ITC under GST - Furthering interpretation to promote business
AUGUST 11 , 2020
By Dr G Gokul Kishore and R Subhashree
BUSINESS promotion is integral to sustenance of an enterprise. Law recognises this fact as manifest by provisions like Section 37(1) of Income Tax Act, 1961 which allows deduction of any expenses laid out wholly and exclusively for the purpose of business. GST law seeks to provide impetus to business promotion by express use of appropriate expression in the provisions relating to input tax credit. In this backdrop, certain exceptions in the nature of restricting credits need an impassionate and in-depth analysis to further the objective of the statute rather than frustrating it. This article is an endeavour in this direction though it may seem that an aggressive position is sought to be adopted.
Use in the course or furtherance of business
Section 16(1) of CGST Act states that registered taxpayer shall be entitled to take credit of input tax charged on any supply of goods or services, which are used or intended to be used in the course or furtherance of his business. The word "business" has been defined in a wide inclusive manner in Section 2(17). Credit is an entitlement and the same is available even in situations of prospective use of the goods or services when the purpose is either for running of the business or to improve the existing business operations. The statute does not use the word "in" or "in relation to" unlike the earlier Modvat / Cenvat credit regime. Use of "in the course of" conveys that the goods or services received are used along with or during business operations. However, since credit itself is available only if the resultant supply is taxable, such expression cannot be taken to mean those goods or services used by an entity but not related to business.
"To further" means to improve or to advance. For the first time, credit related statutory provisions take into account promotion of business as one of the reasons for affording credit. It needs no reiteration that the edifice of GST is built on seamless credit and the intention has been made unequivocally clear in official documents as well as speeches.
Understanding the non-obstante clause
The caravan of promotion gets stuck when it has to traverse through Section 17(5). This sub-section carves out certain exceptions to Section 16(1) by way of the non-obstante clause - "notwithstanding". To appreciate better, the true import and the implications of use of such restrictive covenant in a statute, gainful reference can be made to principles of statutory interpretation. A non-obstante clause may be used as a legislative device to override a particular provision [T.R Thandur v UOI - AIR 1996 SC 1643]. However, when the enacting part is clear, its scope cannot be enlarged or cut down by non-obstante clause. It is an established maxim of construction that the enacting part of an Act must, when it is clear, control the non-obstante clause when both cannot be read harmoniously [ Aswini Kumar Ghosh v. Arabinda Bose - 1953 SCR 1].
Therefore, one has to proceed with extreme caution while trying to interpret Section 17(5) so as to bar credit on goods or services which are used in the course or furtherance of business. Contrary to general understanding, it is the enacting part which controls the non-obstante clause and not the other way round. A statute must always be read as a whole and an exception clause or a non-obstante clause should not be read in isolation or to the exclusion of the main enacting part. Use of non-obstante clause to exclude any other law is different from use of the same within a provision in the same statute. In the former, supervening public interest may be a reason for excluding the operation of any other law so as to further the object of the relevant statute. In the latter, harmonious construction becomes sine qua non to further the objective of the statute by adopting narrow construction of the restrictive clause.
The purpose of non-obstante clause may also be to clarify the scope. Viewed from the perspective of such principles, Section 17(5)(h) can be said to be intended to bar credit when goods are not available for use in business due to reasons mentioned therein like when the goods are stolen or destroyed and credit should continue to be available when the goods serve business purpose. To comprehend this proposition, better reference can be made to the expression "free sample" used in Section 17(5)(h).
Appreciating the nuances through samples
"Sample" in the context of business is understood as a representative of the goods sold or to be sold which is distributed by the businessman to various recipients - dealers, doctors, etc., to gauge their response and improve the functionality or efficacy of the goods. Thus, while a sample may be "free" in the sense that the recipient does not pay a price, the feedback which is of value to the businessman is the consideration for the distribution. However, trade samples are not supplied but placed in the distribution chain for a definite business purpose and, therefore, use of the word "free" is less relevant in the present context.
The GST law bars credit only on samples disposed without consideration and it does not cover trade samples distributed to business partners. When goods are disposed, they go out of the business and they cease to serve a business function. However, when goods are distributed to trade partners they continue to perform a defined role in the business of the supplier and they remain useful for his business. It is only in situations like disposal of defective goods without any consideration and giving away certain portion of goods to employees or local community, the nexus between the sample and business is weak. GST law is transaction based and omnibus application of provisions ignoring transactional peculiarities will not further the objective of the law. For analysis of the term "disposed of" as it appears in Section 17(5)(h), our article titled "CSR & tax laws - Disposal of certain notions " (7th July, 2020) may be seen.
G.P. Singh in his seminal work Principles of Statutory Interpretation [14th Edition] quotes Lord Coke as saying "It is the most natural and genuine exposition of a statute to construe one part of a statute by another part of the same statute, for that best expresseth the meaning of the makers". He cites the judgement in State of West Bengal v. UOI [AIR 1963 SC 1241] wherein the Supreme Court held - "The Court ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with other parts of the law, and the setting in which the clause to be interpreted occurs".
Based on the above jurisprudence, Section 17(5)(d) can be referred to understand Section 17(5)(h) better. As per Section 17(5)(d), the bar on credit is absolute in respect of goods or services used by a taxpayer for construction of immovable property (except plant and machinery) even when they are used for business purpose. The words "on own account" and "even if used in the course or furtherance of business" used in Section 17(5)(d) are conspicuously absent in Section 17(5)(h). It appears that the legislative intention is to allow credit in respect of samples which are used in the course or furtherance of business but lying in various points in the distribution chain or with trade partners and to deny credit only on those samples which are taken out of business by way of disposal.
The above discussions lead to one conclusion - the provisions need to be read as a whole and interpretation which will further the objective of the law should be preferred than the one which will frustrate the same by over-reliance on restrictive clauses.
[The authors are Advocates practising independently. Views expressed are personal.]
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