The Gujarat AAAR in Gujarat In the matter of M/s. Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [Advance Ruling Appeal No. GUJ/GAAAR/APPEAL/2025/17, order dated September 22, 2025] held that Input Tax Credit (ITC) is not admissible on expenses incurred for the buyback of shares, as shares being ‘securities’ do not qualify as goods or services under the GST law, and hence the transaction falls outside the ambit of GST.
Facts:
Gujarat Narmada Valley Fertilizers & Chemicals Ltd. (“the Appellant”), a State Public Sector Undertaking, engaged in fertilizers and chemicals, undertook a share buyback program in December 2023 as part of its business restructuring.
Assistant Commissioner, CGST & Central Excise Division VII, Bharuch representing revenue authorities, contested the eligibility of ITC claimed by the Petitioner on expenses related to the share buyback.
The Appellant argued that expenses incurred on the share buyback, including professional, legal, and consultancy fees, contributed to the furtherance of its business and thus qualified for ITC under Section 16 of the CGST Act. They relied on various contentions including that the buyback is an essential business activity.
The Respondent contended that shares are securities as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, which are excluded from GST as they are neither goods nor services under Sections 2(52) and 2(102) of the CGST Act. Hence, transactions in securities including buyback do not attract GST or ITC. Further, they emphasized that Section 17(2) and Section 17(3) dispel the Appellant’s claim as ITC is disallowed on expenses attributable to exempt supplies like securities transactions.
The Appellant challenged the Authority for Advance Ruling’s (AAR) initial decision disallowing ITC on buyback expenses by filing an appeal under Section 100 of the CGST Act before the Appellate Authority for Advance Ruling (AAAR), seeking reversal of the AAR ruling.
Issue:
Whether the expenditure incurred by the Appellant for the buyback of its shares, in the course and furtherance of business, is eligible for ITC under the GST regime?
Held:
The Gujarat AAAR in Advance Ruling Appeal No. GUJ/GAAAR/APPEAL/2025/17 held as under:
- Observed that, shares are securities under the Section 2(h)(i) of the Securities Contracts (Regulation) Act, 1956, which do not classify as goods or services under the CGST Act, thus excluding transactions in securities from GST levy.
- Noted that, Section 16(1) of the CGST Act allows ITC only on goods or services used in the course or furtherance of business, which excludes securities transactions.
- Held that, while the buyback is a corporate activity in the course of business, the expenditure incurred thereon relates to a transaction outside GST, thus ITC on such expenses is not permissible. Therefore, ITC on expenses like professional fees, legal expenses, consultancy charges etc., relating to buyback of shares, although made in the course of furtherance of business, should not be allowed.
- Noted that, Section 17(2) disallows ITC on goods and services used for exempt supplies, and transactions in securities are declared exempt under Section 17(3) of the Act.
- Upheld the requirement to reverse ITC attributable to common inputs and input services used in relation to buyback expenses, and affirmed AAR’s ruling disallowing ITC on buyback expenses and rejected the appeal.
Our Comments:
The AAAR’s decision exemplifies strict statutory interpretation, stressing that the essence of ITC admissibility is contingent on goods or services involved in taxable supply, excluding transactions in securities from GST ambit.
The Supreme Court’s holding in TVS Motor Company Ltd. v. State of Tamil Nadu [(2019) 13 SCC 403], which held that Input Tax Credit is not a vested or indefeasible right but a concession subject to conditions prescribed under the statute. This aligns with the ruling’s emphasis that mere expenditure in the course or furtherance of business is insufficient without the involvement of taxable supplies.
In the Punjab State Industrial Development Corporation Ltd., (1997) 93 Taxman 522 (SC) and Brooke Bond India Ltd., (1997) 91 Taxman 262 (SC), where the Supreme Court held that expenditures related to enhancement or expansion of capital base are capital expenditures. However, AAAR noted these cases did not deal with specific statutory exclusions like securities transactions and therefore do not override GST law’s express exclusion under Sections 2(52), 2(102), and 17(3).
The Gujarat AAAR also referred to the Kernex Microsystems India Ltd. v. Commissioner of Central Excise, Customs And Service Tax [2015 SCC ONLINE CESTAT 3195], where input services for capital expansion qualified for credit. The AAAR observed that this tribunal decision cannot be analogized here due to the explicit exclusion of securities transactions from GST.
Relevant Provisions:
Section 16(1), CGST Act, 2017
“16. Eligibility and conditions for taking input tax credit.-
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged 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 and the said amount shall be credited to the electronic credit ledger of such person.”
Section 17(2), 17(3) of the CGST Act, 2017
“17. Apportionment of credit and blocked credits.-
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
Explanation.- For the purposes of this sub-section, the expression “value of exempt supply” shall not include the value of activities or transactions specified in Schedule III, except,—
(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and
(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule.”
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