Clarification on Input Tax Credit Availability under Ex-Works Contracts in the Automobile Sector

Introduction
The Central Board of Indirect Taxes and Customs (CBIC) has issued a clarification regarding the availability of Input Tax Credit (ITC) under clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act). This clarification specifically addresses situations where goods are delivered by a supplier at their place of business under an Ex-Works (EXW) contract. The matter has been a point of concern, particularly in the automobile sector.

Background
In the automobile sector, the relationship between Original Equipment Manufacturers (OEMs) and dealers is commonly governed by EXW contracts. Under these contracts:

• The property in goods (e.g., vehicles) is transferred to the dealer at the factory gate of the OEM.
• Goods are handed over to a transporter arranged by the OEM on behalf of the dealer.
• Insurance, if arranged, is done in the dealer’s name, and any claims must be lodged by the dealer.

The dealers typically account for the goods and avail ITC based on invoices raised when the goods are handed over to the transporter at the factory gate. However, some field formations have challenged this practice, contending that ITC can only be availed once the goods physically reach the dealer’s business premises. Show cause notices have been issued, leading to confusion among dealers.

Legal Framework
Clause (b) of sub-section (2) of section 16 of the CGST Act states that a registered person can claim ITC only if they have “received” the goods or services. The explanation to this clause further clarifies that the receipt of goods includes scenarios where:

1. Goods are delivered by the supplier to a recipient or another person on the registered person’s direction, either before or during the movement of goods.
2. Delivery may occur through the transfer of documents of title or otherwise.

Key Clarifications

1. Receipt of Goods
   The provision does not mandate physical receipt of goods at a specific location. Unlike the erstwhile Central Excise regime, where CENVAT credit required physical receipt at the factory, the CGST Act provides for deemed receipt under certain conditions.
2. Deemed Receipt Under EXW Contracts
   In EXW contracts, goods are deemed to have been received when:

• The supplier hands over the goods to the transporter at their factory gate.
• The property in the goods passes to the dealer at this point.
• Transport and insurance, if arranged, are done on behalf of the dealer.

3. Applicability Beyond the Automobile Sector
   The same principles apply to other industries where goods are delivered under EXW contracts. The registered recipient is considered to have “received” the goods at the supplier’s premises upon handing over to the transporter.

Conditions for Availing ITC

1. Use in Business
   ITC can only be claimed if the goods are used or intended to be used in the course of business.
2. Non-Business Diversion
   If the goods are diverted for non-business purposes or lost, stolen, or destroyed, ITC will not be available.
3. Compliance with Other Provisions
   Other conditions under sections 16 and 17 of the CGST Act must also be fulfilled.

Conclusion
This clarification brings much-needed uniformity and clarity to the interpretation of ITC eligibility under EXW contracts. Dealers in the automobile sector and other industries can now proceed with confidence, provided they adhere to the specified conditions. This move is expected to streamline operations and reduce unnecessary litigation.

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