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2018 (10) TMI 745 - AAR - GSTInput tax credit - input services - cost of civil works incurred under Extension project - Mechanical Works - Electrical Works - Applicant submits that input tax credit in relation to Mechanical Works and Electrical Works should be admissible as such costs pertain to construction of plant and machinery. Whether on facts and circumstances of the case the input tax credit of tax paid on costs proposed to be incurred in relation to Mechanical Works and Electrical Works under the Extension Project can be treated as admissible under the Central Goods and Services Tax Act 2017? Held that - Most of the services were held to be admissible. The credit on following services denied Structural work external finishing work internal finishing work M and E related civil work - M and E related civil works - Plumbing - Gardening water supply system - dismantling work - Fire protection work - sprinkler works - Extinguishers - fire documentation - relocation work - process waste water supply system (pipelines outside factory premises and civil work even inside factory) - works related to civil construction - demolition work. Ruling - CENVAT credit on most services allowed except those mentioned above.
The core legal questions considered by the Authority for Advance Ruling (AAR) in this case pertain to the admissibility of input tax credit (ITC) under the Central Goods and Services Tax Act, 2017 (CGST Act) and Maharashtra Goods and Services Tax Act, 2017 (MGST Act) with respect to costs incurred on various activities under an Extension Project of a manufacturing facility. Specifically, the issues include:
1. Whether ITC is admissible on costs related to Mechanical Works and Electrical Works involved in the Extension Project, given that ITC on Civil Works related to construction of immovable property (other than plant and machinery) is inadmissible under Section 17(5)(c) and 17(5)(d) of the CGST Act. 2. The interpretation and application of the definition of "plant and machinery" under Explanation II to Section 17(5) of the CGST Act, particularly whether the Mechanical and Electrical Works fall within this definition and are used for making outward supplies. 3. The nexus required between the goods or services received and the manufacturing process or business activity for ITC to be admissible, including whether indirect but essential usage qualifies for ITC. 4. The applicability of the restrictions under Section 17(5) of the CGST Act on ITC for works contract services and goods/services used in construction of immovable property. 5. The eligibility of ITC on specific sub-activities under Mechanical and Electrical Works as detailed in Annexure 4, including plumbing, fire protection, air conditioning, sub-station work, DG set work, lighting, and others. 6. The relevance of judicial precedent regarding the interpretation of "used in manufacture" and its application to the present facts. Issue-wise Detailed Analysis Issue 1: Admissibility of ITC on Mechanical and Electrical Works vis-`a-vis Civil Works Legal framework and precedents: Sections 16 and 17 of the CGST Act govern the eligibility and restrictions on ITC. Section 17(5)(c) and (d) specifically deny ITC on works contract services and goods/services used for construction of immovable property other than plant and machinery. Explanation II to Section 17(5) defines "plant and machinery" as apparatus, equipment, and machinery fixed to earth by foundation or structural support used for making outward supply, excluding land, building, civil structures, telecommunication towers, and pipelines outside factory premises. Court's interpretation and reasoning: The AAR noted that ITC on Civil Works is inadmissible as per the statutory provisions since such works pertain to immovable property other than plant and machinery. However, ITC on Mechanical and Electrical Works may be admissible if these costs relate to plant and machinery used for making outward supplies. Key evidence and findings: The applicant submitted detailed descriptions of activities under Mechanical and Electrical Works (Annexure 4), including plumbing, fire protection, air conditioning, sub-station work, DG set work, lighting, etc. The applicant contended that these works are essential and indirectly used for manufacturing outward supplies, citing the Supreme Court precedent in J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. Sales Tax Officer, which held that goods used in processes integrally connected to manufacture qualify as "used in manufacture." Application of law to facts: The AAR examined each sub-activity, assessing its nexus to manufacturing and whether it falls within the definition of plant and machinery. It was observed that while some Mechanical and Electrical Works are essential for production processes (e.g., air conditioning for sterile environment, compressed air supply, purified water supply), others (e.g., gardening water supply, fire protection equipment) do not qualify as plant and machinery or are mandated by statutory compliance and thus do not have a direct nexus with outward supplies. Treatment of competing arguments: The applicant argued broadly for ITC on Mechanical and Electrical Works as plant and machinery, relying on the indirect nexus principle and capitalisation in books of accounts. The jurisdictional officer agreed with the applicant's interpretation for Mechanical and Electrical Works but upheld the inadmissibility of ITC on Civil Works. The AAR scrutinized the detailed sub-activities and applied statutory provisions and relevant case law to distinguish admissible from inadmissible costs. Conclusions: ITC on Civil Works is not admissible. ITC on Mechanical and Electrical Works is admissible only to the extent that such works constitute plant and machinery used for making outward supplies. Specific sub-activities were individually assessed for eligibility. Issue 2: Interpretation of "Plant and Machinery" and Nexus with Outward Supplies Legal framework and precedents: Explanation II to Section 17(5) of the CGST Act defines "plant and machinery." The Supreme Court judgment in J.K. Cotton Spinning clarified that goods or equipment indirectly but integrally connected to manufacturing qualify as used in manufacture. Court's interpretation and reasoning: The AAR emphasized that plant and machinery includes apparatus and equipment fixed by foundation or structural support used for making outward supplies, excluding civil structures. The indirect nexus test was applied to determine whether Mechanical and Electrical Works qualify as plant and machinery. Key evidence and findings: The applicant's detailed submissions described how various Mechanical and Electrical Works are essential to maintaining production standards (e.g., air conditioning for sterile environment, compressed air for machines, purified water for manufacturing). The AAR noted statutory requirements under the Factories Act and Maharashtra Factory Rules that mandate certain installations but distinguished those that are merely for compliance from those integral to production. Application of law to facts: The AAR held that equipment and systems directly or indirectly essential for manufacturing and making outward supplies qualify as plant and machinery. However, installations primarily for statutory compliance or general utilities without direct nexus to production are excluded. Treatment of competing arguments: The applicant's broad interpretation was accepted in part, but the AAR rejected claims where the nexus to manufacturing was weak or the works constituted civil structures or statutory compliance measures. Conclusions: The definition of plant and machinery is interpreted purposively to include essential apparatus and equipment fixed to earth used in production. Indirect but essential usage qualifies, consistent with judicial precedent. Issue 3: Application of Section 16 and 17 Conditions and Restrictions on ITC Legal framework: Section 16 prescribes conditions for availing ITC, including possession of tax invoice, receipt of goods/services, payment of tax, and filing of returns. Section 17(5) lists specific restrictions on ITC, including for works contract services and goods/services used in construction of immovable property (other than plant and machinery). Court's interpretation and reasoning: The AAR reiterated that ITC is available only if all conditions under Section 16 are satisfied and no restrictions under Section 17(5) apply. The applicant satisfied the conditions and did not contest inadmissibility of ITC on Civil Works. The AAR carefully applied Section 17(5) to each sub-activity. Key evidence and findings: The applicant provided detailed invoices, contracts, and descriptions of works. The jurisdictional officer did not dispute the applicant's compliance with Section 16 conditions but focused on Section 17 restrictions. Application of law to facts: The AAR held that ITC is admissible on those Mechanical and Electrical Works that qualify as plant and machinery used for making outward supplies and where no Section 17(5) restriction applies. ITC is inadmissible on works related to immovable property (civil works) and certain statutory compliance installations. Treatment of competing arguments: The applicant's submissions for broad ITC claims were moderated by the AAR's detailed scrutiny and statutory interpretation, balancing the applicant's business needs and statutory restrictions. Conclusions: ITC is admissible subject to compliance with Section 16 conditions and absence of restrictions under Section 17(5). The AAR's detailed tabulation clarifies admissibility on a case-by-case basis. Issue 4: Eligibility of ITC on Specific Sub-activities under Mechanical and Electrical Works Legal framework: Section 17(5) and Explanation II define eligibility. The Factories Act and Maharashtra Factory Rules provide context for statutory compliance installations. Court's interpretation and reasoning: The AAR examined each sub-activity in detail, assessing usage, nexus with production, statutory requirements, and nature of the work (civil vs plant and machinery). Key evidence and findings: The AAR's tabular analysis concluded:
Application of law to facts: The AAR applied statutory definitions and nexus tests to each sub-activity, distinguishing between plant and machinery and immovable property or statutory compliance installations. Treatment of competing arguments: The applicant's claims were accepted or rejected based on detailed functional analysis and statutory provisions. The jurisdictional officer's concurrence supported the AAR's approach. Conclusions: The AAR's granular approach provides clarity on ITC eligibility for each sub-activity, balancing statutory restrictions and business realities. Issue 5: Relevance of Judicial Precedent on Nexus to Manufacture Legal framework and precedent: The Supreme Court in J.K. Cotton Spinning and Weaving Mills Co. Ltd. held that goods used in processes integrally connected to manufacture, even if indirectly, qualify as "used in manufacture." Court's interpretation and reasoning: The AAR relied on this precedent to support the applicant's contention that Mechanical and Electrical Works indirectly but indispensably connected to manufacturing qualify for ITC. Key evidence and findings: The applicant demonstrated that air conditioning, purified water, compressed air, and other systems are essential for maintaining production standards and product quality. Application of law to facts: The AAR accepted the indirect nexus principle, applying it to allow ITC on eligible Mechanical and Electrical Works. Treatment of competing arguments: The AAR balanced the precedent with statutory exclusions, ensuring that only qualifying works receive ITC. Conclusions: The judicial precedent supports a purposive interpretation of "used in manufacture," allowing ITC on indirectly used plant and machinery essential for production. Significant Holdings "Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business." (Section 16(1) CGST Act) "Input tax credit shall not be available in respect of 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; and 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." (Section 17(5)(c) and (d) CGST Act) "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 land, building or any other civil structures; telecommunication towers; and pipelines laid outside the factory premises." (Explanation II to Section 17(5) CGST Act) "Where any particular process or activity is so integrally connected with the ultimate production of goods that but for that process, manufacture or processing of goods would be commercially inexpedient, goods required in that process would, in our judgment, fall within the expression 'in the manufacture of goods.'" (Supreme Court in J.K. Cotton Spinning and Weaving Mills Co. Ltd.) The AAR's final determination is that ITC on Civil Works is inadmissible. ITC on Mechanical and Electrical Works is admissible only to the extent that such works constitute plant and machinery used directly or indirectly but indispensably for making outward supplies. The detailed tabulation in the order specifies admissibility or inadmissibility of ITC on each sub-activity under Mechanical and Electrical Works, applying statutory definitions, nexus tests, and relevant judicial precedent.
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