QUESTION

Goods are imported by XYZ from foreign buyer PQR. After receiving the goods, it is found that the goods are deficient in terms of its quality. Therefore, XYZ had performed some re - work / repair on it before putting it in to use. The re - work / repair charges were recovered from the foreign supplier PQR by issuing a Debit Note. Is XYZ required to pay GST on the amount recovered from PQR?

ANSWER

FACTS OF THE CASE:

Imported goods are found to be deficient and are re-worked upon. Re-work charges were recovered from the foreign party and a debit note was raised for the same.

LAW APPLICABLE:

1. Sub section (1) of section 34 CGST dictates that
"Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed."

2. Section 34(3) CGST is laid as follows
"Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient one or more debit notes for supplies made in a financial year containing such particulars as may be prescribed."

INTERPRETATION:

The right to issue a debit note or a credit note is bestowed upon the supplier of goods or services by the Act. Section 34 of CGST Act mandates that such a document shall only be issued by the supplier and not by the receiver. If however the receiver issues such a document then that document can not be said to be "debit note" or a "credit note" within the ambit of GST law and the same shall be treated merely as a financial debit/credit note with no GST implications on output tax liability or ITC.
In the current case, when the importer issues a debit note to the foreign party the same is merely a financial debit note and it can not impact the GST liability or the GST credit. This debit note should also not be shown in GST returns. It can merely be used to settle the ledger for accounting purposes.

CONCLUSION:

The GST liability on RCM basis on import can not be reduced by a financial debit note. RCM is still to be paid on the original amount. To effect the liability you may request a credit note from the freign party or issue a compensation invoice to them. (Reply dt. 20/08/2021)