Ultratech Cement Ltd. [1] it was held that credit would not be eligible to the extent the cost is borne by the ultimate consumer and not by the entity taking the CENVAT credit. However, this is pending before the Supreme Court[2].

The provisions during such period were that CENVAT credit was available in respect of inputs and input services used in the business of manufacturing. Under GST the provisions are liberal enough to enable credit in respect of any expenses incurred for business. Thereby, one could still take a stand that the decisions under the earlier regime would not be applicable to the GST scenario.

Further, it is a settled principle that no collection/recovery of taxes can be done without any authority of law, which is in line with the Article 265. Further, it was held by the Allahabad HC in the case of Standard Niwar Mill[3] that in the absence of statutory provision, the department cannot invoke the doctrine of unjust enrichment to recover taxes.

More specifically, in the case of Tata Advance Materials, it has been held by the Tribunal[4] (affirmed by the Karnataka HC[5]) that in the absence of any provision requiring reversal of credit, merely because the Insurance Company paid the assessee the value of goods including the excise duty paid, that would not render the availment of the cenvat credit wrong or irregular.

The above decisions indicate that credit cannot be denied merely on the ground of unjust enrichment more so in the absence of any provision requiring reversal of credit in such cases.

In this backdrop, one should consider to first book the entire cost of the expenses incurred and then credit the recovery of expenses. This will indicate that the cost was initially borne by the entity taking credit and subsequently recovered as per the applicable business scenario.

Thus, the paper writer is of the view that, finally cost not being borne by any person, cannot be a condition/reason requiring reversal of credit. In view of the paper writer, it is a business prerogative or negotiation power, whether the cost incurred by the entity has to/can be passed on to another entity.

Further, passing on the cost is the next step after incurring the cost. The fact that the invoice is in the name of the entity indicates that the said entity is the person liable to pay for the expense. Subsequent cost recovery from anyone else should not affect the eligibility of ITC in the hands of the entity in all cases.

In fact, any cost incurred by any entity is finally recovered from the customers. If this is regarded as a criterion to enable credit, then no ITC would be eligible to any profit making entity.

To this extent, one could consider that the circular is going beyond the law.

Thus, in view of the paper writer, in the context of the importer referred earlier in this article, who though not being owner of the goods imports, would be eligible for credit irrespective of the fact that finally the Customs duty paid on the goods is recovered from the foreign customer.

However, the agreement / service order needs to be worded in such a way that it brings out that the cost is to be initially borne by the Indian importer and later being charged as a consideration. This will help in case of any dispute raised by the department in future.

Concluding remarks

The circular being a beneficial one should not be looked by the department as being applicable only to the general insurance sector but the principle of ITC laid down therein should be applied to all sectors. This is in the backdrop of Article 14 of the Constitution of ‘Equality before Law’ - that is, equals should be treated equally.

Also, all business entities need to ensure that entire cost in respect of which credit is sought to be taken, is first booked as an expense in the books and subsequently suitable entries are passed for any recovery as price, etc. Suitable clauses should be incorporated in the agreements.

The views expressed are strictly personal and cannot be regarded as an opinion. For any queries or feedback please write to [email protected].

[1] 2010 (20) S.T.R. 577 (Bom.)