FEBRUARY 27, 2017

By G Natarajan, Advocate, Swamy Associates

THE following restriction had been introduced in the definition of "input" under Cenvat Credit Rules, 2004, w.e.f. 01.04.2011.

Input excludes, any goods used for -

(a) construction of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods, except for the provision of any taxable service specified in sub-clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act;

On the same day, the following restriction had been also introduced in the definition of "input service" also.

Input service, excludes services specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for -

(a) construction of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services

Consequent to introduction of negative list based levy of service tax where the individual definition of taxable services ceased to exist from 01.07.2012, consequential amendments were made in the above definitions.

Input excludes any goods used for -

(a) construction or execution of works contract of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods,

except for the provision of service portion in the execution of a works contract or construction service as listed under clause (b) of section 66E of the Act;"

Input service excludes service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for -

(a) construction or execution of works contract of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services

It may be observed from the above that the goods used for laying foundation or making structures for support of capital goods and the services used for laying of foundation or making of structures for support of capital goods are not entitled for cenvat credit.

Let us see the corresponding provisions under the model GST Act.

Section 17 (4) of the Act contains the following provision.

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1), (2), (3) and (4) of section 18, input tax credit shall not be available in respect of the following:

(c) works contract services when supplied for construction of 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 received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;

Explanation 1.- For the purpose of this clause, the word "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Explanation 2.- ‘Plant and Machinery' means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

The effect of the above provisions is that input tax credit would not be admissible for goods, services and works contract services used for construction of any immovable property, except when they are used for "plant and machinery". In other words, even if the activity leads to emergence of an immovable plant and machinery, the goods and services used for the purpose of construction of such plant and machinery would be entitled for credit. For example, while cement, steel and steel structures used for constructing a building would not be entitled for credit, the same, when used for erection, commissioning of a conveyor system would be entitled for credit.

The term "plant and machinery" is also defined by way of an Explanation. For ready reference,

Explanation 2.- ‘Plant and Machinery' means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

Now the moot question is whether the "foundation and structural supports" mentioned above, refer only to the foundation or structural support for telecommunication tower or would cover foundation or structural supports of apparatus, equipment, machinery and pipelines also. In other words, the issue is as to how the above Explanation has to be interpreted and understood. Three possible interpretations are tabulated below.

(i)

(ii)

(iii)

Under the first method, the phrase "fixed to earth by foundation or structural support that are used for making outward supply" if read commonly for all preceding items, would mean that foundation and structural supports for all plant and machinery would be entitled for input tax credit.

Under the second method "used for making outward supply" alone is read commonly for all preceding items, it would mean that the foundation and structural supports referred to are only in respect of telecommunication towers and the same would not apply to foundation and structural support of apparatus, equipment, machinery and pipelines.

Under the third method, "telecommunication towers fixed to earth by foundation or structural support used for making outward supply" by itself would be a category and foundation and structural support for apparatus, equipment, machinery and pipelines would not be entitled for credit.

It may be noted that the definition of the terms, input, input service and capital goods, as per the model GST requires that they should be "used or intended to be used by a supplier in the course or furtherance of business" and nowhere there is a requirement that they shall be used for making outward supply. But the definition of "plant and machinery "brings in the expression" used for making outward supply". Such a restriction, if applied to all items enumerated in the definition would restrict the scope of immovable plant and machinery entitled for credit as being only those which are "used for making outward supply". It is not known as to whether the same is intended. On the other hand, if the expression "foundation or structural support for making outward supply" is read only along with telecommunication towers, it would mean that foundation or structural support for other items (apparatus, equipment, machinery, pipeline) would not be entitled for credit.

This is what is typically "between the devil and deep sea"?

Will the Government make the Explanation simpler to portray the legislative intention clearly?