Inputs have no nexus with outward supply is not a ground for denial of ITC
Fact and Issue of the case
M/s. Aristo Bullion Pvt. Ltd., B/3, R. B. Chamber, Chanla Ole, Manek Chowk, Ahmedabad [hereinafter referred to as the ‘appellant’] has filed an appeal against the Advance Ruling dated 27.01.2021 passed by the Gujarat Authority of Advance Ruling [‘GAAR’], Goods and Service Tax, Ahmedabad. The only issue involved in this appeal is that whether the Input Tax Credit (‘ITC’) legitimately earned by the appellant and lying as balance in Electronic Credit Ledger can be utilised for payment of GST on an outward supply, which has no nexus with the inputs on which the ITC has been taken. The GAAR has considered this issue and passed a Ruling to the effect the applicant cannot use the Input Tax Credit Balance available in the Electronic Credit Ledger legitimately earned on the inputs/raw-materials/inward supplies (meant for outward supply of Bullions) towards the GST liability on ‘Castor Oil Seed’ which were procured from Agriculturists and subsequently meant for onward supply. Being aggrieved, the appellant (who was ‘applicant’ before GAAR) has filed this appeal before us under the provisions of Section 100 of the Central Goods and Services Tax Act, 2017 and Gujarat Goods and Services Tax Act, 2017 [‘CGST Act’ and ‘GGST Act’ for short].
Observation of the Court
Authority have carefully gone through the written and oral submissions made by or made on behalf of the appellant and the Ruling passed by the Gujarat Authority for Advance Ruling. The only question involved in this appeal is as to whether Input Tax Credit validly taken on any ‘input’ can be utilized for payment of ‘output tax’ (GST) on any outward supply, which has no nexus with the inputs on which ITC was taken. Before stating discussion, we reproduce the provision of Section 16(1) of the CGST Act, 2017. In this case, the inputs like Gold and Silver Dore bars, etc. are undisputedly intended to be used in the course or furtherance of the business of the appellant. Therefore, input tax credit of GST paid on such inputs would be admissible subject to conditions and restrictions, as prescribed.
Sub-section (5) of Section 17 prescribes that notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the specified supplies like motor vehicles for transportation of not more than thirteen persons, etc., as listed therein. After reproducing the provisions of Section 17(5), the GAAR has observed, “we find that the inputs i.e. gold dores and silver dores on which the applicant intends to avail input credit are not covered under the excluded provisions of the said section.” [Para 11 of the Ruling refers]. The GAAR agreed to the fact that the inputs such as dores of gold, silver etc. are used in manufacture of various final products of gold and silver. However, after referring to provisions of Section 16(1), the GAAR has observed that the applicant is required to prove the nexus/connection between the inputs and the final products manufactured from those inputs. Such inputs like Gold & Silver dore bars etc. have no nexus/connections for supply of Castor Oil seeds. Therefore, the GAAR has observed and held that the basic conditions envisaged in the provisions of Section 16(1) have not been fulfilled and so, the appellant is not eligible to utilise the input credit for payment of GST on supply of Castor Oil seeds [Para 12 of Ruling refers].
If this logic of the GAAR has been adopted as a principle, taxpayers selling large number of commodities would require to maintain input tax credit accounts in respect of each commodity. Suppose, a Supermarket purchases any commodity from Agriculturists, which attracts Nil rate, and sells the same on payment of applicable GST. In this situation the Supermarket would require to pay GST for that commodity by cash only, even though it has balance of ITC, if this Ruling of GAAR has been applied to other similarly placed taxpayers. However, this would not be according to law. We find that once a taxpayer validly takes ITC on inputs, that ITC merges into common pool of ITC under the Electronic Credit Ledger, which is not being maintained commodity wise. After merging of ITC in the common pool, it would not be always possible to identify that ITC taken on which particular input has been utilised. Thus, we do not agree with the Ruling passed by the Gujarat Authority for Advance Ruling in this case.
Though there is no nexus of the inputs like Gold & Silver Dore bars with outward supply of Castor Oil Seeds, there is a nexus of the said inputs with taxable outward supply of Bullion / various forms of Gold & Silver.
The Authority noted that Section 16(1) of the CGST Act only states the eligibility and conditions for taking ITC. It does not impose any restriction on utilisation of the legitimately earned ITC. It does not prescribe that ITC available in electronic credit ledger to be utilized only for the specific outward supply, on whose inputs such ITC was availed. The Authority also find that Section 16(1) nowhere mandates to prove one-to-one correlation of particular inputs with particular outward supply. In other words, Section 16(1) does not require that payment of outward tax on particular outward supply can be made only from the ITC taken on particular inputs, which have nexus or connection with that outward supply. Therefore, we set aside the observation made by the GAAR to the effect, “It can therefore, be seen that even the basic conditions envisaged in the provisions of Section 16(1) have not been fulfilled in the instant case.” [Para 12 of Ruling refers]. The Authority also find that the requirement of Section 16(1) is that the inward supply should be used or intended to be used in the course or furtherance of the business of taxpayer. In this case, it is undisputed that the inward supply of Gold and Dore bars are intended to be used in the course of business of the appellant, i.e. outward supply of Bullion etc. This undisputed fact entitled the appellant to take input tax credit on such inputs. Once such input tax credit is validly taken, it can be utilised for payment of ‘output tax’ [GST] on any taxable or zero rated outward supply of the appellant. Our views are supported by the statutory provisions of Sub-Section (4) of Section 49 of the CGST Act.
Above provisions make it clear that the amount of input tax credit lying in electronic credit ledger can be utilised by appellant for making any payment of output tax payable by him. Needless to say that all provisions regarding determination, restriction and reversal of input tax credit and payment of tax, as prescribed Chapters V and X of the CGST Act and Chapters V and X of the CGST Rules, would be applicable, which are not under covered under the question raised in the application for Advance Ruling in present case.
The cases of CESTAT and High Court relied upon by the appellant are related to Central Excise and Service Tax. As we are going to allow the appeal, we do not examine the applicability of those relied upon cases to the present appeal.
In view of the foregoing discussion, the authority allow the appeal filed by M/s. Aristo Bullion Pvt. Ltd., Ahmedabad, by modifying the Answer given in the Ruling No. GUJ/GAAR/R/15/2021 dated 27.01.2021 passed by the Gujarat Authority for Advance Ruling as under:
Question: Can the applicant/appellant use Input Tax Credit Balance available in the Electronic Credit Ledger legitimately earned on the inputs/raw-materials/inward supplies (meant for outward supply of Bullions) towards the GST liability on Castor Oil Seeds which were procured from Agriculturists and subsequently meant for onward supply?
Answer: The applicant/appellant can use the Input Tax Credit Balance available in its Electronic Credit Ledger, which has been legitimately earned on the inputs / inward supplies (meant for outward supply of Bullions) for payment of ‘output tax’ (GST) on its outward supply of Castor Oil Seeds.
In other words, we hold that payment of output tax on Castor Oil Seeds through utilization of Input Tax Credit taken on Gold & Silver Dore Bars etc. cannot be denied merely on the ground that the inputs have no nexus with outward supply.