Summary
The Central Board of Indirect Taxes and Customs (CBIC), vide Circular No. 241/35/2024-GST dated 31 December 2024, has clarified the availability of Input Tax Credit (ITC) under Section 16(2)(b) of the CGST Act, 2017, in cases where goods are supplied under an Ex-Works (EXW) contract.
The clarification addresses situations where the supplier hands over goods to a transporter at the supplier’s factory or business premises, while the goods physically reach the recipient at a later date.
Legal Issue
Section 16(2)(b) of the CGST Act provides that a registered person must have received the goods or services to claim ITC. The issue was whether a recipient could claim ITC when goods had been handed over to a transporter at the supplier’s premises but had not yet physically reached the recipient’s business premises.
This issue was particularly relevant in the automobile sector, where vehicle dealers commonly purchase vehicles from original equipment manufacturers (OEMs) under EXW contracts.
CBIC Clarification
1. Meaning of Receipt of Goods under Section 16(2)(b)
CBIC clarified that Section 16(2)(b) does not prescribe any particular place where goods must be physically received. The Explanation to this provision also recognises deemed receipt of goods where the supplier delivers them to the recipient or to another person on the recipient’s direction.
2. ITC under Ex-Works Contracts
Where the terms of an EXW contract provide that:
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The supplier hands over the goods to the transporter at the supplier’s factory or business premises;
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The transportation is arranged by the supplier on behalf of the recipient, or otherwise in accordance with the contract;
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The goods are handed over to the transporter on behalf of the recipient; and
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The property in the goods passes to the recipient at the time of such handover,
the recipient may be considered to have received the goods for the purpose of Section 16(2)(b) at the time the supplier hands them over to the transporter. Physical arrival of the goods at the recipient’s premises at a later date does not, by itself, prevent the recipient from claiming ITC.
3. Applicability to Other Goods
CBIC clarified that the same principle applies to supplies of other goods where the contract is an EXW contract and the goods are delivered to the recipient, or to another person such as a transporter on the recipient’s behalf, at the supplier’s premises, with the property in the goods passing to the recipient at the time of handover.
Conditions and Important Limitations
The clarification does not provide an unconditional entitlement to ITC. The recipient must continue to satisfy the other applicable requirements of Sections 16 and 17 of the CGST Act, 2017.
Business Use of Goods
Under Section 16(1), ITC is available only where the goods are used or intended to be used in the course or furtherance of business.
Diversion or Loss of Goods
If goods are diverted for non-business purposes before or after physical receipt, ITC is not available in accordance with the applicable provisions. Further, where goods are lost, stolen, destroyed, written off, or disposed of by way of gift or free samples after receipt, Section 17(5)(h) may restrict ITC.
Practical Implications for Businesses
Businesses operating under EXW contracts should carefully examine the contractual terms and maintain appropriate supporting documentation, including:
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Purchase orders and EXW contract terms;
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Supplier invoices;
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Transporter receipts, consignment notes or other evidence of handover;
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Documents establishing the transfer of property in the goods, where relevant; and
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Records demonstrating that the goods are used or intended to be used for business purposes.
The precise contractual arrangement and supporting records are important when determining the eligibility and timing of ITC.
Conclusion
Circular No. 241/35/2024-GST clarifies that, in qualifying EXW transactions, goods may be considered received for ITC purposes when they are handed over by the supplier to the transporter on behalf of the recipient and the property in the goods passes to the recipient at that stage. However, ITC remains subject to the other applicable conditions and restrictions under the CGST Act, 2017.
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