JANUARY 07, 2025

By CA Aumkar Gadgil

THE term 'circular reference' (or reference cycle) means ' Chain of logical connections that form a loop'. Often this loop is of interconnected and interlinked functions. The usage of this term perhaps appears to be off track in a tax write up. However, the recently introduced CBIC Circular No 241/35/2024 dated 31 st December 2024, has certainly triggered this thought to title a tax article as 'circular reference'.

The circular prima facie encapsulates the clarification on the issue of 'Eligibility' to claim of Input tax credit u/s 16(2)(b) of the CGST Act, by 'automobile dealers' at the time of purchase from a 'Original Equipment Manufacturer' under an Ex-works contract. Further the circular even extends its connotation to other sectors involving supplies of goods especially under an 'Ex-works' contract. As per the circular, a 'recipient' of supply who has taken the delivery of goods on 'ex-works' basis, at the premises of the 'supplier' through a 'transporter', it shall be deemed that for the purpose of section 16(2)(b), that the delivery of goods for the 'supplier' is completed and that the 'recipient' has 'received' the goods. In other words, it can be said that in case of 'ex-works' contracts, the condition that the goods shall be 'received' shall encompass not only physical receipt but also receipt by way of a constructive delivery (handing over of goods by the 'supplier' along with document of title). This brings up two important aspects into discussion. What would be the impact on 'Input tax credit' provisions? What would be the impact on 'Place of supply' provisions?

- What would be the impact on 'Input tax credit' provisions?

By virtue of provisions under section 16 of the CGST Act (Eligibility to claim ITC), (2) Notwithstanding….. unless,

(b) he has received the goods or services or both. Explanation: For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

As per the circular, in every Ex-works contract, the deeming fiction as specified in explanation to Section 16(2) would by default become applicable. The eligibility to claim the input tax credit to the 'recipient' would be defined, the moment there is a transfer in title to the goods by the 'supplier', when he hands over the possession and documents of title to the 'transporter' on behalf of the recipient. This way, the provisions of section 16(2)(b) would almost become redundant to the extent of 'Ex-works' contract transactions. This sounds tough to digest that a circular is annulling the provision in force as section 16(2)(b) permits the claim of Input tax credit in respect of 'goods received'. Here, it has been an openly debated issue whether this means 'physical receipt' or 'deemed receipt'. Leaving this apart, it has also been constantly a point for findings in audits conducted by GST department and even in scrutiny-based notices, where a lot of emphasis has been given on the fact that if the goods are not received then Input tax credit shall not be considered eligible, unless the goods are physically received at the registered premises. For example, when the supplier has dispatched the goods after 25th June 2024 supplier has already issued tax invoice and all documents of title, such invoices are also uploaded in GSTR-1 returns, but goods are actually received physically in 1 st week July 2024. In such cases, as of now the eligibility of Input tax credit was deferred to the month of July 2024 as the goods would not be actually received by end of June 2024 (relevant tax period when ITC would have otherwise been available). This would often also lead to working capital block as the deferral of Input tax credit due to such reason would often lead to compelled tax payment in cash. Now that this circular is issued, would Ex-works contracts be left out from this limitation and have a permissible claim of ITC on basis of 'constructive delivery'? This is one pertinent question which will now surface and possibly lead to further litigation.

- What would be the impact on 'Place of supply' provisions?

As per provisions of Section 10(1) of IGST Act ( (a) where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient; (b) where the goods are delivered by the supplier to a recipient or any other person on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person;

The point relevant for discussion would be, as to how the place of supply would be determined, especially in case where the recipient does not hold a registration in the state where the supplier is located and where the contract between the supplier and the recipient is of 'Ex-works' basis. The reason being that under current circumstances, referring to the provisions of section 10(1)(a) of the IGST Act 2017, in case of supply involving movement of the goods the place of supply Is considered to be a place where the movement of the goods terminates for the purpose of delivery. This particular aspect we wish to discuss in the light of two specific points envisaged in the referred circular.

In Para 3.3.1 (…. the property in the said goods can be considered to have been passed on to the dealer by the OEM upon handing over of the said goods to the transporter at his factory gate, meaning thereby that the goods can be considered to have been delivered to the registered person (the dealer), through the transporter, by the supplier (the OEM) at his factory gate and the supply of the said goods can be considered to have fructified at the factory gate of the OEM , ……………………)

Further followed by in Para 3.4

(The same principle is applicable in respect of supply of other goods also where the contract between the supplier and recipient is an EXW contract…………)

Thus, taking cue from the above, if the same is read with the provisions of Section 10(1)(a) of the IGST Act 2017, by virtue of above points in circular, since the delivery of goods is said to have been taking place at the supplier's end, the movement for the purpose of delivery would be construed to have taken place and thereby leading to the 'place of supply' being the premises of the 'supplier'.

Now in this case, assume that the recipient is registered in state of 'Maharashtra' only and the supplier is registered in the state of 'Gujarat' only. If the transaction happens to be a 'Ex-works' contract, then the place of supply would be 'Gujarat' by virtue of above discussion. In such case, the 'location of supplier' and 'place of supply' would both be 'Gujarat' making the transaction as 'Intra state supply' in accordance with provisions of section 8 of the IGST Act, 2017 and the supplier would be compelled to levy (CGST+SGST) of Gujarat. Owing to this, the Input tax credit claim at the recipients end in Maharashtra would be under threat as he does not hold registration in state of 'Gujarat'. This certainly would be a challenge for the taxpayers entering in above mentioned type of transaction. One would say then the obvious way to deal with this situation is to try and have the transaction covered under scenario covered under section 10(1)(b) as quoted above. However, for a transaction under this segment the specific scenario which is well covered under the provisions and rules for 'Invoicing' and 'E-way Bills' entails entering the 'location of the ultimate recipient who is often referred to as 'ship to party'. In the reference to the Circular 241/35/2024, as specifically mentioned there is no explicit 'Bill to ship to' contract in such case, can the 'transporter' be called as a 'agent receiving the goods or taking delivery'? The concern is that even though if the transporter can be disguised as a 'recipient' or 'agent' or 'any other person' as specified in section 10(1)(b), it is impossible to do so without actually amending the 'Invoice' and 'E-way bill' rules as well as portal related changes. Since there is no amendment which has been made in either, its really hard to believe that the circular can be really brought into practical use. At one end, the recipients Input tax credit comes in trouble; on the other end the 'legality and modality' stands missing.

In order to conclude, the issues which are now wide open for assumptions, discussions, arguments and debates are -

a. If merely on the supplier handing over goods to 'transporter' is amounting to 'delivery' and 'deemed receipt' for the supplier, then is section 16(2)(b) really relevant, especially in case of 'Ex-works contracts? Further, can the authorities, going forward challenge the validity or eligibility of Input tax credit, especially when the inward supplies are only by way of a 'constructive delivery' and not 'physical delivery'?

b. Can a paradigm shift be made in permitting 'Ex-works' contract to determine the 'place of supply' as per section 10(1)(b) where actually the 'supplier' and 'recipient' were in a pure 'B to B' supply and the transporter is only a representative receiving the goods on behalf of the recipient?

Since a Pandora's box is opened by this very circular leading us to think through the deep inter linkage between Section 16 of the CGST Act, Section 10 of the IGST Act, provisions and rules for Invoicing and E-way bills etc, thus we believe that this 'circular 241/35/2024 has certainly created a 'circular reference'.

[The views expressed are strictly personal.]