Deciphering Legal Judgments: A Comprehensive Analysis of Judgment

Reported as:

2025 (10) TMI 241 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT

Introduction

The appellate decision of the Gujarat Appellate Authority for Advance Ruling (GAAAR) addresses a recurring and conceptually important issue under the GST regime: whether expenditure incurred in connection with a listed company's buyback of its own shares qualifies for input tax credit (ITC), and whether common input tax credit is required to be reversed when such buyback is undertaken.

The case lies at the intersection of three core GST concepts: (i) the scope of "business" and "in the course or furtherance of business" u/s 2(17) and section 16(1); (ii) the exclusion of "securities" from the definitions of "goods" and "services"; and (iii) the special treatment of transactions in securities as "exempt supply" for ITC apportionment u/s 17(2)-(3) and corresponding rules. The ruling therefore has substantial implications for capital market transactions, corporate restructuring, and the scope of ITC for listed entities and large corporates.

Key Legal Issues

1. Eligibility of ITC on buyback-related expenditure

The primary legal issue is whether GST paid on input services and goods used for implementing a share buyback-such as professional fees, legal and consultancy charges, and incidental expenses-is eligible as ITC u/s 16(1) of the CGST Act when the buyback is asserted to be "in the course or furtherance of business".

This issue is essentially one of interpretation of substantive ITC provisions: whether the "furtherance of business" limb in section 16(1) can, by itself, justify ITC irrespective of the nature of the underlying transaction (here, a transaction in securities, which is neither "goods" nor "services") and in the face of subsequent statutory restrictions in section 17.

2. Treatment of buyback as "transaction in securities" and impact on ITC apportionment

The second issue is whether a buyback of shares, though not amounting to a conventional outward supply, nonetheless qualifies as a "transaction in securities" and consequently falls within the deeming rule in section 17(3), thereby forming part of the "value of exempt supply" for the purposes of ITC restriction and reversal on common inputs and input services.

This is an issue concerning the interaction between the definitional exclusion of "securities" from "goods" and "services" and the special deeming inclusion of "transactions in securities" within "exempt supply" for section 17(2)-(3). It raises a structural question: can a transaction which is not a "supply" at all under GST nevertheless affect ITC entitlement through the exempt-supply apportionment mechanism?

3. Validity of direction to reverse common ITC

A related issue is whether, assuming buyback-related expenditure does not qualify for ITC, the authority was correct in directing reversal of ITC attributable to common inputs and input services used for both taxable supplies and the buyback, and in adopting the deeming rule for valuation of securities under the CGST Rules.

Detailed Issue-wise Analysis

1. Whether buyback-related expenses qualify as ITC u/s 16(1)

(a) Statutory framework

Section 16(1) entitles a registered person to take credit of input tax "on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business", subject to conditions and restrictions prescribed. Sections 16(3), 16(4), 17 and 18 constitute key restrictions on this entitlement.

"Goods" are defined in section 2(52) and "services" in section 2(102). In both definitions, "securities" are specifically excluded. Shares are "securities" within section 2(h)(i) of the Securities Contracts (Regulation) Act, 1956. Consequently, dealings in shares are neither a supply of goods nor of services under the GST framework.

Section 17(2) restricts ITC to the portion attributable to "taxable supplies including zero-rated supplies" and disallows credit to the extent attributable to "exempt supplies". Section 17(3) then expands the term "value of exempt supply" to "include ... transactions in securities, sale of land and ... sale of building", even though such transactions may not be supplies per se.

(b) Appellant's contention

The appellant argued that:

• u/s 2(17)(b), "business" includes "any activity or transaction in connection with or incidental or ancillary to" the main business; a buyback undertaken pursuant to corporate and governmental directions is a business activity that supports continuity, stability, and financial optimisation.
• Input services like professional, legal, consultancy and other incidental costs incurred for buyback are used "in the course or furtherance of business" and therefore satisfy section 16(1).
• The process does not itself generate outward taxable supplies but enhances financial health and future capacity to make taxable supplies.
• Buyback is not a sale or purchase of shares in the conventional sense but a mechanism of capital reduction; hence it should not be treated as a "transaction in securities" attracting section 17(3).
• By analogy, if ITC is accepted as admissible in relation to issuance of fresh shares (relying on ICAI FAQs and foreign jurisprudence such as Kretztechnik of the ECJ), parity of reasoning should extend similar treatment to buybacks.
• The advance ruling authority (GAAR) improperly "read into" section 16(1) an additional requirement that the purpose for which input services are used must itself constitute a taxable supply under GST.

(c) Appellate authority's reasoning

The appellate authority firmly rejected the proposition that every cost incurred "in the course or furtherance of business" automatically entitles the taxpayer to ITC. It held that:

• Section 16(1) establishes a general entitlement, but expressly "subject to" conditions and restrictions elsewhere in the Act; entitlement is not absolute or unqualified.
• Sections 17(2) and 17(3) are such restrictions: they disallow ITC for goods or services used for exempt supplies and, by deeming fiction, treat "transactions in securities" as part of "exempt supply".
• Since shares are "securities", transactions involving them are neither "goods" nor "services" and do not constitute "supply" under GST; however, they still trigger ITC consequences via section 17(2)-(3).
• The Supreme Court in TVS Motor Company Ltd. v. State of Tamil Nadu [2018 (10) TMI 887 - SUPREME COURT] clarified that ITC is not an indefeasible or vested right, but a benefit conferred subject to statutory conditions. The authority relied on this to emphasise that statutory limitations override broad business-purpose arguments.
• Section 17(5)(d), which denies ITC on goods or services used for construction of immovable property "even if used in the course or furtherance of business", was cited as further evidence that the mere satisfaction of the "furtherance of business" test does not guarantee credit.

From this, the authority concluded that the appellant's business-necessity argument is "wholly irrelevant" where the legislature has specifically excluded transactions in securities from the supply framework and simultaneously brought them into the exempt-supply basket for ITC restriction.

2. Characterisation of buyback as "transaction in securities" and its consequences

(a) Nature of buyback

The appellant contended that in a buyback there is no "sale" in the conventional sense, but merely a reduction of share capital; shares bought back are cancelled within a prescribed time frame and do not constitute assets in the hands of the company. On this basis, it argued that buyback should not be treated as a taxable event or as a transaction in securities for GST purposes, and therefore ITC should not be disallowed u/s 17(3).

(b) Statutory treatment of securities

The appellate authority, echoing GAAR's view, emphasized that:

• Securities are expressly excluded from the concepts of "goods" and "services" in sections 2(52) and 2(102). Therefore, any dealing in securities is excluded from the charging provisions relating to supply.
• However, section 17(3) adopts a deliberate legislative fiction: "the value of exempt supply ... shall include ... transactions in securities". This aligns with the explanation to Chapter V of the CGST Rules, which provides that, for ITC purposes, "the value of security shall be taken as one per cent of the sale value of such security".

A "conjoint reading" of these provisions led the authority to hold that, even though a transaction in securities is not a supply, Parliament has chosen to treat it as an exempt supply for the limited purpose of apportionment and denial of ITC u/s 17(2).

The authority thus implicitly accepted that buyback of shares necessarily involves a "transaction in securities" as that expression is used in section 17(3), irrespective of its characterisation as capital reduction under company law. The corporate-law form (capital reduction vs. purchase/sale) does not displace the statutory fiction created for GST-ITC computations.

3. Requirement to reverse common ITC

(a) Statutory mechanism

u/s 17(2), where inputs or input services are used partly for taxable supplies and partly for exempt supplies (including, by virtue of section 17(3), transactions in securities), ITC must be restricted to the portion attributable to taxable supplies, and the remaining portion reversed in accordance with Chapter V of the CGST Rules.

The explanation to Chapter V specifies, for determining the value of exempt supplies for section 17(3):

• Value of land and building = value adopted for stamp duty purposes.
• Value of security = 1% of the sale value of such security.

This deeming rule facilitates the computational mechanism for ITC reversal involving transactions in securities.

(b) Appellate authority's conclusion

The appellant argued that since securities are excluded from "goods" and "services", they fall outside the ambit of exempt or non-taxable supplies, and thus there is no basis to demand reversal of common ITC. The authority rejected this argument as inconsistent with the explicit language of section 17(3), which expressly includes "transactions in securities" in the value of exempt supplies "by way of inclusion clause", notwithstanding their general exclusion from "supply".

On this basis, the authority held that:

• The deeming fiction in section 17(3) and the explanation to the ITC Rules mandates that transactions in securities be counted as exempt supplies for ITC apportionment.
• Consequently, ITC attributable to common inputs and input services used both for normal taxable operations and for implementing the buyback must be reversed in accordance with the prescribed formulae.

4. Treatment of precedents relied upon by the appellant

(a) Income-tax precedents

The appellant cited the Supreme Court's decisions in Punjab State Industrial Development Corporation Ltd. [1996 (12) TMI 6 - SUPREME COURT] and Brooke Bond India Ltd. [1997 (2) TMI 11 - SUPREME COURT], both rendered under the Income-tax Act, where expenses linked to expansion of share capital were held to be capital expenditure. The appellate authority observed that:

• Those cases turned on the revenue vs. capital expenditure dichotomy, not on eligibility of indirect tax credit.
• Although those judgments recognised that such capital-raising expenses incidentally help business and profit-making, the Court still characterized them as capital in nature.

Crucially, the appellate authority noted that those decisions did not address a statutory framework in which transactions in securities were expressly excluded from the taxable base and simultaneously brought within a specific ITC restriction mechanism. Accordingly, they were held not to assist the appellant's case.

(b) CENVAT credit precedent: Kernex Microsystems (India) Ltd.

The appellant also relied on Kernex Microsystems (India) Ltd. [2015 (12) TMI 1106 - CESTAT BANGALORE], where CENVAT credit was allowed on IPO-related advertisement and campaign services intended to raise funds for expansion of manufacturing facilities. The Tribunal's reasoning in that case rested on the broad wording of "input service" in Rule 2(l) of the CENVAT Credit Rules, which expressly covered "activities relating to business", "advertisement", "sales promotion", "financing" and "setting up of a factory".

The appellate authority distinguished this line of authority on multiple grounds:

• The CENVAT regime had a materially different and often broader definition of "input service", explicitly including activities "in relation to setting up of a factory" and "financing".
• There was no analogous statutory exclusion of securities from the taxable base and no provision corresponding to section 17(3) specifically including transactions in securities as exempt supply for credit denial.

The authority reiterated that even if buyback expenses are linked to furtherance of business, ITC is still barred by express statutory exclusion and the scheme of section 17(2)-(3). Thus, Kernex and similar CENVAT precedents cannot override the plain text of the GST statute.

Key Holdings and Reasoning

1. Ratio decidendi

The operative legal principles crystallised by the appellate authority may be summarised as follows:

• Shares are "securities" and, by statutory definition, are neither "goods" nor "services" under the GST law. Dealings in securities therefore do not amount to "supply" and are not taxable.
• Input tax credit u/s 16(1) is a conditional benefit. Entitlement to ITC on supplies used "in the course or furtherance of business" is expressly subject to restrictions in sections 16(3), 16(4), 17 and 18.
• Section 17(2) read with section 17(3) and the rules creates a specific restriction: ITC cannot be claimed on inputs and input services to the extent they are used for "exempt supplies", and "exempt supplies" are statutorily deemed to include "transactions in securities".
• Consequently, GST paid on expenses directly related to a buyback of shares-being a transaction in securities-is not eligible as ITC, irrespective of whether the buyback is in the course or furtherance of business.
• Since transactions in securities form part of the value of exempt supply for ITC apportionment, ITC attributable to common inputs and input services used for both taxable activities and the buyback must be reversed as per section 17 and the rules.

2. Obiter considerations

Some observations, while supporting the conclusion, have broader doctrinal implications and can be viewed as obiter dicta:

• The emphasis that the "furtherance of business" test does not by itself override express exclusions (e.g., securities, immovable property u/s 17(5)(d)) underlines a general interpretive principle: where the legislature has carved out specific disallowances, purposive arguments based on business necessity cannot be used to read them down.
• The reliance on TVS Motor reaffirms that ITC is not a vested right but a statutory concession that can be curtailed by clear legislative text.

3. Disposition

Applying these principles, the appellate authority:

• Affirmed GAAR's conclusion that the appellant is not entitled to ITC on expenditure incurred for buyback of its shares.
• Upheld the direction to reverse ITC on common inputs and input services attributable to the buyback, relying on section 17(3) and the explanation to Chapter V of the CGST Rules.
• Rejected all arguments based on business-necessity, capital-raising jurisprudence, CENVAT credit precedents, and professional guidance (e.g., ICAI FAQ) as inconsistent with the statutory text and scheme of the GST law.

Conclusion

This decision firmly aligns ITC entitlement with the structural design of the GST statute regarding securities. By holding that expenses related to share buybacks do not qualify for ITC and that common ITC must be reversed to the extent attributable to such transactions, the authority has reinforced the legislature's clear intent to keep capital-market transactions outside the umbrella of input tax credit, notwithstanding their undoubted business significance.

Practically, listed entities and large corporates must recognise that:

• Costs associated with buybacks, capital reduction, and other security-market transactions will effectively carry GST as a non-creditable cost element.
• Where common input services (e.g., audit, legal, financial advisory) support both operational activity and securities transactions, there is a statutory obligation to identify and reverse ITC in accordance with section 17 and the rules, applying the deeming value of securities (1% of sale value) for computation.
• Arguments premised solely on "business furtherance" or on pre-GST CENVAT jurisprudence are unlikely to prevail where the statute contains express carve-outs, especially in relation to securities and immovable property.

From a policy perspective, the ruling exposes an inherent tension between the broad economic concept of "business" and the more constrained, legislatively tailored notion of ITC entitlement under GST. Unless the legislature revisits the treatment of securities and related costs-particularly in the context of capital-intensive industries and capital markets-corporates will continue to face embedded tax costs on strategic financial transactions. Future litigation and advance rulings may further explore the boundary between activities directly "in relation to" securities and those only tangentially connected, but the present ruling lays down a clear baseline that direct buyback-related expenditure falls squarely outside the ITC net.

Full Text:

2025 (10) TMI 241 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT