MAY 29, 2017

By PG James

IN the Budget 2016-17, CENVAT credit on inputs and capital goods used for pumping of water, for captive use in the factory, is being allowed even where such capital goods are installed outside the factory consequent upon issuance of Not No 13/2016-CE(NT) dated 1.03.16. Industries had been representing to include goods used for pumping rawmaterials, gas, fluids, oils etc. also which are used in the manufacturing process apart from water. Accepted proposition in catenaof judgementsis that pipelines, rope ways, conveyers etc. connected to the plant are integral part of manufacturing process and Cenvat credit thereof cannot be denied.

But in the GST Act, pipelines laid outside the factory are specifically excluded for input tax credit.

Water is life for any industry which finds use either as a raw material, solvent, coolant, energy source or as transport agent and mostly it is carried through pipeline. Pipelines are unique mode of transportation inasmuch as they can move large quantities over long distance at low cost apart from its environment adaptability. Pipelines, Rail tracks, conveyer belts, ropeways, etc. connected to a factory used for movement of various inputs and consumables are indispensable to the manufacturingprocess and it is unfair to impose restrictions on input tax credit availment on Pipelines.

In the Model GST Law introduced on 29 th November 2016, credit on pipelines and telecommunication towers was allowed in a staggered manner viz, one–third of the total input tax in the financial year in which the goods are received and remaining two-third in the succeeding year.

But in the revised GST Act, pipelines laid outside the factory premises are specifically excluded from the purview of Input Tax credit.

Hon Supreme Court, High Courts and Tribunals had been continuously upholding the eligibility of the credit on these items, even if used outside the factory and owing to the myriad of judicial pronouncements pipelines were specifically included in the definition of capital goods by way of amendment of Cenvat Credit Rules in 2016.

1. Torrent Pharmaceuticals Ltd Vs CCE, Ahmedabad –III - 2014-TIOL-2217-CESTAT-AHM

CENVAT Credit on pipes used for laying of pipelines for bringing water to the factory and services used for laying and maintenance of pipeline are admissible

2. CCE, Belgaum Vs Bellary Steel & Alloys Ltd (2008 (226) E.L.T. 280 (Tri. - Bang.)

Water is essential ingredient for manufacturing of final product andCENVAT credit on Pipes used for transporting water from outside the factory into factory for manufacture of final product

3. CCE, Chennai vs Pepsico India Holdings Ltd (2001 (130) E.L.T. 193 (Tri. - Chennai) = 2002-TIOL-197-CESTAT-MAD

PVC pipes used outside the factory for the purpose of drawing water from the well situated 200m from factory only an extension of pipelines inside the factory to be used within the factory premises - Modvat credit admissible -

4. Birla Corporation Ltd. vs CCE - 2005-TIOL-99-SC-CX

Spares of ropeway used for transporting crushed limestone from mines located 4.2 kms away to factory, entitled to Modvat credit.

5. Raj Cement vs UOI (2006 (197) E.L.T. 491 (Raj.)

Crusher and conveyor belts used for transporting crushed limestone from area under mining lease to factory side through rope way which connects two sites, entitled to Modvat credit under Rule 57Q of erstwhile Central Excise Rules, 1944 - Rules 2(a) and 3 of Cenvat Credit Rules, 2004.

6. Birla Corporation Ltd vs CCE, Raipur - 2007-TIOL-111-SC-CX

Credit admissible on ropeway spares used for conveying crushed limestone from crusher located in/near captive mines to cement factory

7. Madras Cements Ltd vs CCE, Trichy - 2015-TIOL-272-SC-CX

Cenvat credit of Capitalgoods used in mining area eligible

Definition of Capital Goods, Inputs and Input services in GST Act commonly used the expression"used or intended to be used by a supplier in the course or furtherance of business" which is synonymous with ‘activity related to business' contained in the definition of input service in Cenvat Credit Rules which had been a focal point in many litigations and ultimately Govt has amended the Rule so as to remove such a broad expression.

Similarly the definitions of Capital Goods, Inputs and Input services in GST also were tagged with the term'‘furtherance of business' as follows:

Sec 2(19) "capital goods" means goods, the value of which is capitalised in the booksof account of the person claiming the input tax credit and which are used or intendedto be used in the course or furtherance of business;

Sec 2 ( 59 ) "input" means any goods other than capital goods used or intended to beused by a supplier in the course or furtherance of business;

Sec 2 ( 60 ) "input service" means any service used or intended to be used by a supplierin the course or furtherance of business;

Definition of Capital Goods and Inputs in Rule 2 of Cenvat Credit Rules stipulate that it shall be "used in the factory of the manufacturer of final products". But there is no such conditionin the GST Act except for pipelines laid outside the factory and so long as the goods are received, Invoice is in possession, tax charged is paid and return is furnished, credit can be taken.

As per Sec 16 (2), no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

(c) subject to the provisions of section 41,the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

The conditions and exclusions are clearly spelt out alsoin the FAQ on GST released by CBEC on 31.03.17:

Q 5. What are the conditions necessary for obtaining ITC?

Ans. Following four conditions are to be satisfied by the registered taxable person for obtaining ITC:

(a) he is in possession of tax invoice or debit note or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both;

(c) the supplier has actually paid the tax charged in respect of the supply to the government; and

(d) he has furnished the return under section 39.

Q 12. Is credit of tax paid on every input used for supply of taxable goods or services or both is allowed under GST?

Ans. Yes, except a small list of items provided in the law, the credit is admissible on all items. The list covers mainly items of personal consumption, inputs use of which results into formation of an immovable property (except plant and machinery), telecommunication towers, pipelines laid outside the factory premises, etc. and taxes paid as a result of detection of evasion of taxes.

Viewed from the above, there appears to be no infirmity in availing credit on goods used outside the factory like conveyers, ropeways, rail tracks, goods used in storage yards, pump houses, captive mines, jettyetc. except ‘pipe lines' and telecommunication towers.

The lethargy attached to ‘pipelines', though it assumes the nature of immovable property once embedded to earth is not in harmonywith the noble concept of ‘furtherance of business'in GST. Further, foundation, structural support etc of Plant and machinery embedded to earth which are presently excluded in Cenvat Credit Rules are specifically included in GST by virtue of Sec 17(5)and hence there is no or little rationale for excluding ‘pipelines' which are,in fact, arteries of an industry.