GST: CBIC Clarifies ITC Eligibility for Goods Delivered Under Ex-Works Contracts as per 16(2)(b) of CGST Act [Read Circular]

The Central Board of Indirect Taxes and Customs ( CBIC ), under the Ministry of Finance, issued Circular No. 241/35/2024-GST dated December 31, 2024, to provide clarity on the eligibility of Input Tax Credit (ITC) as per clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act).

This clarification addresses scenarios involving goods delivered under Ex-Works (EXW) contracts and aims to resolve disputes regarding the interpretation of the term "received" in the context of claiming ITC.

Background:

A query has been raised from the automobile sector seeking clarification regarding the availability of Input Tax Credit (ITC) under the Central Goods and Services Tax Act, 2017 (CGST Act). Specifically, the question is about whether ITC can be claimed for goods delivered by the supplier to their place of business under an Ex-Works (EXW) Contract, as per the provisions of clause (b) of sub-section (2) of section 16 of the CGST Act.

In the automobile sector, contracts between dealers and manufacturers (OEMs) often follow the EXW model. Under this contract:

• The ownership of goods (vehicles) transfers to the dealer at the factory gate when the OEM hands the goods over to a transporter, acting on behalf of the dealer.
• The OEM's delivery obligation is complete at the factory gate.
• The OEM may arrange transportation and insurance on behalf of the dealer, but any claims for loss must be filed by the dealer.
• The dealer records the invoice in their accounts when the vehicles are handed over to the transporter.
• The dealer claims ITC when the vehicles are billed and handed over to the transporter at the OEM’s factory.

Some tax authorities believe that ITC can only be claimed after the dealer physically receives the vehicles at their business location. This has led to the issuance of show-cause notices to several dealers alleging improper ITC claims under Section 16(2)(b)of the CGST Act.

Clarification on the Matter

Overview of Section 16(2) of the CGST Act: Section 16(2) of the CGST Act is a special provision that overrides the general rules in Section 16. It lists conditions that must be met for a registered person to claim an Input Tax Credit (ITC) for the supply of goods or services.

One of these conditions, stated in Clause (b), is that a person cannot claim ITC unless they have "received" the goods or services. However, the Explanation to Clause (b) clarifies situations where the goods or services are considered "received" even if they are not physically in the possession of the person. These are called "deemed receipt" scenarios.

“Section 16. Eligibility and conditions for taking input tax credit.
…
(2) Notwithstanding anything contained in this section, no registered person shall be
entitled to the credit of any input tax in respect of any supply of goods or services or
both to him unless, -
...
(b) he has received the goods or services or both.

Explanation.- For the purposes of this clause, it shall be deemed that the registered
person has received the goods or, as the case may be, services-
(i) where the goods are delivered by the supplier to a recipient or any other person on
the direction of such registered person, whether acting as an agent or otherwise,
before or during movement of goods, either by way of transfer of documents of title to
goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of
and on account of such registered person;
…”

A plain reading of clause (b) of sub-section (2) of section 16 of the CGST Act makes it clear that there is no requirement for goods to be “received” at a specific location by the registered person. This differs from the old Central Excise rules, which required the physical receipt of goods at the manufacturer’s factory to claim CENVAT credit. Similarly, most State VAT laws did not explicitly require a physical receipt of goods at a specific place, and input tax credit was generally allowed based on the purchase of goods.

Conditions for Claiming ITC under Clause (b)

Clause (b) of sub-section (2) of Section 16 of the CGST Act specifies that Input Tax Credit (ITC) can only be claimed if the registered person has "received" the goods or services. This means that without the receipt of goods or services, ITC cannot be availed. The term "received" is essential for establishing eligibility under the law.

Explanation of "Deemed Receipt" Scenarios

The Explanation under Clause (b) expands the interpretation of "received" to include specific situations where the registered person may not have physical possession of the goods. Goods are deemed to be "received" under the following conditions:

1. When the supplier delivers the goods to a transporter or another person on the registered person's instructions, either before or during the movement of goods.
2. When delivery is confirmed through the transfer of documents of title or physical handover.

This clarification ensures that physical possession is not the sole criterion for deeming goods "received."

No Specific Requirement for Location of Receipt

The CGST Act does not require that goods must be physically received at a specific location for ITC eligibility. This is a significant departure from older laws such as Central Excise, which required physical receipt at the manufacturer’s premises for claiming CENVAT credit. Under the CGST Act, ITC can be claimed based on deemed receipt, even if the goods are physically received at a later stage or at a different location.

Applicability of ITC in EXW Contracts

In the case of Ex-Works (EXW) contracts, goods are deemed to be "received" when they are handed over to a transporter at the supplier’s factory gate. This aligns with the Explanation to Clause (b), which recognizes receipt even if the goods are not yet physically with the registered person.

Ownership Transfer at the Factory Gate

Under EXW contracts, ownership of goods transfers to the buyer at the supplier's factory gate when the goods are handed over to a transporter. This signifies the completion of the supplier's obligation. The registered person (buyer) is considered to have "received" the goods at this point, regardless of the physical receipt occurring later.

Alignment with Business Use and Other Provisions of CGST Act

Section 16(1) of the CGST Act states that ITC can only be claimed for goods or services that are used or intended to be used for business purposes. If goods are used for non-business purposes, ITC cannot be claimed. Similarly, if the goods are lost, stolen, or written off after receipt, ITC eligibility is forfeited.

Importance of Compliance with Section 17(5)

Section 17(5) imposes additional restrictions on ITC claims. Goods that are lost, destroyed, or disposed of as gifts or free samples after receipt are not eligible for ITC. Businesses must ensure compliance with these provisions to avoid disallowed claims.

CBIC requested the issuance of appropriate trade notices to spread the contents of this Circular, with any implementation difficulties to be reported to the Board. A Hindi version of the Circular will also follow.

To Read the full text of the Circular CLICK HERE

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