2025 (10) TMI 241 - AAAR - GST

Section 17(5)(d) bars ITC on professional, legal and consultancy fees for share buyback expenses incurred

In Re: M/s. Gujarat Narmada Valley Fertilizers & Chemicals Ltd.,

AAAR dismissed the appeal, holding the appellant ineligible to claim ITC for expenses incurred on share buyback. The Authority ruled Section 17(5)(d) ... Eligibility for ITC under GST regime - expenditure incurred by the applicant, a listed entity, for the buyback of its shares in the course of furtherance of business - requirement to reverse the ITC on common inputs and input service used in relation to the expenditure incurred for buyback of share. Expenditure incurred by the applicant, a listed entity, for the buyback of its shares in the course of furtherance of business - HELD THAT:- On reading Section 17(5)(d), ibid, it is fortified that all costs incurred for the furtherance of the business is not eligible for credit, as the said Section restricts input tax credit on goods or services or both received by a taxable person for construction of an immovable property, even if they are used in the course of furtherance of business. Therefore, there are no merit in the argument that the ITC on the expenses like professional fees, legal expenses, consultancy charges, etc., relating to buy back of shares, if used in the course of furtherance of business, should be allowed - the argument that the activities are in the course of furtherance of business is wholly irrelevant to decide the availability of ITC if the activities are in relation to transaction in securities. Hence, it is not worthwhile to go into the issue of whether or not the activities, relevant in this case, are in the course of furtherance of business - the appellant is not eligible to avail ITC involved in the expenditure incurred for buy back of its shares. Reversal of ITC on common inputs - HELD THAT:- In the cases Punjab State Industrial Development Corporation Ltd. [1996 (12) TMI 6 - SUPREME COURT] and Brooke Bond India Ltd [1997 (2) TMI 11 - SUPREME COURT] pertaining to the Income Tax Act, the dispute was whether an expenditure was a capital expenditure or a revenue expenditure. While holding that the expense made led to expansion of the capital base and would help the business and may also help in profit making, the Hon’ble Court ruled that it was a capital expenditure. In the case of M/s. Kernex Microsystems (India) Ltd. [2015 (12) TMI 1106 - CESTAT BANGALORE], it was held that the IPO was used to collect the capital expansion and creation of manufacturing activities. We have already held that even if the said expenses are related to furtherance of business, the ITC would not be available as the securities are neither goods nor services. Therefore, these case laws, which primarily deal with credit of tax paid on activities related to furtherance of business, will not help the appellant’s cause. In none of the above cases were the courts/Tribunal dealing with a situation where there was specific statutory exclusion of such activities from the ambit of input tax credit. The appeal filed by appellant is rejected. ISSUES PRESENTED AND CONSIDERED Issue 1: Whether expenditure incurred by a registered person for the buyback of its own shares qualifies for Input Tax Credit (ITC) under Section 16(1) of the GST Act. Issue 2: Whether ITC attributable to common inputs and input services used in relation to the buyback of shares must be reversed under the provisions of Section 17 read with the related Rules. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework Section 16(1) entitles a registered person to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of business, subject to conditions and restrictions prescribed by the statute and rules. Issue 1 - Statutory exclusions and relevant provisions Definitions: securities (shares) are not goods (Section 2(52)) and not services (Section 2(102)). Section 17(2) restricts ITC to inputs attributable to taxable supplies (including zero-rated supplies) and denies ITC for goods or services used for effecting exempt supplies. Section 17(3) expressly includes 'transactions in securities' within the value of exempt supply. Rule/Explanation in Chapter V prescribes a deeming value of security as one per cent of the sale value for determining value of exempt supply. Issue 1 - Precedent treatment The Tribunal/High Court/Supreme Court authorities cited by the appellant concerned characterization of expenditures as capital or revenue in income-tax context or allowance of credit in other tax regimes; none addressed a statutory exclusion of transactions in securities from ITC under the GST framework. The Court relied on the Supreme Court pronouncement that entitlement to ITC is a statutory benefit subject to legislative conditions (treated as supporting principle). Issue 1 - Interpretation and reasoning The Appellate Authority reasons that mere use of goods or services in furtherance of business does not automatically grant ITC; eligibility is constrained by explicit statutory restrictions. Because shares are statutorily defined as securities and thereby excluded from the definitions of goods and services, the buyback transaction is not a 'supply' under GST. Section 17(3)'s inclusion of 'transactions in securities' in the value of exempt supplies demonstrates legislative intent to exclude costs related to securities transactions from ITC. Analogous restrictions (e.g., Section 17(5)(d) disallowing ITC for certain immovable property construction) reinforce that business-use alone is not determinative. Issue 1 - Ratio vs. Obiter Ratio: The core holding that expenditures incurred for buyback of shares are not eligible for ITC because (a) shares are statutorily excluded from goods and services, (b) transactions in securities are treated as part of the value of exempt supplies under Section 17(3), and (c) the statutory scheme limits ITC to taxable supplies. Obiter: Discussion of case law from income-tax jurisprudence and non-GST credit cases (e.g., IPO-related CENVAT jurisprudence) is treated as inapposite and therefore obiter for the specific GST legal question addressed. Issue 1 - Conclusion The Court upholds the Advance Ruling: expenditure incurred for buyback of shares is not eligible for ITC under Section 16(1) read with Section 17, and the appellant's contention that such costs are in the course or furtherance of business does not override the statutory exclusion for transactions in securities. Issue 2 - Legal framework Section 17(3) prescribes what shall be included in the value of exempt supply and explicitly includes transactions in securities. The Chapter V Explanation to the Rules prescribes that for determining value of exempt supply the value of security shall be taken as one per cent of the sale value of such security, creating a deeming fiction for attribution and reversal purposes. Issue 2 - Precedent treatment No controlling authority was cited that overrules or displaces the statutory deeming inclusion of transactions in securities within exempt supplies for ITC reversal purposes; earlier non-GST authorities on capital/revenue character were distinguished as dealing with different statutory contexts without comparable express exclusion. Issue 2 - Interpretation and reasoning The Appellate Authority reasons that because transactions in securities are expressly included within the statutory definition of exempt supply for ITC computation, tax paid on common inputs or input services related to securities transactions must be attributed to exempt supplies and accordingly reversed or blocked under the statutory scheme. The deeming provision and the Rule's prescribed valuation (one per cent of sale value) demonstrate legislative intent to require reversal/adjustment for common inputs used in relation to securities transactions. Issue 2 - Ratio vs. Obiter Ratio: Reversal of ITC attributable to common inputs/input services used in relation to buyback of shares is required, by operation of Section 17(3) and the related rule explanation prescribing valuation for securities, and cannot be avoided by labeling such costs as in the furtherance of business. Obiter: Comparative discussion of CENVAT-era decisions allowing credit in IPO contexts is considered non-determinative for GST because of specific statutory exclusion and is therefore obiter in relation to the GST question. Issue 2 - Conclusion The Appellate Authority affirms GAAR's direction to reverse ITC attributable to common inputs and input services used in relation to the buyback of shares, relying on the inclusion of transactions in securities within the value of exempt supply and the statutory valuation prescription. Cross-reference and overall holding Cross-reference: Issue 1 and Issue 2 are interlinked - the determination that buyback of shares is not a taxable supply (Issue 1) directly informs the requirement to treat related costs as attributable to exempt supplies and to reverse ITC (Issue 2). Overall holding: The Advance Ruling denying ITC on expenses incurred for share buyback and directing reversal of common input credits is correct and is affirmed by the Appellate Authority on the basis of statutory definitions, restrictions in Section 17 and the rule-based valuation mechanism.