Clarification on Input Tax Credit (ITC) for Goods Delivered Under Ex-Works (EXW) Contracts

On December 31, 2024, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 241/35/2024-GSTto address ambiguities regarding the availability of input tax credit (ITC) for goods delivered under Ex-Works (EXW) contracts. The circular provides much-needed clarity, particularly for the automobile sector, where EXW contracts are commonly used.

Background

Under EXW contracts, property in goods is transferred to the buyer at the supplier’s factory gate. However, some field formations have contested ITC claims on goods that have not been physically received at the buyer’s business premises. The CBIC’s clarification ensures uniformity in the implementation of Section 16(2)(b) of the CGST Act, 2017.

Key Characteristics of EXW Contracts:

1. Goods are handed over to the transporter at the supplier’s factory gate.
2. Transportation and insurance are arranged by the supplier on behalf of the buyer.
3. Property in goods transfers to the buyer when handed over to the transporter.
4. Buyers account for the invoice in their books upon delivery to the transporter.

Legal Framework

Section 16(2)(b) of the CGST Act:

• A registered person cannot claim ITC unless they have “received” the goods or services.
• Explanation to Clause (b):
  • Goods are deemed “received” if:
    1. Delivered by the supplier to the recipient or any person on their direction.
    2. Delivery occurs before or during movement, either by transferring documents of title or otherwise.

CBIC’s Clarification

Deemed Receipt of Goods:

• Goods are considered “received” when handed over to the transporter at the supplier’s factory gate if:
  1. The supplier delivers goods to the transporter on the buyer’s behalf.
  2. Property in goods transfers to the buyer at the time of such delivery.

Application to EXW Contracts:

• In EXW contracts, the supplier’s responsibility ends upon handing over goods to the transporter.
• Even though goods physically reach the buyer’s premises after transit, ITC can be claimed from the date of delivery to the transporter.

Applicability to Other Goods:

• The same principle applies to other goods delivered under EXW contracts where property is transferred at the supplier’s location.

Conditions for ITC Eligibility

1. Business Use:
   • Goods must be used or intended to be used in the course or furtherance of business.
2. Compliance with CGST Provisions:
   • Other conditions under Section 16 and Section 17 must be satisfied.
3. Restrictions on ITC:
   • ITC cannot be claimed if goods are:
     • Diverted for non-business purposes.
     • Lost, stolen, destroyed, written off, or given away as gifts or free samples.

Examples for Clarity

Scenario 1: Automobile Dealer

• Contract Type: EXW contract with an OEM.
• Delivery Point: Factory gate of the OEM.
• Transport & Insurance: Arranged by OEM on behalf of the dealer.
• ITC Claim: Dealer can claim ITC from the date the goods are handed over to the transporter.

Scenario 2: FMCG Distributor

• Contract Type: EXW contract with a supplier.
• Delivery Point: Supplier’s warehouse.
• Transport Responsibility: Distributor’s transporter.
• ITC Claim: Distributor can claim ITC upon receipt of goods at the warehouse.

Implications for Taxpayers

1. Dealers and Distributors:
   • Can claim ITC for goods delivered to a transporter, even if physically received later.
2. Suppliers:
   • Must ensure clear documentation to establish the transfer of property and delivery responsibility.
3. Field Formations:
   • Must adhere to CBIC’s clarification to avoid inconsistent interpretations.

Conclusion

The CBIC’s clarification resolves long-standing ambiguities regarding ITC eligibility for goods under EXW contracts. By deeming goods “received” upon transfer to a transporter, the circular aligns GST provisions with business practices, particularly in sectors like automobiles and FMCG. Taxpayers are advised to maintain proper documentation to substantiate ITC claims and comply with all relevant conditions.

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