ADVANCE RULING: INPUT TAX CREDIT ON VARIOUS SERVICES UNDER GST

[Dr. Sanjiv Agarwal]

The allowability of input tax credit to assessees on goods and services has always been fertile area of litigation between assessees and the department right from Service Tax and excise days. In GST too, this appears to be an area of utter confusion because of restrictions in section 16 and 17 of CGST Act, 2017. The Authority for Advance Ruling has been engaged in dealing with such issues. Here in we discuss, one of the advance ruling followed by its appellate ruling on allowability or otherwise of ITC on various services.

Advance Ruling

In Re: National Aluminium Company Ltd.  2018 (10) TMI 748 - AUTHORITY FOR ADVANCE RULING, ODISHA, the applicant (NALCO) sought advance ruling on entitlement to input tax credit on various items of goods and services used for maintenance of township, guest house, hospital, horticulture etc in ordinary course of business. It was of the view that services of management, maintenance and repair in its townships, guest houses, hospitals and horticulture are being used in the course or furtherance of the applicant’s business and, therefore. It is entitled to take credit of tax paid on such services as per the provisions of Central Goods and Service Tax Act, 2017.

It serves the business interest of the applicant having its employees residing in townships and colonies near its factories and offices. It operates guest houses for temporary stay of employees and guests. It runs hospitals for its employees. The management, maintenance and repair service obtained from the service providers for running of these establishments has direct benefit to the business operations. Further, the supplies on which the applicant seeks to take input tax credit, are not blocked in section 17(5) of CGST Act.

The services included support services, waste collection and sanitation services, sweeping and snow removal services, security services, service of repair / alteration / addition / replacement / renovation , painting services, human health services and maintenance & repair services risk of machinery and equipments.

The AAR observed and ruled that :

1. In case of maintenance of residential colony, perquisites provided to employee by employer as per contract are not chargeable to GST and is an exempt supply. Thus, all inward supplies of goods and services received for management, repair, renovation, alteration or maintenance, furnishing, etc. of residential colony, are not eligible for ITC. However, such denial of ITC would be pro rata for services which are partially used in plant and partially used in residential colony as ITC in respect of services received in plant is not deniable.

2. In case of health care, it was held that notwithstanding that said service is provided by employer for discharging statutory obligation under ESI Act, it being nil rated supply, ITC was not admissible presently. However, after coming into force amendment in Section 17(5) of Central Goods and Services Tax Act, 2017 in terms of CGST (Amendment) Act, 2018 (yet to be made effective), ITC would not be deniable in such case in view of proviso proposed to be inserted.

3. In case of establishment of guest house and its furnishing, maintenance, it was ruled that maintenance of guest house is purely for providing accommodation to guests / employees on tour. It is neither a perquisite nor a statutory obligation but a business requirement. ITC is admissible on services used in guest house / transit hostel, except food and beverage but including landscaping and gardening.

4. In case of horticulture and plantation services, services were availed, both inside plant are and unspecified outside plant area in addition to residential town ship. It was ruled that such services provided to unspecified outside location, may be a statutory requirement, but not a business requirement. ITC is not admissible for such services. Similarly, ITC is also not admissible for plantation services used in residential area. However, plantation and gardening within plant and mining area, eligible for ITC being used within business premises.

The ruling has since been modified by AAAR on appeals preferred by Department. Assessee’s appeal before AAAR was dismissed.

Appellate Advance Ruling

Against Advance ruling dated 28.09.2018, pronounced by AAR, Odisha, an appeal was preferred before AAAR, Odisha by both, revenue as well as assessee. [In Re: National Aluminum Company Ltd. 2019 (2) TMI 1527 - APPELLATE AUTHORITY FOR ADVANCE RULING, ODISHA].

While the assessee prayed to allow input tax credit on inputs and input services used by them for maintenance of their township, security services and horticulture meant for township, the revenue’s stand was that AAR has erred in :

(i)    Allowing the input tax credit of the services utilized for maintenance of guest house, transit house and trainee hostel.

(ii)   Allowing the input tax credit for the service utilized for plantation and gardening within the plant area including the mining area and the premises of other establishment like administrative building, guest house, transit house and training hostel.

The AAR observed that to claim input tax credit, an input service must be integrally connected with the business of manufacturing the final product Cost of an input service forming part of the cost of final product alone cannot be a condition to allow the benefit of input tax credit.

The ruling of the AAR that services availed in relation to plantation and gardening within the plant area including mining area and the premises of other business establishments will qualify for input tax credit was found to be correct. Creation and maintenance of green area/zone inside plant/mining/office premises is a business necessity for controlling pollution as well as atmospheric temperature. It is also a requirement for preventing soil erosion. This is also mandated in various laws under which the Appellant-I conducts its business such as the Forest Conservation Act, the Environment Protection Act, etc.

AAAR dismissed the assessee’s appeal and modified the advance ruling on revenue’s appeal, partly allowing the same. The AAAR ruled as follows:

1. ITC on maintenance of residential colony - not for furtherance of business and hence ITC deniable
2. ITC on establishing, furnishing and  maintenance  of  guest house / transit hostel – ITC not admissible irrespective of whether accommodation provided to employees or non- employees
3. ITC on plantation and gardening services – ITC allowed as it is a business necessity for controlling pollution as well as atmospheric temperature and prevent soil erosion, besides being a mandatory law.
4. ITC on input service must be integrally connected with manufacture for admissibility of credit. Cost of an input service forming part of the cost of final product alone cannot be a condition to allow credit.