Input Tax Credit on construction of Sheds in factory premises [AAR]

Maruti Ispat & Energy (P.) Ltd. [2018] (AAR – ANDHRA PRADESH) Ruling : Input Tax Credit on construction of Sheds in factory premises not allowed and blocked by virtue of provisions of Section 17(5)(c) and (d) of CGST Act, 2017

1. Query: Whether applicant is eligible to take GST input on Goods and Services used for installation (Foundation) and protection (by creating sheds) of plant and machinery

2. Facts

Applicant is a private limited company, and manufacturers of steel and generation of power. Applicant submitted that they had DRI (direct reduced iron) i.e. spong iron unit and they involve in generation of power. They stated the nature of industry and product requires buying of large plant and machinery for installation and protection of this plant & machinery, they required to lay foundations, and also to construct the sheds.

3. Contention of the petitioner:

There is no restriction to claim input, with respect to items related to plant & machinery. Further, structural support and civil structure are covered as per the explanation to the provisions of Section 17(5). The digging process is done with regard to creation of foundation for specific installation of plant & machinery and is completely suitable only for the specific plant & machinery. The word ‘support’ used in explanation not only means support from base, but also support from all the ways, creating sheds is to protect the plant & machinery.

4. Observation by AAR

On being perusal of photographic evidences, AAR was of the opinion that argument of applicant to treat civil structures as structural support for plant and machinery is not tenable. The civil structures under consideration squarely falls under other civil structures which are excluded as per explanation to the proviso as stated above.

5. Held

As per the material on record and photographic evidences of the applicant, on which sought for clarification does not fall under the ambit of explanation to the proviso to the Section 17(5) of CGST/APGST Act,2017. Hence, the applicant is not entitled to claim the input tax credit on the goods and services.

6. Comment:

Section 17(5)(c) and (d) of CGST Act along with the explanation is reproduced here in below:

17. (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section(1) of section 18, input tax credit shall not be available in respect of the following, namely:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation.For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(ii) pipelines laid outside the factory premises.

Emphasis Supplied

Its the portion which has been highlighted which was the primary question before the AAR whether foundation to the machinery and sheds fall within the ambit of foundation and structural support for plant and machinery or not.

For the purpose of Sheds, AAR held that it neither falls within the ambit of foundation and nor within the ambit of structural support. For the foundation of the machinery, whether on the basis of evidences or otherwise and which might need reconsideration, AAR held that such foundation is not covered by the explanation to Section 17(5).

It seems that the view might need reconsideration since, sheds might not fall within the ambit of structural support to the plant and machinery but foundation which is specific to machinery would be falling within the ambit of the explanation which allows foundation and structural support to the machine to be part of the plant and machinery and takes it out of the ambit of Section 17(5)(c) and (d) . If foundation specific to the machinery is taken out of the ambit of the Explanation to Section 17(5), then the purpose of inserting the explanation might get defeated since Explanation does nothing but to clarify what is already written in the main part of the law.