GAAAR Upholds Denial of ITC on Share Buyback Expenses for Gujarat Narmada Valley Fertilizers & Chemicals Ltd [Read Order]

The Gujarat Appellate Authority for Advance Ruling (GAAAR) upheld that expenses such as professional fees and legal charges relating to the buyback are not eligible for ITC, and further mandated the reversal of common input credit.

Gujarat Narmada Valley Fertilizers & Chemicals Ltd [GNFC] (applicant), a Public Limited Company engaged in the manufacturing of fertilizers and chemicals, initiated a share buyback program in December 2023. The company incurred various incidental expenses and sought an Advance Ruling (AR) on the eligibility of ITC for these costs.

The Gujarat Authority for Advance Ruling (GAAR) initially ruled that the applicant company GNFC was not eligible to avail ITC on the expenditure and was required to reverse the ITC on common inputs and input services used in relation to the buyback.

Read More: No ITC on Share Buyback Expenses Unless Linked to Taxable Supply: AAR [Read Order]

Aggrieved by the GAAR ruling, the applicant filed an appeal before the GAAAR. The applicant contended that the expenses were incurred as part of an activity buyback of shares that is covered under the definition of ‘business’ under the act and is undertaken in the course or furtherance of business.

The applicant also stated that while the buyback does not directly result in immediate outward taxable supply, it is an essential step towards optimizing financial health, which ultimately increases the company's ability to make future taxable supplies.

The applicant also argued that GAAR’s direction for the reversal of ITC attributable to common expenses was legally incorrect, arguing that the term 'transaction in securities' should be read in conjunction with the value of exempt supply and not independently.

The GAAAR bench comprising Rajeev Topno (SGST) and Sunil Kumar Mall (CGST) upheld the original AAR ruling, dismissing all arguments made by the appellant.

The GAAAR confirmed that shares are securities as per the Securities Contracts (Regulation) Act, 1956. By virtue of their exclusion from the definitions of both 'goods' [Section 2(52)] and 'services' [Section 2(102)], a transaction in securities is not a "supply" under GST and is thus not taxable.

The Authority emphasized that the eligibility for ITC under Section 16(1) was subject to conditions and restrictions laid down in Sections 17 and 18 of the GST Act.

Specifically, Section 17(2) restricts ITC allowance only to the extent of expenses attributable to taxable supplies. Since a transaction in securities is not a taxable supply, the ITC paid on goods or services used for it is disallowed.

The GAAAR stated that the argument that the activities are in the course of furtherance of business was wholly irrelevant to decide the availability of ITC if the activities are in relation to transaction in securities.

The GAAAR thus concluded that the deeming fiction legally necessitated the reversal of common ITC, thereby validating the GAAR’s original ruling.

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The GAAAR confirmed that no ITC is admissible on share buyback expenses as they relate to transactions in securities, which are treated as 'exempt supply' for the purpose of ITC reversal under GST law. The authority rejected the appeal.