On December 31, 2024, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 241/35/2024-GST, addressing a critical concern regarding Input Tax Credit (ITC) for goods delivered under EX-Works (EXW) contracts. This clarification is particularly significant for the automobile sector, where such contracts are standard.
Context of the Circular
The circular focuses on Section 16(2)(b) of the Central Goods and Services Tax (CGST) Act, 2017, which mandates that ITC can only be availed when the recipient “receives” the goods or services. However, ambiguity arose when goods were handed over to transporters at the supplier’s premises under EXW contracts. Some field formations interpreted “receipt” as physical delivery at the buyer’s premises, leading to disputes and tax demands.
Key Highlights
- EX-Works Contracts in Focus:
- In EXW contracts, ownership of goods transfers to the buyer when the supplier hands over the goods to the transporter.
- Transport and insurance are often arranged by the supplier on behalf of the buyer, making the buyer responsible for any claims during transit.
- Clarification on ‘Receipt of Goods’:
- As per Section 16(2)(b), goods are considered “received” when:
- Delivered directly to the buyer.
- Delivered to a third party (e.g., transporter) on the buyer’s instructions.
- The circular explicitly states that goods handed over to transporters at the supplier’s premises fulfill the “receipt” requirement for ITC claims.
- As per Section 16(2)(b), goods are considered “received” when:
- Application Beyond Automobiles:
- The principle applies to other sectors with EXW contracts, ensuring consistent interpretation across industries.
- Conditions for ITC Eligibility:
- Goods must be used in the course or furtherance of business.
- ITC is not available if goods are diverted for non-business purposes, lost, or disposed of as free samples or gifts.
Implications for Businesses
- For Automobile Dealers:
- Resolves disputes regarding ITC eligibility for vehicles received under EXW contracts.
- Ensures smoother compliance with GST provisions.
- For Other Industries:
- Provides a clear framework for ITC claims under EXW contracts.
- Reduces legal uncertainties and potential tax disputes.
- For Tax Administration:
- Promotes uniform application of GST rules across jurisdictions.
- Simplifies ITC verification processes.
Practical Scenarios
- Scenario 1: A dealer receives vehicles at the factory gate of the manufacturer. Transport and insurance are arranged by the manufacturer on behalf of the dealer. The dealer can claim ITC when the goods are handed over to the transporter, even if they physically arrive at the dealer’s showroom days later.
- Scenario 2: A supplier delivers goods to a transporter as per the recipient’s instructions. The recipient is eligible to claim ITC once the supplier hands over the goods to the transporter.
Conclusion
GST Circular No. 241/2024 offers much-needed clarity on ITC eligibility under EXW contracts, addressing a key pain point for businesses. By defining “receipt of goods” in practical terms, it ensures fairness and uniformity in GST compliance. Businesses are encouraged to align their practices with this clarification to avoid disputes and penalties.
