License Fee Recovery for leased pumps qualifies as common input service restricting full input tax credit under Section 17(2)

AAR Kerala ruled that the applicant, engaged in both taxable and exempt supplies, cannot claim full input tax credit on License Fee Recovery for leasing of pumps and equipment. The service constitutes common input services used for both taxable and exempt supplies, making Section 17(2) of CGST Act applicable. Credit is restricted to the proportion attributable to taxable supplies as determined under Rule 42 of CGST Rules. The query regarding tax rate on inward supply was deemed outside advance ruling scope since applicant was service recipient, not provider.

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Issues Involved:
1. Admissibility of input tax credit (ITC) on inward supply of services by way of License Fee Recovery (LFR) on leasing of pumps along with the equipment.
2. Rate of tax applicable on the inward supply of services of leasing of pumps along with the equipment.

Summary:

Issue 1: Admissibility of Input Tax Credit (ITC)
The applicant, a retail dealer of Hindustan Petroleum Corporation Ltd, sought advance ruling on the admissibility of ITC against the tax paid on services received for leasing pumps and equipment. The applicant argued that since the supply of petrol and petroleum products is neither exempt nor non-taxable, Rule 42 of the CGST Rules, which mandates proportional reversal of ITC for common inputs used for taxable and exempt supplies, should not apply. The Authority, however, concluded that the supply of petrol and diesel falls under the definition of "non-taxable supply" as per Section 2(78) of the CGST Act, 2017, and consequently within the definition of "exempt supply" under Section 2(47). Therefore, the applicant is engaged in both taxable and exempt supplies, making the provisions of sub-section (2) of Section 17 of the CGST Act applicable. The applicant is eligible only for proportionate ITC as per Rule 42 of the CGST Rules, 2017.

Issue 2: Rate of Tax
The second question raised by the applicant pertained to the rate of tax applicable on the service of leasing of pumps and equipment. The Authority noted that while the question falls under clause (a) of sub-section (2) of Section 97 of the CGST Act, the applicant is the recipient of the service. Hence, the question does not pertain to a transaction being undertaken or proposed to be undertaken by the applicant. As per Section 103 of the CGST Act, the ruling is binding only on the applicant and their jurisdictional authority, not on the supplier or their jurisdictional authority. Therefore, the question on the rate of tax is not admissible.

Ruling:
1. The applicant is eligible only for proportionate ITC on the inward supply of services by way of LFR on leasing of pumps and equipment, determined as per Rule 42 of the CGST Rules, 2017.
2. No ruling can be given on the rate of tax applicable on the inward supply of services of leasing of pumps along with the equipment, as it does not pertain to a supply being undertaken or proposed to be undertaken by the applicant.

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