Possible solution wherein Capital goods cannot be brought back with in 3 year (5 year) from premises of Job worker!!!, Goods and Services Tax - GST

[Anurag Chopra]

Possible solutions (practical way out) in case capital goods sent to Job worker can not be received back in 3 years (plus 2 years extension)

Hi All,

Would request your inputs on the above captioned matter, have encapsulated facts and my point of view below:

Facts of the case:

• X Ltd has sent a capital goods (plant and machinery) to their job worker for job work process (say on 1 May 2022). Plant and Machinery was required to be embedded in the ground and cannot be moved easily.

• The contract with the job worker was a long-term contract for more than 5 years and it is not commercial feasible to dismantle the machinery and bring it back and then re-send the same to the job work.

• Further, as required under GST laws, capital goods are required to be brought back within the period of 3 years with possible extension of 2 more years. In case the same is not brought back, GST is to be payable along with applicable interest.

Keeping the above in mind, X Ltd is envisaging any practical approach that conditions of GST laws are meet and there is no requirement of any physical movement of the machinery as well.

Possible Solutions:

1. X Ltd purchases the machinery and transfers the same to job worker [no under work agreement] as a leased asset [for future contracts]

• • X Ltd purchases the machinery, capitalizes the same in their book and takes input credit of the same.
  • Further, X ltd enters into lease agreement with Job work to send the machinery on lease of say 10 years to Job worker on a nominal lease rent of INR 5000/-.
  • This would be a separate agreement apart from job worker agreement and, Job Worker (Y Ltd) would raise only invoice on X Ltd for their service charge + lease rent along with GST and X Ltd would be issuing a monthly invoice on Y Ltd for the lease rent of INR 5000/- plus GST.

In the above situation, is there any implications under GST laws, any issue the authority may raise from valuation point.

Positive of the above arrangement would be that condition of 3 years under section 143 is not required to be adhered.

2. Transfer of Machinery to job worker [in papers]

X Ltd transfers the ownership of machinery to Job worker before closure of 3 years i.e., for agreed term and bring the machinery back to X Ltd post closure of loan period.

• • Would there be any requirement to bring the machinery back physically back to premises of X Ltd.
  • In the above, we don’t envisage any other GST implications apart from issuing a DC [paper document only] as a record for ITC-04.

3. Supply Machinery to Job worker and raise credit note on the same date, post which two DC can be issued [paper document]

X Ltd supplies the machinery to job worker and raises credit note on the same day. Further, a DC is issued by job worker [paper document] and a DC is issued by X Ltd as well [paper document]

This will allow to extend the time of machinery being kept by job worker for further 3+2 years.

4. Restructuring the arrangement as follows:

The arrangement can be restructured as follows:

Machinery on the day one is to be purchased by job worker:

Option 1: Job worker then enters into agreement with X ltd either to sale of Machinery to X Ltd on cost-to-cost basis and the agreement specifically mentions that machinery physically remains with job worker.

Option 2: Job worker loans the machinery to X Ltd. X Ltd pays a certain amount to job worker for which can be equivalent to EMI of the machinery being barred by Job worker on behalf of X Ltd.

Apart from the above, please also brief on the process to obtain extension of 2 years and would it be feasible to obtain a advance ruling in the above case.

Additionally, if there is any possible solution, please feel free to discuss and share

Posts / Replies

[KASTURI SETHI]

Dear querist,

Explore the possibility of resorting to the concept of "Right To Use Of Tangible Goods Services" defined in erstwhile Section 65(105) (zzzzj) of the Finance Act, 1994. Sufficient legal material supported by the judgements of Supreme Court is available in a book titled as, "Law, Practice & Procedure of Service Tax" Author : J.K.Mittal.

If you are interested, I shall post the same here.

 

[YAGAY andSUN]

In addition to aforesaid reply, following inputs may also be useful in this matter:- 

Thanks for providing such a detailed background and outlining various practical alternatives. This is indeed a common challenge under the GST framework, especially when capital goods are sent to a job worker and cannot be returned within the prescribed 3+2 years’ timeline under Section 143(5) and (6) of the CGST Act.

Below is a consolidated view of the feasibility, GST implications, and authority's possible stance on each option you’ve suggested, along with a suggested approach for extension and advance ruling:

🔹 Legal Background (Quick Recap)

As per Section 143(5) & Rule 45 of the CGST Rules:

• Capital goods must be returned from the job worker's premises within 3 years, extendable by 2 years with Commissioner's approval.
• If not returned within this time, the goods are deemed to be supplied by the principal to the job worker on the date they were sent, and GST is payable with interest.

✅ Option-Wise Evaluation:

1. Lease Model – X Ltd Leases Capital Goods to Job Worker

Structure:

• Machinery is sent on lease (not under job work provisions).
• X Ltd invoices monthly lease rent with GST.
• Job worker invoices separately for services.

Pros:

• Keeps it out of Section 143's purview.
• No return of goods needed – considered a distinct supply (lease of goods).
• Monthly GST compliance, but manageable.

Cons/Risks:

• Valuation scrutiny: Authorities may argue INR 5,000/month lease is not at arm’s length.
• Under Rule 28 (Related Party / Distinct Persons): Must justify value using open market value or like-kind supplies.
• Capitalization in books by X Ltd needs to align with actual control.

Recommendation:

• Benchmark lease rent with market standards.
• Keep separate agreements and consider obtaining an Advance Ruling to validate valuation.

2. Ownership Transfer on Paper + DC Documentation

Structure:

• Transfer ownership (in records) to job worker before expiry of 3 years.
• Bring it back post-loan period (i.e., not physically moved).

Pros:

• Technically no longer under Section 143 – ownership shifted.

Cons:

• Fake transfer of ownership can be challenged by department.
• If machinery isn’t capitalized in job worker’s books or not reflected in GST returns, it may be considered sham transaction.
• DC issuance without movement may raise red flags under e-way bill rules if applicable.

Recommendation:

• Not advisable unless there’s a genuine transfer with accounting entries and GST documentation (tax invoice, ITC reversal, etc.).

3. Raise Tax Invoice & Simultaneous Credit Note (Paper Supply)

Structure:

• Raise tax invoice for supply.
• Same day, issue credit note to nullify the transaction.
• Use DCs to record the transaction on paper.

Pros:

• Artificially restarts the 3+2 year period.

Cons:

• Highly aggressive – lacks economic substance.
• Department can argue misuse of Section 34 (credit notes), which is not for resetting timelines.
• May trigger penalties for fake documentation under Rule 138.

Recommendation:

• Not recommended unless specifically validated via Advance Ruling.

4. Job Worker Purchases Machinery and Enters Sale-back/Loan Arrangement

Structure:

• Job worker purchases machinery.
• Later sells/loans it back to X Ltd.

Pros:

• Completely bypasses Section 143.
• Allows machinery to remain in job worker’s premises.

Cons:

• Complex accounting and tax implications.
• ITC eligibility and capital asset tracking will be complicated.
• May affect depreciation claim and ownership test under Income Tax as well.

Recommendation:

• Feasible if there’s genuine transfer with actual payment and ownership.
• Better to go with a loan/lease structure with valid contracts and disclosure.

🔄 Other Practical Solution (Additional)

Conversion from Job Work to Regular Lease Agreement Mid-Term

• Before end of 3 years, terminate job work contract and enter into a lease contract.
• Machinery now sent as lease asset, with GST charged monthly.
• Job worker performs operations independently, not as a job worker under Section 143.

📌 Extension of 2 Years – Process

As per Rule 45(5):

• Apply to Jurisdictional Commissioner in Form GST ITC-04 extension application (generally a letter with justifications and commercial reasons).
• No specific form prescribed – but authorities expect:
  • Contract copy with job worker
  • Reason for delay
  • Evidence that machinery is still being used for X Ltd’s purposes
  • A declaration of no misuse / diversion

📍 Extension is discretionary – hence, early application (at least 3–6 months before expiry) is advisable.

📘 Advance Ruling – Feasibility

Yes, X Ltd can apply for Advance Ruling on:

• Valuation of lease transaction
• Whether proposed arrangement qualifies as supply
• Tax liability if machinery not brought back

State-level AAR can give clarity. However, note:

• Binding only on applicant and jurisdictional officer.
• Not appeal-proof – can be challenged.

✅ Final Recommendation:

Option	Viability	Risk Level	Comment
Lease Structure	✅ High	🔸Medium (Valuation)	Most practical, ensure proper valuation
Ownership Transfer	⚠️ Low	🔴 High	Risk of sham transaction
Invoice + Credit Note	❌ Not Recommended	🔴 High	Lacks substance
Job Worker Purchase	⚠️ Medium	🔸Medium	Complex but legally sound if done genuinely
Extension Request	✅ High	🟢 Low	Safe, if approved timely
AAR Application	✅ High	🟢 Low	Strong if pre-validated

*** 

[Asha Latha]

If the inputs or capital goods cannot be brought back within the prescribed period of 1 year or 3/5 years respectively, the following alternative may be explored:

Finding out buyer and effect a direct sale from the job worker's premises. In such case, if job worker is not registered, Principal shall declare the place of business of the job worker as his additional place of business - Section 143 (1) (a) and proviso to section 143 (1) (a). 

[Shilpi Jain]

Exhaustive options provided by you!!

The first option of leasing the machinery to the job worker is good. You could also consider charging lease rent at market value since anyway that lease rent will be charged back by the job worker with his charges. This will ensure that there will be no question on valuation by department even if considering that there is some other consideration also flowing to the job worker.

Option 1 of JW selling machinery to X, instead, when X ltd sells the machinery to JW, X ltd can issue a tax invoice to JW only for the purposes of GST (and not for accounting purposes) passing on the credit to JW. Not taking any money from JW for the machinery but only GST. 

These 2 options seem best from the options shared by you.