ITC on Support services by JV to its member

[Narayan Pujar]

In one of the cases, two parties formed a Joint Venture (JV) pursuant to a railway contract awarded to the JV. As per prevailing industry practice, the entire contract was sub-contracted on a back-to-back (on a toto) basis to the lead member of the JV. Accordingly, the member executed the project and raised invoices on the JV, which in turn raised invoices on the Railways.

Owing to contractual and statutory obligations, the JV incurred certain expenses such as bank guarantee charges, labour cess, audit fees, and similar costs. These expenses are intrinsic and unavoidable for execution of the railway contract and are directly attributable to the said project.

Given that the entire contract was sub-contracted to the JV member, the expenses incurred by the JV effectively constitute support services facilitating execution of the contract by the member. Accordingly, the JV has raised tax invoices on the member towards provision of such support services. The said arrangement is also in consonance with Section 7(1)(c) of the CGST Act, 2017, read with Schedule I, which recognizes certain transactions as deemed supplies.

However, the department has disputed the eligibility of input tax credit (ITC) in the hands of the JV member (recipient), alleging that the transaction is merely a pass-through of expenses and not in the course or furtherance of business.

How should one defend the ITC here?

AI Summary

Input tax credit on JV support services invoiced to a member defended as attributable, invoiced supplies enabling ITC. The issue is entitlement to Input Tax Credit on tax invoices issued by a JV to its lead member for unavoidable, project attributable expenses incurred while executing a subcontracted railway contract. The JV treated those expenses as support services and invoiced the member; the department argues they are mere pass throughs not in the course or furtherance of business. The defence rests on direct attribution of costs to contract performance and characterization of the transactions as deemed supplies under Section 7(1)(c) read with Schedule I, supporting the recipient's ITC claim.