Facts of the Case

• M/s. I-tech Plast India Pvt. Ltd. (“Taxpayer”) is engaged in manufacture and supply of toys made of plastic and/or rubber or both wherein essentially plastic is the main component;
• The taxpayer claimed that, the plastic toys manufactured and supplied by them would squarely be eligible to be classified under chapter heading 9503;
• The taxpayer also stated that his supplier seeks to issue Debit Notes (DN) in respect of transactions entered into during FY 2018-19.
• DN represents price variation as the supplier had mistakenly charged lower price and on being noticed, the supplier desires to rectify the same by issue of DN in FY 2020-21

Questions before the AAR

• What is the appropriate classification and rate of GST (CGST and SGST) on supply of plastic toys?
• Can the taxpayer claim ITC of GST charged on DN issued by the supplier in current financial year i.e. 2020-21, even though the original transaction took place in 2018-19?

Contention of the Taxpayer

• The taxpayer relying on various jurisprudence, rules of interpretation and general explanatory notes of the First Schedule to the Customs Tariff Act, 1975 claimed that the plastic toys other than electronic toys manufactured and supplied by the taxpayer is classifiable under tariff heading 9503 00 30 liable to GST @12%;
• As regards the claim of ITC, the taxpayer has submitted that supplier seeks to issue DN against transactions entered into during 2018-19;
• The taxpayer further submitted that linkage between invoice and DN, as envisaged in the Sec.16(4), has been dropped now by deleting the phraseology “invoice relating to such” debit note, vide the Finance Act, 2020;
• The taxpayer claimed that the law has been amended and has been made more simple; the earlier words “invoice relating to such debit note” were restricting the claims to ITC to a particular time limit.

Observation and ruling by the AAR

• The AAR evaluated appropriateness of classification under heading 9503 in the light of Chapter notes pertaining to chapter 95 of the First Schedule to the Customs Tariff Act, 1975 and noted that it covers various kinds of toys for children such as Tricycles, Scooters, Pedal cars and similar Wheeled toys, Dolls carriages, Dolls, other Toys, reduced-size (“scale”) models and similar recreational models, working or not as well as puzzles of all kinds;
• AAR noted that said toys are made of plastic meant for children and are not electronic toys, and concluded that the plastic toys manufactured and supplied by the taxpayer are correctly classifiable under heading 95030030;
• As regards the claim of ITC, AAR noted that the phraseology “such invoice or invoice relating to such debit note pertains” will now read as “such invoice or debit note pertains” post the amendment. However, no drastic or far reaching change has been affected by Finance Bill, 2020 as interpreted by the taxpayer, and , irrespective of the fact as to whether the words “invoice relating to such” is connected to “debit note” or omitted, the fact remains that a DN is always connected to the invoice and issued in relation to change in value of an invoice;
• The AAR noted that merely because the words “invoice relating to such” was omitted, it does not mean that relation of DN to invoice has been cut-off or that omission of the above words means, that the year in which the debit note was issued will be considered as the ‘financial year’ as per amended section 16(4);
• The AAR added that, the intention of the legislature if to omit the words “invoice relating to such” in the said sub-section, was not to disconnect DN from the original invoice so as to give an independent existence to DN and to allow taxpayer claim of ITC of GST charged separately in DN issued in FY 2020-21, relating to the transaction of FY 2018-19;
• The AAR referred to the definition of ‘debit note’ and its contents to note that one of the contents of a DN is the serial number and date of the corresponding tax invoice or, as the case may be, bill of supply;
• The very purpose of incorporating details of original invoice issued by supplier is to restrict ITC;
• AAR observed that, it follows that the financial year to which a debit note pertains, is invariably the financial year in which the original invoice (related to the said debit note) was issued;
• The AAR concluded that taxpayer shall be entitled to ITC only in respect of DN issued by the supplier within the time limit specified under Section 16(4).

BDO Comments

Amendment in section 16 of the CGST Act, 2017 vide the Finance Act, 2020 was seen as beneficial to the industry and trade, as it is a general industry practice to issue DN for price variations at later dates. However, the AAR did not find merit in that argument to extend the benefit of ITC. This ruling might raise question marks on ITC of GST paid under RCM, beyond the time limit prescribed under Section 16(4), where a self-invoice is issued by the tax payer. It is also interesting to see, how the appellate forum would view the sweep of the terminology ‘pertains’ employed in Section 16(4), especially if it seen in the context of Supreme Court ruling in the case of Doypack Systems (P) Ltd Vs. UoI (AIR 1988 SC 782), where the Apex Court had opined that expression ‘pertaining to’ presupposes another subject-matter it means to bring into association or connection with.

While this being a ruling of the AAR and this matter may be canvassed before the appellate forums in future, the tremors of this ruling would be felt in the coming times across business and trade!

[AAR-Gujarat, M/s. I-tech Plast India Pvt.Ltd. ruling no: GUJ/GAAR/R/10/2021, dated 20 January 2021]