2025 (5) TMI 1100 - AAR - GST

Eligibility of proportionate Input Tax Credit (ITC) on inputs input services and capital goods used in the construction and installation of a Pre-Engineered Building (PEB) and associated structures supporting an overhead crane in an integrated factory setting - whether the ITC in this case is blocked by sub-sections viz section 17 (5) (c) and (d) ibid? - HELD THAT - The Hon ble Supreme Court in M/s. Safari Retreats P Ltd 2024 (10) TMI 286 - SUPREME COURT while analyzing section 17 (5) (c) ibid has concluded that in the case of works contract benefit of ITC is not available in respect of services supplied for the construction of immovable property subject however to two exceptions a when the goods services or both are received for construction of plant and machinery ; and b where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract. What however cannot be ignored is also the fact that in the second Explanation under section 17 (5) ibid land building or any other civil structures have been excluded from the definition of plant and machinery. The Hon ble Supreme Court further explains that construction is said to be on a taxable person s own account when i it is made for his personal use and not for service; or b it is to be used by the person constructing as a setting in which business is carried out further stating that construction cannot be said to be on a taxable person s own account if it is intended to be sold or given on lease or license. The ITC on inputs and input services used for construction of immovable property is hit by section 17 (5) (c) (d) ibid and hence ITC is not eligible on this count. Our finding is also substantiated vide the amendment in section 17 (5) (d) through Finance Act 2025. Whether proportionate ITC is admissible for supply of other capital goods like rails electrification etc. installed or erected for smooth operation of crane? - HELD THAT - Once these are embedded in the civil structure and become an immovable property the credit stands blocked in terms of section 17 (5) (c) and (d) ibid. Thus the averment regarding availment of proportionate credit in respect of other capital goods like rails electrification etc. installed or erected for smooth operation of crane is not legally tenable. Conclusion - i) Steel Cement and other consumables etc. to the extent of their actual usage in the execution of works contract service when supplied for construction of immovable property in the form of the factory which is an Integrated Factory Building with Gantry Beam which in turn is used for mounting across the pre-cast concrete beams poles over which the crane would be operated. ii) Installation and Erection Services of the PEB when supplied for construction of immovable property in the form of the factory which is an Integrated Factory Building with Gantry Beam which in turn is used for mounting across the pre-cast concrete beams poles and over which the crane would be operated. iii) Other capital goods like rails electrification etc. installed or erected for smooth operation of the crane.

Summary

The core legal questions considered by the Advance Ruling Authority pertain to the eligibility of proportionate Input Tax Credit (ITC) on inputs, input services, and capital goods used in the construction and installation of a Pre-Engineered Building (PEB) and associated structures supporting an overhead crane in an integrated factory setting. Specifically, the issues are:

1. Whether proportionate ITC is admissible on steel, cement, and other consumables used in the execution of works contract services supplied for the construction of an immovable property, namely an integrated factory building with gantry beams supporting a crane.

2. Whether proportionate ITC is admissible on installation and erection services of the PEB supplied for the construction of such immovable property.

3. Whether proportionate ITC is admissible on other capital goods such as rails and electrification installed or erected for the smooth operation of the crane.

Issue-wise Detailed Analysis

Issue 1 & 2: Eligibility of proportionate ITC on inputs, consumables, and installation/erection services used in construction of immovable property (PEB with gantry beam)

Legal Framework and Precedents: The relevant provisions include Sections 2(59), 2(60), 2(119), 16(1), and 17(5)(c) and (d) of the Central Goods and Services Tax (CGST) Act, 2017. Section 2(119) defines "works contract" extensively, encompassing contracts for construction, erection, installation, and related activities involving immovable property. Section 16(1) allows ITC on goods or services used in the course of business subject to conditions. Section 17(5)(c) and (d) block ITC on works contract services and goods/services used for construction of immovable property, except where such construction relates to "plant and machinery" as defined in the Explanation to Section 17.

The Supreme Court's judgment in the case of Safari Retreats P Ltd (2024) was pivotal. The Court analyzed clauses (c) and (d) of Section 17(5), clarifying that ITC is generally blocked on works contract services and goods/services used for construction of immovable property on one's own account, except where the construction is of "plant and machinery." The Explanation to Section 17 defines "plant and machinery" as apparatus, equipment, and machinery fixed to earth by foundation or structural support used for making outward supply of goods or services, including such foundations and structural supports, but explicitly excludes land, buildings, or any other civil structures.

Vide Finance Act, 2025, Section 17(5)(d) was amended to replace "plant or machinery" with "plant and machinery," with a clarificatory Explanation 2 stating that any reference to "plant or machinery" shall be construed as "plant and machinery." This amendment reinforces the interpretation that ITC is blocked unless the construction is of "plant and machinery" as defined.

Court's Interpretation and Reasoning: The Authority examined the nature of the PEB structure and the overhead crane installation. The applicant contended that the PEB is not a mere civil structure but a special multi-utility building that functions as plant and machinery because it supports and bears the load of the overhead crane, which is a plant and machinery. The applicant submitted a Chartered Engineer's certificate and load calculations to demonstrate that the crane load is borne by the PEB, and thus the PEB forms an integral part of the plant and machinery.

The Authority, however, relied on the Supreme Court's ruling and the statutory definition of "plant and machinery." It held that the PEB, despite its specialized nature, is essentially a civil structure and does not qualify as plant and machinery. The exclusion of land, building, or any other civil structures from the definition of plant and machinery was decisive. The crane itself is plant and machinery, but the supporting PEB structure is a civil structure and hence not eligible for ITC.

Key Evidence and Findings: The applicant's evidence included weight calculations showing that the crane load constituted approximately 50.36% of the total weight capacity of the PEB. The applicant argued for proportionate ITC based on this weight ratio. However, the Authority found that this mechanical interdependence does not alter the legal classification of the PEB as a civil structure excluded from ITC eligibility.

Application of Law to Facts: Applying the statutory provisions and Supreme Court precedent, the Authority concluded that ITC is blocked under Section 17(5)(c) and (d) on works contract services and goods used for constructing immovable property on the applicant's own account, unless the construction is of plant and machinery. Since the PEB is a civil structure, ITC on inputs, consumables, and erection services related to the PEB is not admissible.

Treatment of Competing Arguments: The applicant relied on a prior order from the Tamil Nadu Appellate Authority for Advance Ruling, which had allowed proportionate ITC on structural supports related to overhead cranes. The Authority distinguished that order on the ground that it predated the Supreme Court's judgment in Safari Retreats and the subsequent amendment to Section 17(5)(d). Therefore, the prior ruling was not applicable.

Conclusion: Proportionate ITC is not admissible on steel, cement, consumables, and installation/erection services supplied for construction of the PEB, as it is a civil structure and not plant and machinery.

Issue 3: Eligibility of proportionate ITC on other capital goods like rails, electrification installed or erected for smooth operation of the crane

Legal Framework and Precedents: The same provisions of Section 17(5)(c) and (d) apply, blocking ITC on goods and services used for construction of immovable property on own account, except where the construction relates to plant and machinery.

Court's Interpretation and Reasoning: The Authority observed that once capital goods such as rails and electrification are embedded into the civil structure and become part of the immovable property, the ITC on these goods is blocked. The rationale is that these goods lose their separate identity and become part of the civil structure, which is excluded from ITC eligibility.

Application of Law to Facts: Since the rails, electrification, and similar capital goods are installed or erected as part of the factory building's civil structure to facilitate crane operation, they form part of the immovable property. Therefore, ITC on these capital goods is blocked under Section 17(5)(c) and (d).

Conclusion: Proportionate ITC is not admissible on other capital goods like rails and electrification installed or erected for the smooth operation of the crane.

Significant Holdings

"In the case of works contract services supplied for the construction of immovable property, the benefit of ITC is not available. However, there are exceptions to clause (c). First is when goods or services, or both, are received by a taxable person for the construction of 'plant and machinery', as defined in the explanation to Section 17. The second exception is where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract."

"The explanation defines the meaning of the expression 'plant and machinery'. However, ... land, building or any other civil structures; telecommunication towers; and pipelines laid outside the factory premises are excluded."

"Construction is said to be on a taxable person's 'own account' when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot be said to be on a taxable person's 'own account' if it is intended to be sold or given on lease or license."

"The ITC on inputs and input services used for construction of immovable property is hit by section 17(5)(c) & (d), ibid and hence ITC is not eligible on this count."

"Once capital goods like rails, electrification, etc. are embedded in the civil structure and become an immovable property, the credit stands blocked in terms of section 17(5)(c) and (d), ibid."

Final Determinations:

a) No proportionate Input Tax Credit is admissible on steel, cement, and other consumables used in the execution of works contract services supplied for the construction of the integrated factory building with gantry beam supporting the crane.

b) No proportionate ITC is admissible on installation and erection services of the PEB supplied for construction of the immovable property.

c) No proportionate ITC is admissible on other capital goods like rails, electrification, etc., installed or erected for the smooth operation of the crane, as these become part of the immovable property.