2025 (6) TMI 917 - AAR - GST

Eligibility to avail ITC - GST paid on goods and services used for construction of Tie-in pipeline for delivery of re-gasified LNG from FSRU to the National Grid - Tie-in Pipeline qualifies to be a plant and machinery as per explanation to Section 17 of the CGST Act or plant or machinery ? - applicability of restriction u/s 17 (5) (c) and 17 (5) (d) - HELD THAT - In view of the amendment to the provisions of Section 17 (5) of the Central Goods and Services Act 2017 once the aforesaid amendment comes into force it would become effective retrospectively from 01.07.20217. Then the decision of the Hon ble Supreme Court of India in the case of Safari Retreats Pvt. Ltd. Ors 2024 (10) TMI 286 - SUPREME COURT which was based on the fact that the explanation of the words Plant and Machinery provided in the said Section would be applicable to the words plant and machinery used in clause (c) of the said section and not to clause (d) of the said section where the words used were Plant or Machinery would not be applicable to that extent. It was based on the said position of law that the Hon ble Supreme Court had rejected the explanation of Plant and Machinery as provided in the statute for deciding what is plant or machinery and espoused the test of functionality to determine whether the Input Tax Credit would be available to the petitioner on the plant or machinery installed by the petitioner. The basic function carried out by the pipeline is to transfer the gasified LPG from the FSRU to the National Grid. In order to carry out the said function the pipelines use various techniques and technology and devices such as isolation valves check valves high pressure loading arms metering system pressure regulating system pig launcher S.V. Station SCADA Monitoring system etc. However it is necessary to understand that all these systems and devices are used by most pipelines carrying petroleum and other products and use of these systems and devices does not in any manner alter the fact that the basic structure is the pipeline laid outside their factory premises and all these devices are part of the said pipeline system. The presence of such system may entitle them to fit in apparatus equipment and machinery but does not take them out of phrase pipelines laid outside the factory premises . Hence they would not be called as plant and machinery for the purposes of section 17 (5) (c) and 17 (5) (d). Once it has been established that the premises of the FSRU can be justly considered as factory premises then there is no doubt that the Tie-in pipeline to be laid by the Applicant which will join the FSRU to the National Grid will be considered as pipeline laid outside the factory premises and accordingly attract the applicability of the subject exclusion clause i.e. exclusion clause (iii) of the explanation to section 17 of CGST Act 2017. As a result of this Applicant will not be entitled to avail the ITC of GST paid on goods and services used for construction of Tie-in pipelines from the FSRU to the National grid as per the provisions laid out in section 17 (5) (c) and 17 (5) (d) of the CGST Act 2017. Conclusion - Applicant is not entitled to avail the ITC of GST paid on goods and services used for construction of Tie-in Pipelines from the FSRU to the National grid as per the provision laid out in section 17 (5) (c) and (5) (d) of the CGST Act 2017 as amended by the Finance Act 2025.

Summary

The core legal questions considered in this matter are:

1. Whether the applicant is eligible to avail Input Tax Credit (ITC) of GST paid on goods and services used for construction of the Tie-in Pipeline connecting the Floating Storage Regasification Unit (FSRU) to the National Grid for delivery of re-gasified LNG.

2. Whether the Tie-in Pipeline qualifies as "plant and machinery" or "plant or machinery" under Section 17(5)(c) and 17(5)(d) of the Central Goods and Services Tax Act, 2017 (CGST Act), thereby exempting it from the ITC disallowance provisions applicable to immovable property.

3. Whether the exclusion clause in the Explanation to Section 17(5) - specifically, "pipelines laid outside the factory premises" - applies to the Tie-in Pipeline constructed by the applicant.

4. The effect of the Hon'ble Supreme Court's ruling in the Safari Retreats case on the interpretation of "plant or machinery" and the applicability of the functionality test for determining ITC eligibility.

5. The impact of the retrospective amendment by the Finance Act, 2025 substituting "plant or machinery" with "plant and machinery" in Section 17(5)(d) of the CGST Act on the applicant's eligibility for ITC.

Issue-wise Detailed Analysis:

Issue 1: Eligibility to avail ITC on goods and services used for construction of Tie-in Pipeline

Legal Framework and Precedents: Section 16(1) of the CGST Act entitles a registered person to avail ITC on goods and services used in the course or furtherance of business, subject to conditions and restrictions. Section 17(5) enumerates specific exceptions where ITC is disallowed, including construction of immovable property, except plant and machinery.

The relevant sub-clauses are:

o Section 17(5)(c): Disallows ITC on works contract services for construction of immovable property other than plant and machinery.

o Section 17(5)(d): Disallows ITC on goods or services used for construction of immovable property other than plant or machinery on own account.

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, but excludes land, buildings, telecommunication towers, and pipelines laid outside factory premises.

Court's Interpretation and Reasoning: The initial rulings by the Advance Ruling Authority (AAR) and the Appellate Authority for Advance Ruling (AAAR) denied ITC on the pipeline construction, holding that the Tie-in Pipeline is immovable property outside the scope of "plant and machinery" and falls within the exclusion of pipelines laid outside factory premises.

The Hon'ble Bombay High Court set aside these orders and remanded the matter for fresh consideration in light of the Supreme Court's observations in the Safari Retreats case, which clarified the interpretation of "plant or machinery" and the applicability of the functionality test.

Key Evidence and Findings: The applicant's submissions detailed the technical and regulatory necessity of the Tie-in Pipeline as an integral component of the LNG regasification and supply process. The pipeline is embedded underground, approximately 60 km in length, equipped with specialized apparatus such as high-pressure unloading arms, valves, metering systems, SCADA monitoring, and safety devices. The applicant argued that the pipeline is essential for delivering the outward supply of regasified LNG and is inseparable from their business activity.

Application of Law to Facts: The applicant contended that the Tie-in Pipeline qualifies as "plant and machinery" or "plant or machinery" because it is fixed to earth, used for outward supply, and serves a specialized technical function. They argued that the exclusion clause for pipelines laid outside factory premises does not apply as the FSRU is a floating vessel and not a factory premises. Further, they relied on the functionality test from the Safari Retreats judgment to assert the pipeline's qualification as plant or machinery.

Treatment of Competing Arguments: The jurisdictional officer maintained that the pipeline falls within the exclusion clause as it is laid outside the factory premises, with the FSRU constituting factory premises under the Factories Act, 1948, since manufacturing (regasification) occurs there. The officer rejected the applicant's interpretation that the FSRU is not a factory and held that the pipeline is immovable property outside factory premises, disqualifying ITC under Sections 17(5)(c) and (d).

Conclusions: The Advance Ruling Authority, after remand, concluded that the Tie-in Pipeline is a pipeline laid outside factory premises (FSRU being a factory), and thus ITC is disallowed under Section 17(5)(c) and (d) of the CGST Act as amended.

Issue 2: Interpretation of "plant and machinery" vs. "plant or machinery" and applicability of the functionality test

Legal Framework and Precedents: The Explanation to Section 17(5) defines "plant and machinery" but does not define "plant or machinery" used in clause (d). The Supreme Court in Safari Retreats held that the definition in the Explanation applies only to clause (c) ("plant and machinery") and not to clause (d) ("plant or machinery"). For clause (d), the Court applied the functionality test, considering commercial and technical usage to determine if an immovable property qualifies as plant or machinery.

Court's Interpretation and Reasoning: The applicant relied on the Safari Retreats judgment to argue that the Tie-in Pipeline satisfies the functionality test, serving a specialized technical function essential for their business and thus qualifies as plant or machinery under Section 17(5)(d). The applicant submitted dictionary meanings of "plant," "apparatus," "equipment," and "machinery" to support their contention that the pipeline and associated equipment constitute plant and machinery.

The applicant also argued that the exclusion clause for pipelines laid outside factory premises does not apply because the FSRU is not a factory premises.

Key Evidence and Findings: The applicant demonstrated the specialized nature of the pipeline, including regulatory approvals, technical specifications, and integral equipment, highlighting the pipeline's role in ensuring safe, efficient, and compliant delivery of gas.

Application of Law to Facts: The applicant's submissions emphasized the integral and inseparable nature of the pipeline to their regasification business, fulfilling the functionality test as per Safari Retreats. They argued that the pipeline is not a mere civil structure but a specialized apparatus critical for outward supply.

Treatment of Competing Arguments: The Authority rejected the applicant's interpretation of the FSRU not being a factory and held that the pipeline is laid outside factory premises, thus excluded from "plant and machinery." They noted that the retrospective amendment by the Finance Act, 2025 substituting "plant or machinery" with "plant and machinery" in Section 17(5)(d) would negate the applicability of the functionality test going forward but was not decisive at the time of the ruling.

Conclusions: The Authority found that the pipeline does not qualify as plant and machinery under the Explanation to Section 17(5) and is excluded by the clause relating to pipelines laid outside factory premises. The functionality test was considered but ultimately not accepted as decisive given the factual determination that the FSRU is a factory premises.

Issue 3: Applicability of the exclusion clause "pipelines laid outside the factory premises"

Legal Framework and Precedents: Explanation to Section 17(5) excludes pipelines laid outside factory premises from the definition of plant and machinery, thereby disallowing ITC on their construction.

Court's Interpretation and Reasoning: The applicant argued that the FSRU is a floating vessel, not a factory premises, and hence the exclusion clause does not apply. They contended that the term "factory premises" should be interpreted in its ordinary commercial sense, relying on dictionary definitions and judicial precedents cautioning against importing definitions from unrelated statutes.

The Authority, however, relied on the definition of "factory" under the Factories Act, 1948, which includes premises where manufacturing processes occur, to hold that the FSRU qualifies as factory premises.

Key Evidence and Findings: The Authority noted that regasification is a manufacturing process occurring on the FSRU, which has workers engaged in this process, satisfying the Factories Act definition.

Application of Law to Facts: Since the FSRU is a factory premises, the pipeline laid from the FSRU to the National Grid qualifies as a pipeline laid outside factory premises, attracting the exclusion under Explanation to Section 17(5).

Treatment of Competing Arguments: The Authority rejected the applicant's reliance on dictionary definitions and the argument that the Factories Act definition was inapplicable, holding that in absence of a definition in the CGST Act, reference to other statutes is appropriate.

Conclusions: The exclusion clause applies, disallowing ITC on the pipeline construction.

Issue 4: Impact of retrospective amendment substituting "plant or machinery" with "plant and machinery" in Section 17(5)(d)

Legal Framework and Precedents: The Finance Act, 2025 retrospectively amended Section 17(5)(d) replacing "plant or machinery" with "plant and machinery" and inserted an explanation clarifying that all references to "plant or machinery" shall be construed as "plant and machinery."

Court's Interpretation and Reasoning: This amendment effectively aligns clause (d) with clause (c), making the Explanation to Section 17(5) applicable to both clauses, thereby limiting the scope for applying the functionality test as per Safari Retreats.

Key Evidence and Findings: The Authority observed that post-amendment, the applicant's reliance on the functionality test for clause (d) is no longer tenable, and the exclusion clause applies.

Application of Law to Facts: The retrospective amendment is binding and curtails the applicant's claim for ITC under clause (d).

Treatment of Competing Arguments: The applicant requested a ruling on merits despite the amendment, but the Authority noted the amendment's overriding effect.

Conclusions: The retrospective amendment negates the applicant's claim under clause (d) based on the functionality test.

Significant Holdings:

o "The applicant is not entitled to avail the ITC of GST paid on goods and services used for construction of Tie-in Pipelines, from the FSRU to the National grid as per the provision laid out in section 17 (5) (c) and (5) (d) of the CGST Act, 2017, as amended by the Finance Act 2025."

o The FSRU qualifies as factory premises under the Factories Act, 1948, since regasification is a manufacturing process carried out there with workers engaged.

o The Tie-in Pipeline is a pipeline laid outside factory premises, thereby excluded from the definition of plant and machinery under Explanation to Section 17(5).

o The retrospective amendment substituting "plant or machinery" with "plant and machinery" in Section 17(5)(d) applies retrospectively from 1st July 2017 and precludes reliance on the functionality test for clause (d).

o The exclusion clause in Explanation to Section 17(5) operates to disallow ITC on construction of the Tie-in Pipeline.

o The functionality test laid down by the Hon'ble Supreme Court in Safari Retreats is not applicable post the retrospective amendment to clause (d) of Section 17(5).

o Reference to definitions in other statutes such as the Factories Act is appropriate in absence of a definition in the CGST Act.