2020 (4) TMI 631 - AAR - GST

Input Tax Credit - manufacture and supply of salt and bromine chemicals - credit on bunds which are constructed and used in the manufacture of salt and bromine chemicals - zero rated supply or not - HELD THAT - Section 16(2) of IGST Act states that subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, 2017, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply. - Whereas as per section 2(47) of the CGST Act, exempt supply includes nil rated supply and non-taxable supply. Thus, as per section 16(2) of the IGST Act, Input tax credit is available on inputs and input services to make Zero rated supplies (such supply may be an exempt supply), subject to the provisions of sub-section (5) of section 17 of CGST Act. As per Clauses (c) and (d) of Section 17(5) of the GST Acts, input tax credit is not admissible in respect of works contract services or any goods and services for construction of immovable property (other than plant and machinery). Thus, a specific exception is made with regard to plant and machinery. Input tax credit of GST paid on goods and services used to construct the bunds is admissible to M/s. Satyesh Brinechem Private Limited, provided that the bunds are used for making zero rated supplies and fulfill the conditions which are necessary for treating the bunds as plant and machinery .

Summary

Issues Involved:
1. Admissibility of Input Tax Credit (ITC) under GST Acts for bunds used in manufacturing salt and bromine chemicals.
2. Classification of bunds as "plant and machinery" under GST Acts.
3. Applicability of Section 17(5) of the GST Acts regarding ITC on immovable property.

Issue-wise Detailed Analysis:

1. Admissibility of Input Tax Credit (ITC) under GST Acts for bunds used in manufacturing salt and bromine chemicals:

The applicant, a private limited company engaged in manufacturing and supplying salt and bromine chemicals, sought clarification on whether ITC is admissible for bunds constructed and used in their manufacturing process. The salt produced is zero-rated under Section 16 of the IGST Act due to its export requirement. The manufacturing process involves constructing bunds (crystallizers) to facilitate solar evaporation of seawater, essential for producing salt and bromine chemicals. The applicant argued that since the bunds are indispensable for their manufacturing process, ITC should be admissible under Section 16(1) of the GST Acts, which allows ITC for goods and services used in the course or furtherance of business.

2. Classification of bunds as "plant and machinery" under GST Acts:

The applicant contended that bunds qualify as "plant and machinery" as defined in the Explanation to Section 17 of the GST Acts. According to this definition, plant and machinery include apparatus, equipment, and machinery fixed to earth by foundation or structural support used for making outward supply of goods or services. The applicant cited several judgments, including the Supreme Court's decision in Scientific Engineering House (P) Ltd. vs. Commissioner of Income Tax, where technical know-how was considered plant due to its essential role in manufacturing. Applying the functional test, the applicant argued that bunds, being integral to the manufacturing process, should be classified as plant and machinery, thus making ITC admissible.

3. Applicability of Section 17(5) of the GST Acts regarding ITC on immovable property:

Section 17(5) of the GST Acts restricts ITC on works contract services and goods/services for constructing immovable property, excluding plant and machinery. The applicant argued that bunds do not fall under the restrictive clauses of Section 17(5) since they are essential for the manufacturing process and should be treated as plant and machinery. The applicant also referenced the Gujarat High Court's judgment in State of Gujarat vs. Pipavav Defense and Offshore Engineering Company Ltd., which held that goods used for constructing essential infrastructure for manufacturing qualify as plant and machinery, thus making ITC admissible.

Judgment:

The Authority for Advance Ruling (AAR) considered the applicant's submissions and the relevant legal provisions. It was noted that the applicant's manufactured salt is zero-rated under Section 16 of the IGST Act due to its export requirement. The AAR acknowledged that Section 16(2) of the IGST Act allows ITC for inputs and input services used to make zero-rated supplies, subject to the provisions of Section 17(5) of the CGST Act. The AAR ruled that ITC of GST paid on goods and services used to construct bunds is admissible, provided that the bunds are used for making zero-rated supplies and fulfill the conditions necessary for treating them as plant and machinery.

Ruling:

Input tax credit of GST paid on goods and services used to construct the bunds is admissible to the applicant, provided that the bunds are used for making zero-rated supplies and fulfill the conditions necessary for treating the bunds as plant and machinery.