This Tax Alert summarizes a recent ruling of the Haryana Appellate Authority for Advance Ruling (AAAR) on availability of input tax credit (ITC) on services used directly in relation to raising capital by issuance of shares. Assessee arranged a Qualified Institutional Placement (QIP) to raise funds for restructuring/ repayment of borrowings and for investment in its subsidiary. ITC w.r.t expenses incurred in this regard was treated not eligible by Haryana Authority for Advance Ruling (AAR). Aggrieved, assessee filed an appeal before the AAAR.
The key observations of the AAAR are:
- Activities undertaken for
restructuring or repayment of borrowings directly contribute to the
stability and sustainability of the business. Utilization of funds raised
for such activities represents the discharge of financial liabilities and
can be regarded as undertaken in the course or furtherance of business.
- In respect of the funds used
for investment in subsidiary, it is to be noted that the subsidiary is a
distinct entity. The benefits to the assessee by way of investment in a
subsidiary arise indirectly through equity participation and corporate
control rather than through consumption of services used directly in
making taxable supplies.
- The actual consumption and
economic benefits of such services accrue to the subsidiary company rather
than the assessee. The expenditure incurred by one entity cannot be
claimed as ITC in hands of another entity.
Basis above, AAAR held that that while capital
raising qualifies as a business activity, ITC on related services depends on
the end use of funds.
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