ADMISSIBILITY OF INPUT TAX CREDIT TO AIR CONDITIONING AND COOLING SYSTEM

[Mr. M. GOVINDARAJAN]

IN RE: M/S. WAGO PRIVATE LIMITED - 2024 (6) TMI 109 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT, Wago Private Limited (‘appellant’ for reference) was establishing a new factory in Vadodara, Gujarat.  The appellant wanted to know as to whether they were eligible for input tax credit (‘ITC’ for short) in respect of-

• Air conditioning and cooling system; and
• Ventilation system - Plant and Admin.

The appellant, therefore, filed an application for obtaining Advance Ruling from the Authority for Advance Ruling, Gujarat.  In the said application the appellant sought for advance ruling on the question as to the admissibility of ITC of GST paid on the procurement of plant and machines including the services of installation and commissioning the same in terms of the provisions of section 16 and 17 of the CGST Act, 2017.

The Authority for Advance Ruling observed the following-

• The appellant had awarded a single work order dated 1.9.2020 to. Skai Air Control Private Limited to supply, install and commission HVAC [heating, ventilation and air conditioning system] works for proposed factory building, assembly building, admin, building, staff facility and associated works;
• The total contract value is inclusive of cost of materials, labor, machineries;
• The invoices do not describe the nature of supply; that the description used is either of goods or labor charges;
• They have divided the air conditioning and cooling system into four sub-categories viz air conditioning and cooling system, process water system, exhaust system and VRF work;
• There is no specification of molding machine to be fitted with any further system/sub-system to function as a molding machine;
• All the parts of Air conditioning and cooling system get assembled at the site and fitted on the wall and roof and the floor of the building.

The Authority for advance Ruling in their order dated 30.07.2021 hele as below-

• The different parts of ‘Air conditioning and cooling system’ consequent to being fitted in the building, loose their identity as machines or parts of machines and become a system.
• AC System comes into existence by assembly and connection of various components and parts; that though each component is dutiable to GST; that though Air conditioning unit is dutiable as per MSN, an Air conditioning plant/system is not dutiable
• The air conditioning system cannot be taken as such to the market for sale and cannot be shifted from one place to another as such and further can be shifted only after dismantling; that the Air Conditioning system once installed and commissioned in the building is transferred to the building owner and this involves transfer of property;
• The supply and erection of Central Air conditioning system merits classification under works contract service;
• Such supply of centralized air conditioning plant is covered under section 17 (5) (c) of the CGST Act;
• ‘Ventilation system’ once installed and commissioned in the building is transferred to the building owner and this involves the element of transfer of property; that ‘Ventilation system merits to be classified as work contract supply as the system per se is an immovable property.

Being aggrieved against the ruling of the Authority for Advance Ruling, the appellant filed the present appeal before AAAR, Gujarat.  The appellant submitted the following before the AAAR-

• Awarding of a single work order does not lead to change in the nature of supply; that there is no legal bar that a single party cannot be issued a work order for providing multiple goods and/or services;
• The System description has clearly specified requirements separately for factory area, canteen building and server room, it cannot be construed as one system merely on account of issue of single work order issued to a single vendor;
• Invoices do not describe the nature of supply; that it is because the vendor is supplying various machines and not one standalone system thus invoices do not contain the description of any system;
• The Air conditioning system is nothing but a group of inter-related and inter-dependent machines performing a desired task
• Different machines may become part of air conditioning and cooling system; that each machine has a role to play like the chiller provides cool air, pumping system provides cool water, exhaust system ensures that there is sufficient ventilation etc.; that they become part of an Air conditioning system and the individual machines do not lose their identity;
• Since all the parts/machines can be dismantled and taken elsewhere without any substantial damage, the machines/ assets forming part of HVAC system are movable;
• Under section 17 (5) (c), ibid. Plant & Machinery are specifically excluded:

The AAAR has given a personal hearing to the appellant.  The appellant submitted a brief note, explaining what a cooling system in injection molding is in addition to the cooling method of injection mold, and cooling system design and water cooling system.

The AAAR considered the submissions made by the appellant.  The AAAR analyzed the provisions of Section 16 and Section 17 of the Act.  The AAAR observed that the expression ‘immovable property’ is not defined under the Act.  Section 3(36) of General Clauses Act defines the expression ‘immovable property’ as to include land, benefits arising out of land and things attached to the earth, or permanently fastened to anything attached to the earth.  section 3 of the Transfer of Property Act, 1882 stipulates that unless there is something repugnant in the subject or context, ‘immovable property’ does not include standing timber, growing crops or grass. ‘Immovable property’, essentially means something which is attached to the earth, or permanently fastened to anything attached to the earth, or forming part of the land and not agreed to be severed before supply or under a contract of supply.

A conjoint reading of sections 16 (1) and 17 (5) (c), shows that ITC can be availed by a registered person subject to conditions and restrictions prescribed on any supply of goods or services or both, which are used or intended to be used in the course of furtherance of his business.  ITC is not eligible for works contract services when supplied for construction of any immovable property except when it is an input service for further supply of works contract service. 

The AAAR, on perusal of www.electricalworkbook.com, observed that in a central air-conditioning system, all the components of the system are grouped together in one central room and conditioned air is distributed from the central room to the required places through extensive duct work. The whole system can be divided into three parts as detailed below-

• Plant room, which includes compressor, condenser and motor
• Air handling unit (AHU room)
• Air distribution system (Ducting).

The plant room is located away from the room to be air conditioned. Other components are grouped together in a AHU and conditioned air is circulated through air distribution system i.e. ducting with the help of fan or blower to the room to be air-conditioned. The air, which is to be conditioned, is directly allowed to flow over the evaporator coil. Low pressure and temperature refrigerant passing through evaporator coil absorbs heat from the air. Thus, the air gets cooled.

The AAAR ruled that as the installation of the air conditioning and cooling system and ventilation system via a works contract service as pointed out above, makes it an immovable property, it ceases to be a plant and machinery.   The AAAR rejected the appeal.  The AAAR held that that the appellant is not eligible to avail ITC on supply of air conditioning and cooling system and ventilation system since it ceases to be a plant and machinery and is blocked under Section 17 (5) (c) of CGST Act, 2017 as the same is works contract services for construction of an immovable property.