Analyses of CBIC circular 241/35/2024 dated 31-12-2024- GST impications - Ex works contract - ITC availment - impact on place of supply

[Ketaan Mehta]

Re:-Circular no 241/35/2024-GST dated 31/12/2024 –Clarification on availability of input tax credit as per clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 in respect of goods which have been delivered by the supplier at his place of business under Ex-Works Contract- place of supply under Ex- works Contract

The Central Board of Indirect Taxes and Customs ( CBIC ), under the Ministry of Finance, issued Circular No. 241/35/2024-GST dated December 31, 2024, to provide clarity on the eligibility of Input Tax Credit (ITC) as per clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act). The circular addresses scenarios involving goods delivered under Ex-Works (EXW) contracts and aims to resolve disputes regarding the interpretation of the term “received” in the context of claiming ITC.

The circular clarifies that In the case of Ex-Works (EXW) contracts, goods are deemed to be “received” when they are handed over to a transporter at the supplier’s factory gate. This aligns with the Explanation to Clause (b), which recognizes receipt even if the goods are not yet physically with the registered person.

Further under EXW contracts, ownership of goods transfers to the buyer at the supplier’s factory gate when the goods are handed over to a transporter. This signifies the completion of the supplier’s obligation. The registered person (buyer) is considered to have “received” the goods at this point, regardless of the physical receipt occurring later.

Section 16(1) of the CGST Act states that ITC can only be claimed for goods or services that are used or intended to be used for business purposes. If goods are used for non-business purposes, ITC cannot be claimed. Similarly, if the goods are lost, stolen, or written off after receipt, ITC eligibility is forfeited.

Hence  Incase of Ex works contracts, goods are deemed to be received by recipient when they are handed over to transporter at factory gate . Hence Recipient is eligible to avail ITC when goods are deemed to  be received.

Though the clarification is silent on its implication on levy of GST by seller on his output, but if we look at place of supply as defined under IGST Act, 2017 

10. (1)

The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,--

(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;

Hence, the place of supply for Ex-Works should thus be the supplier’s place and CGST+SGST should be chargeable as per Section 10(1)(a) of IGST Act.

The Ex-works scenario apart from automobile business, it is very common on EPC contract also where contracts are issued by awarded on ex works bases for supply of goods and separate contract issued  for erection / installation works.

Taking note of above, the automobile business and EPC contractors has to revisit what treatment they are giving in their output invoice . Furthermore, this clarification may also lead to initiate  ITC litigation on the ground wrong availment for prior periods.  

The circular discussed in detail in following pages.

Re:-Circular no 241/35/2024-GST dated 31/12/2024 –Clarification on availability of input tax credit as per clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 in respect of goods which have been delivered by the supplier at his place of business under Ex-Works Contract- place of supply under Ex- works Contract-

The Central Board of Indirect Taxes and Customs ( CBIC ), under the Ministry of Finance, issued Circular No. 241/35/2024-GST dated December 31, 2024, to provide clarity on the eligibility of Input Tax Credit (ITC) as per clause (b) of sub-section (2) of section 16 of the Central Goods and Services Tax Act, 2017 (CGST Act). The circular addresses scenarios involving goods delivered under Ex-Works (EXW) contracts and aims to resolve disputes regarding the interpretation of the term “received” in the context of claiming ITC.

Background:

A query has been raised by automobile sector seeking clarification on availability of Input Tax Credit (ITC) under the Central Goods and Services Tax Act, 2017 (CGST Act).The question raised is

• whether ITC can be claimed for goods delivered by the supplier to their place of business under an Ex-Works (EXW) Contract, as per the provisions of clause (b) of sub-section(2) of section 16 of the CGST Act?

Contract terms

contracts between dealers and manufacturers (OEMs) often follow the EXW model. The contract provides the following conditions:          

• The ownership of goods (vehicles) transfers to the dealer at the factory gate when the OEM hands over vehicle  to a transporter, acting on behalf of the dealer. The OEM’s
• delivery obligation is complete at the factory gate.
• The OEM may arrange transportation and insurance on behalf of the dealer, but any claims for loss must be filed by the dealer.
• The dealer records the invoice in their accounts when the vehicles are handed over to the transporter.
• The dealer claims ITC when the vehicles are billed and handed over to the transporter at the OEM’s factory.

Some tax authorities believe that ITC can only be claimed after the dealer physically receives the vehicles at their business location. This has led to the issuance of show-cause notices to several dealers alleging improper ITC claims under Section 16(2)(b) of the CGST Act.

Clarification issued:

If we look at section 16(2) of the CGST Act, one will observe that section 16(2)(b) is a special provision that overrides the general rules in Section 16. It lists conditions that must be met for a registered person to claim an Input Tax Credit (ITC) for the supply of goods or services. One of these conditions, stated in Clause (b), is that a person cannot claim ITC unless they have “received” the goods or services. However, the Explanation to Clause (b) clarifies situations where the goods or services are considered “received” even if they are not physically in the possession of the person. These are called “deemed receipt” scenarios.

“Section 16. Eligibility and conditions for taking input tax credit.

 …

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him 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; (ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person;

….”

A plain reading of clause (b) of sub-section (2) of section 16 of the CGST Act makes it clear that there is no requirement for goods to be “received” at a specific location by the registered person. This differs from the old Central Excise rules, which required the physical receipt of goods at the manufacturer’s factory to claim CENVAT credit. Similarly, most State VAT laws did not explicitly require a physical receipt of goods at a specific place, and input tax credit was generally allowed based on the purchase of goods.

The main conditions for Claiming ITC under Clause (b) Clause (b) of sub-section (2) of Section 16 of the CGST Act is that Input Tax Credit (ITC) can only be claimed if the registered person has “received” the goods or services. i.e. without the receipt of goods or services, ITC cannot be availed. The term “received” is essential for establishing eligibility under the law.

However one look at Explanation of “Deemed Receipt” Scenarios The Explanation under Clause (b) expands the interpretation of “received” to include specific situations where the registered person may not have physical possession of the goods. Goods are deemed to be “received” under the following conditions:

• When the supplier delivers the goods to a transporter or another person on the registered person’s instructions, either before or during the movement of goods.
•  When delivery is confirmed through the transfer of documents of title or physical handover.

The explanation ensures that physical possession is not the sole criterion for deeming goods “received.” The CGST Act does not require that goods must be physically received at a specific location for ITC eligibility. This is a significant departure from older laws such as Central Excise, which required physical receipt at the manufacturer’s premises for claiming CENVAT credit. Under the CGST Act, ITC can be claimed based on deemed receipt, even if the goods are physically received at a later stage or at a different location.

ITC in EXW Contracts:  In the case of Ex-Works (EXW) contracts, goods are deemed to be “received” when they are handed over to a transporter at the supplier’s factory gate. This aligns with the Explanation to Clause (b), which recognizes receipt even if the goods are not yet physically with the registered person.

Further under EXW contracts, ownership of goods transfers to the buyer at the supplier’s factory gate when the goods are handed over to a transporter. This signifies the completion of the supplier’s obligation. The registered person (buyer) is considered to have “received” the goods at this point, regardless of the physical receipt occurring later.

Section 16(1) of the CGST Act states that ITC can only be claimed for goods or services that are used or intended to be used for business purposes. If goods are used for non-business purposes, ITC cannot be claimed. Similarly, if the goods are lost, stolen, or written off after receipt, ITC eligibility is forfeited.

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MTAS Comment:

Section 16(2)(b) provides -

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him 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;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.]

As such, based on explanation to Sec 16(2)(b), It would construed that transfer of property is passed on by the supplier to the recipient and he has received the goods where the goods are delivered by the supplier to a transporter or another person before movement of goods. Therefore, the recipient may claim ITC on date of such ‘receipt’.

Now, look at Section 10(1)(a) & 10(1)(b) of IGST Act which state as follows :

10. (1)

The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under,--

(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;

Hence, the place of supply for Ex-Works should thus be the supplier’s place and CGST+SGST should be chargeable as per Section 10(1)(a) of IGST Act.

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Ketaan Mehta

Mehta Tax Advisory Services

Discussions to this article

[deepak gulati]

This Circular is going to create huge confusion and litigation, at the conclusion it says :

 Hence, the place of supply for Ex-Works should thus be the supplier’s place and CGST+SGST should be chargeable as per Section 10(1)(a) of IGST Act.
 

Now consider most of cases, where the supplier and recipient of goods are in different state, as per this circular C & S to be charged. The recipient will not get Input credit inspite of satisfying all conditions of section 16. 

[Ketaan Mehta]

Many of EPC contractor are operating contract on ex-works  under identical contrcatual terma and raising supply invoices charging IGST .  This clarification may impact all of them