Clarification on the availability of input tax credit as per clause (b) of subsection (2) of section 16 of the Central Goods and Services Tax Act, 2017 in respect of goods which have been delivered by the supplier at his place of business under Ex-Works Contract-reg

Analysis of Input Tax Credit (ITC) on Ex-Works (EXW) Contracts: Automobile Sector

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Background of the Issue

1. Reference: Automobile dealers sought clarification on ITC eligibility under Section 16(2)(b) of the CGST Act for goods delivered under Ex-Works (EXW) contracts.
2. Context:
   • In EXW contracts, the ownership of goods (e.g., vehicles) transfers to the dealer when the supplier (OEM) hands over the goods to the transporter at the factory gate.
   • Dealers account for the invoice and claim ITC based on this transaction.
   • Disputes arose when field formations issued show cause notices, asserting ITC could only be claimed when goods were physically received at the dealer’s premises.

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Legal Basis for ITC Eligibility

1. Section 16(2)(b) of CGST Act:
   • ITC can only be claimed when the registered person has “received” the goods.
   • Explanation to Section 16(2)(b):
     • Goods are deemed to be “received” when delivered to a recipient or a third party (e.g., transporter) on the registered person’s directions during or before movement of goods.
2. No Physical Receipt Requirement:
   • Unlike the Central Excise regime, the CGST Act does not require physical receipt of goods at a particular location for ITC eligibility.

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Clarifications Provided

1. Deemed Receipt under EXW Contracts:
   • When goods are handed over to a transporter at the supplier’s factory gate for onward delivery:
     • The property in goods is transferred to the dealer.
     • The dealer is deemed to have “received” the goods under Section 16(2)(b).
   • Physical delivery to the dealer’s business premises is not a condition for ITC eligibility.
2. Applicability Beyond the Automobile Sector:
   • The same principle applies to any supply where:
     • The contract is EXW.
     • Goods are handed over to a transporter or other party on the recipient’s direction, and ownership transfers at that point.
3. Conditions for ITC Utilization:
   • ITC is available only if the goods are used or intended to be used for business purposes, as per Section 16(1).
   • If goods are diverted for non-business purposes or are lost, stolen, destroyed, or written off, ITC is not allowed.

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Key Implications

1. For Dealers and Other Recipients:
   • ITC can be availed upon transfer of goods to the transporter or designated party at the supplier’s premises, provided ownership is transferred as per the contract.
   • Physical receipt at the business location is unnecessary.
2. For Field Formations:
   • Disputes and show cause notices requiring physical receipt at the dealer’s location should be avoided in such cases.
   • Uniform application of provisions under Section 16(2)(b) is essential.
3. Compliance Requirements:
   • Dealers must ensure proper documentation of EXW terms, including invoices, transport arrangements, and any relevant agreements with the supplier.
   • If goods are later diverted for non-business purposes, ITC must be reversed.

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Conclusion

The clarification resolves disputes on ITC eligibility under EXW contracts by emphasizing deemed receipt provisions in Section 16(2)(b). Dealers and other recipients should ensure compliance with the conditions of Section 16 and Section 17 while maintaining appropriate records to substantiate their claims.