QUESTION

As per SCHEDULE II of Section 7 of CGST Act.,2017 at para 5(e) , it has been mentioned that (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and Department is raising demand on this issue (i) If a RP not pay amount to creditor which is due since PRE GST regime and (ii) Deducted some amount of creditor/ job worker on account of quality difference/defect in GST regime. Then Both deducted amount are adjusted against expenses in P& Loss account of R P. Whether both deducted amount are liable for GST as service income under head 5(e) of Schedule II,

ANSWER

In your question it is not mentioned how the credit balance is created. We assumed in our reply that it is a part amount due against goods/ services supplied. The transaction is divided into 2 regimes: Pre GST Regime and Post GST Regime.

Pre GST Regime:
CASE 1: Writing off of credit balance will not attract any service tax*.

CASE 2: Reduction from purchase A/c as a discount: In this case, Excise/Service Tax was paid on assessable value. The same is reduced by you by posting discount amount. On this no tax is to be charged by you but the supplier can file refund of Excise/Service tax on the discount amount. However this refund will be rejected on following grounds:
(i) Time barred
(ii) CENVAT credit is already taken and utilized by you

Post GST Regime:
CASE 1: If the time limit under section 34 is not expired
Issue a debit note to the supplier and the supplier will issue a credit note and get a reduction in tax liability

CASE 2: If the time limit under section 34 is expired
You can issue commercial Debit Note without disturbing GST liability and ITC or you can issue Debit Note with GST amount and supplier may claim refund of the same.

CASE 3: * You don't want to issue Debit Note and want to write off instead of deducting the amount from Purchase A/c.

* Further Interpretation:
INTERPRETATION 1
Case 1 of Pre GST regime and Case 3 of Post GST regime are same. If you are writing off an amount due to the creditor, it cannot be considered as Supply u/s 7. It is a suo moto action taken by you. A person cannot provide service to himself. This case is well decided by Bangalore Tribunal in case of Precot Mills Ltd. v/s Commissioner of Central Excise. the extract of the case is reproduced below:

"M/s. Precot Mills Ltd. is a Corporate entity. It has got various units which function as separate profit centers. When service is rendered by one unit to the other, debit note is raised for the value of service in order to evaluate the performance of a particular unit. Ultimately there is only one Balance sheet for the legal entity for M/s. Precot Mills Ltd. and not for the separate unit. In other words, the appellants, M/s. Precot Mills Ltd. do not receive any valuable consideration for services rendered by one unit of the appellant to the other unit, in view of the fact that the each unit is part of the same legal entity which is the appellant. To put it differently, when one renders service to oneself, as in the present case, there is no question of leviability of service tax."

There are chances that SCN may be issued taking liability to pay tax under clause 5(e) of Schedule II. But you can file reply on the same.

INTERPRETATION 2
In case the amount is written off because it is permitted in some clause of agreement between debtor and creditor, then we have to go through the agreement to decide the tax liability. (Reply dt. 31/03/2021)