Ineligible ITC, Goods and Services Tax - GST

[RAGHAV SHARMA]

ITC on Electrical items(Wires, Bulb, LED,) are claimed. DRC-01 is issued concerning ITC claimed on electrical items. All of these items are capitalized under the furniture head. Electrical items are necessary to carry on the business activities and how it is valid to issue DRC-01 on this matter. Kindly guide.

Posts / Replies

[KASTURI SETHI]

Dear Querist,

The department is correct. ITC is allowed if these are not capitalized. See Explanation to Section 17 (5) (d) . In other words, the same should have been part of Profit and Loss Statement.- in the Balance Sheet.

[RAGHAV SHARMA]

Okay. What about the Air Conditioner? Is that also covered under the blocked credit?

Thanks

[KASTURI SETHI]

Not admissible. Go through the decision of AAR (Gujarat) :2021 (8) TMI 740 - AUTHORITY FOR ADVANCE RULING, GUJARAT IN RE: M/S. WAGO PRIVATE LIMITED,

[KASTURI SETHI]

The above judgement pertains to air conditioning system and not meant for air conditioner. Air Conditioner is a movable property and if not capitalized, ITC is admissible.

[Amit Agrawal]

With regards to the decision of AAR (Gujarat) :2021 (8) TMI 740 - AUTHORITY FOR ADVANCE RULING, GUJARAT IN RE: M/S. WAGO PRIVATE LIMITED, I respectfully disagree with the conclusion drawn therein to deny ITC to the tax-payer.

In my view, such 'air conditioning system' falls within the expression “plant and machinery” as per explanation given below Section 17(5). And thereby, exclusion from ITC u/s 17(5)(c) & 17(5)(d) does not apply for such plant & machinery (i.e. even when such plant & machinery is treated as 'immovable property' and even if expenses thereof (i.e. excluding ITC portion) is capitalized in tax-payer's books of accounts).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Sadanand Bulbule]

Dear all

Please refer the following AAAR as well:

2023 (10) TMI 473 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT

IN RE: M/S. THE VARACHHA CO-OP. BANK LTD.,

Blocking of Input Tax Credit - construction of their new administrative office - Central Air-conditioning Plant - Lift - Electrical fittings not for civil construction - Solar Plant - Fire Safety Extinguishers - Architect Service Fees - Interior Designing Fees.

Central Air Conditioning Plant - HELD THAT:- As the construction of central air conditioning plant via a works contract service, makes it an immovable properly, it ceases to be a plant and machinery - the ITC on the supply of Central Air Conditioning Plant, ceases to be a plant and machinery & hence, is blocked under Section 17(5)(c) of CGST Act, 2017 as the same is works contract services for construction of an immovable properly.

Lift - HELD THAT:- On examining the agreement for supply of lift, it is found that the same falls under the category of ‘works contract’ service as defined under section 2(119) of CGST Act, 2017, as it fulfills the description of the works contract service.

The lift would become an immovable property after being erected and installed, as it is attached to the building itself - As the erection, installation and commissioning of lift via a works contract service as pointed out above, makes it an immovable property, it ceases to be a plant and machinery.

Thus, in terms of section 17 of the CGST Act, the appellant is not entitled to ITC of GST paid on supply of Lift/Elevator.

Electrical fittings such as Cables, Switches, NCB and other Electrical consumables materials - HELD THAT:- The electrical fittings are mostly concealed into the wall/floor of the building. They are concealed or fitted on to the building through pipes as it serves the dual purpose of safety and aesthetics. The supply of electrical fittings involves its installation also, The supply therefore falls under the category of ‘Works Contract Service’, further on installation of the electrical fittings it becomes part of the building and thereby an immovable property - the supply of electrical fittings after installation and commissioning becomes part of the building i.e. immovable property and thus in terms of section 17 of the CGST Act, the appellant is not entitled to ITC of GST paid on Electrical fittings.

Roof Solar Plant - HELD THAT:- The roof solar plant, affixed to foundation via nuts and bolts and which has the flexibility of 4 different angles is not an immovable properly but a plant and machinery, The applicant has further stated that they have capitalized the roof solar plant in their books of accounts, the Roof Solar Plant, as is evident is not permanently fastened to the building. Thus, it qualifies as a plant and machinery and is not an immovable property, hence, it is not covered under blocked credit as mentioned in 17(5)(d) of the CGST Act, 2017. Therefore the applicant is eligible for input tax on roof solar plant.

Fire Safety Extinguishers - HELD THAT:- There is an intention to install the ‘Fire Safety Extinguishers’ permanently to the building. The Fire Safety Extinguishers once fitted, no longer remains movable goods as it gets assimilated in a permanent structure i.e. the administrative building of the appellant.

As the supply and installation of fire safely extinguishers as pointed out above, makes it an immovable properly, it ceases to be a plant and machinery - the appellant is not entitled to ITC of GST paid on Fire Safety Extinguishers in view of the provisions of section 17(5)(c) of the CGST Act, 2017.

Architect Service Fees - Interior Designer Fees - HELD THAT:- It is undisputed that the services of an Architect and Interior Designer availed is with regard to construction of an immovable properly i.e. the new administrative/office building of the appellant.

As is evident, AS 10, prescribes capitalization of professional fees, meaning thereby that in this case both these services viz. architect service fees and interior designer Fees, should in terms of the accounting standards be capitalized. The averment therefore that since they are booking a capital expense under Profit and Loss account will make them eligible for ITC, is not a legally tenable argument - the appellant is not entitled to ITC of GST paid on Architect Service Fees and Interior Designing Fees in view of the provisions of Section 17(5)(d) of the CGST Act, 2017.

Appeal dismissed.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, I agree with you in toto. Thank you very much for throwing more light on the issue. You have widened my horizon of knowledge and hence enriched me.

I further add that an asseseee has to fulfil the conditions/parameters laid in the definition and scope of 'Revenue Expenditure' and 'Revenue Expenditure'.

[Amit Agrawal]

In support of my last post above, one needs to take note of followings provisions from CGST Act, 2017:

"Apportionment of credit and blocked credits.

17. ..............

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (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

(iii) pipelines laid outside the factory premises."

And Section 2(119) which reads as follows:

"(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;"

Following points are worth noting IMHO:

A. Restriction on ITC u/s sub-clause (c) & (d) of Section 17(5) is for 'Construction of immovable property' OTHER THAN "Plant & Machinery''.

B. “Works contract” u/s 2(119) covers not only 'Construction of immovable property' but also activities like "erection, installation of immovable property".

B1. Thus, scope of works contract u/s 2(119) is much more vast as compared to what is restricted for ITC u/s sub-clause (c) & (d) of Section 17(5).

C. Case-laws related to excise regime (i.e. Excisebility or otherwise of any particular item / plant / system on the ground that same is movable or immovable etc.) has no direct relevance to block ITC u/s sub-clause (c) & (d) of Section 17(5) in following situations:

I. When there is NO 'Construction of immovable property'

II. Even when there is 'Construction of immovable property', but same is for 'Construction' of 'Plant & Machinery' (What is 'Plant & Machinery', is duly explained under Section 17(5)).

III. When, as an inward supply, it is works contract (as defined u/s 2(119)) for activities other than 'Construction of immovable property'.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Among other things, I respectfully disagree with logic given in Para 15.6 & 15.7 in case of 2023 (10) TMI 473 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT, to deny ITC, which is reproduced below for ready reference:

"15.6 As the construction of central air conditioning plant via a works contract service as pointed out above, makes it an immovable properly, it ceases to be a plant and machinery.

15.7 In view of the foregoing, we hold that the ITC on the supply of Central Air Conditioning Plant, ceases to be a plant and machinery & hence, is blocked under Section 17(5)(c) of CGST Act, 2017 as the same is works contract services for construction of an immovable properly."

And my reasoning for disagreement is as follows (given reasons should be treated as without prejudice to each other):

A. Under common trade parlance, 'central air conditioning plant' are NEVER said as "constructed" but same is called as 'Erected or Installed'. As there is no construction involved, question of blockage on ITC u/s sub-clause (c) & (d) of Section 17(5) does not arise.

A1. Explanation given under sub-clause (d) of Section 17(5) (explaining what is 'construction') will not help Revenue in any way, specially when one reads definition of works-contract u/s 2(119).

A2. Furthermore, when AAR itself calls it as 'Plant', then, to deny ITC using sub-clause (c) & (d) of Section 17(5) is illogical & self-contradictory in my humble view.

B. Even otherwise, logic given in above reproduced Para 15.6 of said AAAR ruling is contrary is what is expressly provided in sub-clause (c) & (d) of Section 17(5) itself.

B1. Plain reading of sub-clause (c) & (d) of Section 17(5) shows that there can be 'construction of immovable property' but still ITC will be available if such immovable property is 'Plant & Machinery'.

B2. So, logic given in Para 15.6 of said AAAR ruling that 'As the construction of central air conditioning plant via a works contract service as pointed out above, makes it an immovable properly, it ceases to be a plant and machinery' is faulty IMHO because sub-clause (c) & (d) of Section 17(5) specifically says that even an immovable property can be 'Plant & Machinery'.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Shilpi Jain]

ITC w.r.t. electrical items would be eligible since these cannot be regarded to have been used in construction of immovable property. Also, these items would be movable i.e. easily removable and installed for use elsewhere. ITC is not restricted on these items.