Listed entity cannot claim ITC on share buyback expenditure as securities excluded from goods and services definitions under sections 16 and 17

AAR Gujarat ruled that a listed entity cannot claim ITC on expenditure incurred for buyback of its shares. The authority held that under sections 16 and 17 of CGST Act 2017, ITC is available only on supply of goods or services used in course of business. Since securities are excluded from definitions of both goods and services under sections 2(52), 2(101) and 2(102), the primary condition for ITC availment is not met. The applicant must reverse any ITC claimed on common inputs/services related to share buyback expenditure.

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ISSUES PRESENTED AND CONSIDERED

The primary issue considered in this judgment is whether the applicant, a listed company, is eligible to claim Input Tax Credit (ITC) on the expenditure incurred for the buyback of its shares under the Goods and Services Tax (GST) regime. The question revolves around whether such expenditure can be considered as being in the course or furtherance of business, thereby qualifying for ITC under the relevant provisions of the Central Goods and Services Tax Act, 2017 (CGST Act).

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The relevant legal framework includes sections 16 and 17 of the CGST Act, 2017. Section 16 provides that every registered person is entitled to take credit of input tax charged on any supply of goods or services used in the course or furtherance of business. Section 17 outlines the apportionment of credit and blocked credits, stating that credit is restricted to the extent it is attributable to business purposes. The definitions of "goods," "services," and "securities" under sections 2(52), 2(101), and 2(102) of the CGST Act are also pertinent, as they determine the eligibility of activities for ITC.

Court's Interpretation and Reasoning

The Court examined whether the buyback of shares constitutes a supply of goods or services. It concluded that the buyback does not fall under the definition of goods or services, as securities are explicitly excluded from both categories. Consequently, the buyback of shares does not meet the primary condition for claiming ITC under section 16(1) of the CGST Act, which requires that the expenditure be related to goods or services.

Key Evidence and Findings

The applicant argued that the buyback of shares is a business activity undertaken in the course or furtherance of business, aiming to improve financial standing and shareholder value. However, the Court found that this argument is irrelevant because the buyback does not involve the supply of goods or services, which is a prerequisite for ITC eligibility.

Application of Law to Facts

The Court applied the definitions of goods, services, and securities to the facts of the case and determined that the buyback of shares is neither a supply of goods nor services. Therefore, the expenditure incurred does not qualify for ITC under section 16(1) of the CGST Act. The applicant's reliance on the notion of furtherance of business was deemed unnecessary to explore further, as the primary condition of involving goods or services was not met.

Treatment of Competing Arguments

The applicant's argument that the buyback is in the course of business and should qualify for ITC was dismissed as it did not satisfy the fundamental requirement of involving goods or services. The Court did not delve into whether the buyback was in furtherance of business, as it would be merely academic given the lack of qualification under section 16(1).

Conclusions

The Court concluded that the applicant is not eligible for ITC on the expenditure incurred for the buyback of shares, as the activity does not involve goods or services. The applicant must also reverse any ITC on common inputs and input services related to the buyback.

SIGNIFICANT HOLDINGS

The Court held that the applicant is not entitled to avail ITC on the expenditure incurred for the buyback of shares, as it does not involve the supply of goods or services, a primary condition under section 16(1) of the CGST Act. The ruling emphasized that securities are excluded from the definitions of goods and services, thereby disqualifying the buyback from ITC eligibility.

Core Principles Established

The judgment reinforces the principle that ITC can only be claimed on expenditures involving the supply of goods or services. Activities related to securities, such as share buybacks, do not meet this criterion and are thus ineligible for ITC.

Final Determinations on Each Issue

The final determination is that the applicant is not eligible for ITC on the buyback of shares and must reverse ITC on related common inputs and input services. The ruling clarifies that the buyback of shares, being a transaction in securities, falls outside the ambit of goods and services under the CGST Act.

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