IS INPUT TAX CREDIT ON ‘INSTALLATION SERVICES’ BLOCKED ?

[Dr. Sanjiv Agarwal]

Section 16 and 17 of the CGST Act, 2017 provides for manner of claiming input tax credit and restrictions / conditions for availing the same. Sub-section (5) of section 17 enumerates credits which are blocked. Section 17(5) provides the activities or events where input tax credit shall not be available to the taxpayer. This overrides section 16(1) which allows for input tax credit.

In the instant case, the applicant was a company developing a shopping mall and is entering into various lease agreements with customers or tenants. The applicant has installed chillers, air handling units, lift, escalator, travellator, water treatment plant, sewage treatment plant, HSD yard, mechanical car park, surveillance system, DG sets, transformers, electrical wiring and fixtures and PHE, firefighting and water management pump system and other facilities of the building. The applicant was of the view that although the Installations are fixed to the building/ earth, they qualify as ‘Plant’ or ‘Machinery’ under the CGST Act, 2017 and accordingly, the taxes paid on procurement of goods or services for such Installations should not be regarded as blocked credits in terms of Section 17(5) (d) of the CGST Act, 2017 read with Explanation to Chapter V and Chapter VI of the CGST Act, 2017.

The applicant sought advance ruling from the Authority for Advance Ruling on “whether taxes paid on procurement of goods and/or services for installation of the following, “Installations” are regarded as blocked credits under Section 17(5) of the CGST Act, 2017?

(a) Chillers,

(b) Air Handling Unit (AHU),

(c) Lift, Escalators and Travellator,

(d) Water Treatment Plant (WTP).

(e) Sewage Treatment Plant (STP),

(f) High Speed Diesel Yard (HSD),

(g) Mechanical Car Park (MLCP),

(h) Indoor / Outdoor Surveillance System (CCTV),

(i) D.G.Sets,

(j) Transformers,

(k) Electrical wiring and fixtures

(l) Public Health Engineering (PHE), Fire-fighting and water management pump system.”

The Authority for Advance Ruling, vide Order dated 30.09.2019 ruled that the taxes paid on procurement of goods and/or services for installation of the Installations as listed in the application are regarded as blocked credits under Section 17(5) of the CGST Act, 2017. [IN RE: M/S. TARUN REALTORS PRIVATE LIMITED - 2019 (10) TMI 1021 - AUTHORITY FOR ADVANCE RULING, KARNATAKA]

Being aggrieved, the assessee preferred an appeal u/s 101 of the CGST Act, 2017 before the AAAR, Karnataka on various grounds as mentioned in Para 8 of the appellate order, inter alia ,

1. The taxes paid on goods or services received for construction of plant or machinery on one’s own account is available as input tax credit and is not blocked under Section 17(5) of the CGST Act.
2. The explanation to Chapter V of the CGST Act i.e “Plant and Machinery” cannot be applicable to the phrase “Plant or Machinery” used in Section 17(5) of the said Act. Although the phrase “Plant and Machinery” is defined under the GST laws, the phrase “Plant or Machinery” has not been defined; that Section 17(5) uses the phrase “Plant or Machinery”, which has not been defined under the GST laws; that therefore, references must be drawn from the dictionary meanings ascribed to it under other laws and judicial pronouncements.
3. As per the Law Lexicon, “Plant” means the fixtures, machinery, tools, apparatus, appliances, etc, necessary to carry on any trade or mechanical business, or any mechanical operation or process. “Machinery” means something more than a collection of ordinary tools. It means more than a solid structure built upon the ground, whose parts either do not move at all or if they do move the one with or upon the other in interdependent action with the object of producing specific and definite results.
4. Parts, components, accessories come into existence before the installation of the machinery and credit of taxes paid on the same cannot be denied even if they become part of the immovable property after installation of the plant and machinery.
5. The installations are recorded in the books of accounts under separate heads as per Indian Accounting Standards which is sufficient justification that these installations are distinct from the land and building. Hence the same do not form a part of the exclusion portion of the explanation to Chapter V and Chapter VI of the CGST Act, 2017 and are accordingly, not excluded from the definition of “Plant and Machinery”.
6. Although the installations are fixed to the building/earth, they qualify as “Plant” or “Machinery” under the CGST Act and accordingly the taxes paid on procurement of goods or services for such installations should not be regarded as blocked credits in terms of Section 17(5)(d) of the CGST Act read with Explanation to Chapter V and Chapter VI of the CGST Act, 2017.

They also relied upon various judicial pronouncements.

The AAAR observed that the main issue to be decided is whether input tax credit against purchases of goods and services used for installation of the aforesaid items in the shopping mall under construction can be claimed and utilized to pay GST on the outward supply of services of renting of the shopping mall as retail shops, food courts, cinema theater, etc. Section 16(1) of the CGST Act, 2017 stipulates that “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”.

The generalized interpretation of section 16(1) implies that the appellant is entitled to credit of input tax charged on any supply of goods and/or services made to the appellant and used by the appellant in furtherance of his business. However, this is subject to the conditions and restrictions as specified in Section 16(2) and Section 17 (5) of the CGST Act, 2017. Section 17(5) of the CGST Act, 2017 stipulates the situations wherein input tax credit shall not be available notwithstanding anything contained in Section 16(1) of the CGST Act, 2017.

The AAAR concluded that the word ‘or’ in clause (d) of Section 17(5) of the CGST Act can be read as ‘and’ since it appears to give effect to the intention of the legislature to allow input tax credit on the construction of plant and / or machinery. The restriction contained in Section 17(5)(d) is applicable to goods and services received by a taxable person for construction of an immovable property. When goods and services are received by a taxable person for construction of plant or machinery, there is no bar on eligibility to input tax credit. The appellant has argued that all the installations mentioned in his application qualify as ‘Plant’ or ‘Machinery’.

Further, the items such as Chiller, Air Handling Unit, Indoor/Outdoor Surveillance System (CCTV), electrical wiring and fixtures, Public Health Engineering (PHE), Fire-fighting and water management pump system do not appear to be apparatus/equipment/machinery which are fixed to the earth. The appellant has also not submitted any information as to how these items are getting embedded to the earth since the criteria for terming such items as “Plant and Machinery” is that they have to be fixed to the earth either by foundation or structural support. In the absence of such information we hold that Chiller, Air Handling Unit, Indoor/Outdoor Surveillance System (CCTV), electrical wiring and fixtures, Public Health Engineering (PHE), Fire-fighting and water management pump system do not qualify as plant or machinery but are items which are procured for the purpose of construction of the immovable property. Hence, the appellant is not eligible for the input tax credit of the tax paid on the procurement and installation of Chiller, Air Handling Unit, Indoor/Outdoor Surveillance System (CCTV), electrical wiring and fixtures, Public Health Engineering (PHE), Fire-fighting and water management pump system.

In respect of the Water treatment Plant and Sewage Treatment Plant, they formed part of the civil structure of the immovable property. Civil structures are specifically excluded from the definition of “Plant and machinery”. So also, the DG Set and Transformer - they are procured as independent items and their installation becomes part of the civil structure of the immovable property - the appellant is not eligible of the credit of the taxes paid on the procurement of the Water Treatment Plant, Sewage Treatment Plant, DG Set and Transformer.

In conclusion, the AAAR upheld the Advance Ruling and dismissed the appeal. [IN RE: M/S. TARUN REALTORS PVT. LTD. - 2020 (3) TMI 981 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA].

Discussions to this article

[OmPrakash jain]

Sir,

Also read Ruling dated 13.9.2021 of ARA Rajasthan in the case of Pristine Industries Ltd.  allowing full ITC on “Solar Power Generating Plant”.