NOVEMBER 05, 2018

By Akella A S Prakasa Rao, B.E.(Hons), LLB

THIS article is an attempt to highlight some of the issues being faced by the pharma industry post issuance of the Circular 72/46/2018-GST dt.26.10.2018, which was well received by many practitioners for the lucid clarifications given for the return of unsold goods in their respective domains and to suggest an alternate, which takes care of practical difficulties in the field.

Pharmaceutical products are subject to the regulations of Drugs & Cosmetics Act, 1940 and the rules made thereunder (hereinafter referred to as DCA). As per the Drugs and Cosmetics Rules, 1945 and as introduced by Notification No. F.1-55/61-D dated 22.08.1964 in Rule 65(17), which reads as under:

(17) No drug shall be sold or stocked by the licensee after the date of expiration of potency recorded on its container, label or wrapper, or in violation of any statement or direction recorded on such container, label or wrapper:

Provided that any such drugs in respect of which the licensee has taken steps with the manufacturer or his representative for the withdrawal, reimbursement or disposal of the same, may be stocked after the date of expiration of potency pending such withdrawal, reimbursement or disposal, as the case may be, subject to the condition that the same shall be stored separately from the trade stocks 2[and all such drugs shall be kept in packages or cartons, the top of which shall display prominently, the words - Not for sale.

Thus it is clear that the time expired goods cannot be sold under the DCA. In such a scenario, how can the GST authorities clarify that the supply of such time expired goods may be treated as fresh supply and a tax invoice can be issued? When the sale itself is not permitted under the DCA, how will the recipient of such return supply avail Input Tax Credit (ITC)?

So also, the illustration given under (A) of the Circular is not practical for the below reasons:

Illustration: Supposedly, manufacturer has availed ITC of Rs.10/- at the time of manufacture of medicines valued at Rs.100/- i.e., ITC on the inputs and input services that have gone into the manufacture of the medicines. At the time of return of such medicines on account of expiry, the ITC available to the manufacturer on the basis of fresh invoice issued by the wholesaler is Rs.15/-. Let us assume, for a better understanding in the illustration that the GST rate is hypothetically 10% of IGST or 5% CGST + 5% SGST and the manufacturer has sold the goods valued at his end for Rs.100/- with a profit at Rs.150/- to the wholesaler and thereby the wholesaler is returning the time expired goods back to the manufacturer at Rs.150/- and is charging the IGST of Rs.15/- @10% IGST. So, when the time expired goods are destroyed by the manufacturer he would be required to reverse ITC of Rs.15/- and not of Rs.10/-.

This is leading to confusion as detailed hereunder:

Now the manufacturer has valued the medicines at Rs.100/- and sold to the wholesaler at Rs.150/-. Initially, the goods were not time expired and in a hope that they could be sold at his end, the wholesaler has availed the ITC of Rs.15/- . He in turn has sold them to the retailer at Rs.180/- and charged GST of Rs.18/-. The retailer was not able to sell the goods before the expiry date. The DCA mandates that the goods are to be returned back to the manufacturer for undertaking destruction at his end. Hence the retailer has to follow the supply chain route in order to return the goods to the manufacturer. In such a scenario, the Circular clarifies that the time expired goods can be supplied to the wholesaler treating them as fresh supply. In such a case, the value that needs to be adopted by him would be the same value at which he bought them from the wholesaler so that he will get the reimbursement of his cost in full. Thus the retailer would supply the time expired goods to the wholesaler at Rs.180/- and charges GST of Rs.18/-. Now the wholesaler can avail the ITC of Rs.18/- on such supply at his end and now in turn has to invoice them back to the manufacturer. Now the problem would be at what value he needs to raise the tax invoice. If he raises the invoice for Rs.180/- then the tax payable would be Rs.18/-, but the manufacturer would not be able to reimburse him the consideration of Rs.180/-, when he had received only Rs.150/- at his end. In the alternate, if the wholesaler charges only Rs.150/- on the time expired goods to the manufacturer, the differential GST credit of Rs.3/- i.e., Rs.18/- on receipt and Rs.15/- on fresh sale, would remain in his hands and for which he cannot go for a refund under inverted duty structure. To remain GST complaint, if he charges Rs.150/- towards the consideration and reverses the ITC availed of Rs.18/- the invoice will not be acceptable in the GSTN and the GSP will return a remark that excess GST charged.

In addition, as per DCA the time expired goods cannot be transacted and they need to be returned back to the manufacturer for the purpose of destruction. The time expired goods need to be destroyed adhering to the regulations of Pollution Control norms also. In such a scenario, how the above clarification will answer the regulatory requirements for the pharma industry? This clarification may be good for other products like in FMCG, Electronics but definitely not applicable to a highly regulated products like drugs or medicines.

In order to overcome these difficulties, it is recommended that the time expired goods may be written off from the books wherever they were identified in the supply chain and thereby the ITC availed on their purchases gets nullified and thereafter they may be returned to the manufacturer in the supply chain route on the basis of delivery challan. The considerations are settled through commercial credit notes. This method would be compliant with DCA as well as GST provisions also.

To illustrate by taking the above example only, the transactions would be as under:

The manufacturer avails ITC of Rs.10/- on the manufacture of medicines valued at Rs.100/- and sells them to the wholesaler at Rs.150/- by charging GST of Rs.15/- as the GST is 10%. Subsequently the wholesaler sells them at Rs.180/- to the retailer by charging GST of Rs.18/-. At the retailer end, the goods have become time expired. Hence the retailer will write them off in his books and also reverse the ITC availed of Rs.18/- and returns the goods on the basis of delivery challan to the wholesaler and gives him a commercial credit note for Rs.180/- towards his cost. The wholesaler receives these goods and settles the commercial credit note to the retailer and in turn returns the time expired goods to the manufacturer on the basis of delivery challan and also raises a commercial credit note for Rs.150/-. The manufacturer will receive the time expired goods for destruction at his end and settles the commercial credit note to the wholesaler. Thus the entire transaction is GST compliant and also fulfilling the requirements of DCA. This method is suggested in case of time expired goods sold originally and sold post introduction of GST and will be equally applicable in case of goods sold prior to GST, but became time expired post GST. By following this suggested method, there is no requirement for the option (B) given in the above Circular. Thereby, there will be one uniform method to deal with time expired goods in pharma.

It is hoped that the CBIC takes note of the above and issues suitable revised instructions. After all, it is trade facilitation that is the core of the new tax regime!

(The author is currently working with a leading biopharmaceutical company. The views in the article are strictly personal)