The applicant, M/s. Paragon Polymer Products Pvt. Ltd., engaged in the manufacture and trading of footwear, sought an advance ruling on whether Input Tax Credit (ITC) would be admissible in cases involving sale and buy-back transactions, where payment for goods procured from outsourced vendors is settled through book adjustments against receivables arising from outward supplies made to such vendors.

The applicant explained that, in the course of business, raw materials required for manufacturing footwear are supplied to vendors, who in turn manufacture footwear or footwear components and supply the same back to the applicant under tax invoices. In such transactions, mutual obligations arise between the parties, which are proposed to be settled by way of book adjustments, with only the net balance being discharged through banking channels.

The Authority examined the provisions of Section 16 of the CGST Act, 2017, which prescribes the conditions for availing ITC, and noted that while payment of consideration is a mandatory requirement, the Act does not restrict the mode of payment exclusively to cash or bank transfers. The definition of “consideration” under Section 2(31) of the CGST Act expressly includes payments made or to be made, whether in money or otherwise, and also covers the monetary value of any act or forbearance.

The Authority further observed that settlement of liabilities through book adjustments is a well-recognised commercial and accounting practice, also supported by Accounting Standards, and constitutes a valid mode of discharging consideration. Reference was also made to similar reasoning adopted by the West Bengal Authority for Advance Ruling in Senco Gold Ltd., reinforcing the view that book adjustments amount to valid consideration.

On a combined reading of Sections 2(31), 12, 13, and the proviso to Section 16(2) of the CGST Act, the Authority concluded that payment through book adjustment satisfies the condition of payment of consideration. Accordingly, ITC would be admissible in respect of goods purchased from outsourced vendors, even when consideration is settled through book adjustments, subject to fulfillment of all other statutory conditions and restrictions prescribed under the CGST Act and Rules.


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