NOVEMBER 13, 2018

By Dr G Gokul Kishore

CGST Act was amended recently. Retrospective effect was provided to amendments like bar on taking credit on cesses and AED (T&TA). But a benevolent change in otherwise restrictive provision of Section 17(5) is yet to be notified. In this eleventh part, we shall analyse input tax credit related issues with the aid of two advance rulings.

ITC - No coverage for shed protecting plant

The only statutory provision everyone connected with GST remembers by number of the sub-section is Section 17(5) of CGST Act. The reason behind such reputation is not something praiseworthy but the provision is in the form of negative list of goods and services on which input tax credit will not be available. ITC is barred in respect of goods or services which are received for construction of immovable property but plant and machinery are excluded from such immovable property. This effectively means that goods or services received for construction or more appropriately, erection and installation of plant and machinery will be eligible for credit. Foundation and structural support used for such plant and machinery are also blessed by the provision as eligible for credit.

Normally, large industrial plants and machinery are not capable of being housed in typical concrete building but sheds or special roofing sheets are used to cover them. Because the protective shed over the machinery is required to be placed on a foundation on the sides and, therefore, certain structural construction is required, the vice of Section 17(5) comes into play. This is also because the provision excludes land, building and civil structure from the definition of plant and machinery. To understand what is land or building one may refer to relevant statutes but civil structure is not defined in CGST Act or in statutes like Transfer of Property Act. The word 'civil' is not the virtue used as adjective but relates to engineering where it is used in connection with construction. Therefore, any structure which shares some relationship with construction may become civil structure. Because the shed over the plant and machinery rests on some structure which in turn has civil foundation, the entire shed gets affected by the credit embargo. Presumably based on such ground, input tax credit has been denied by Advance Ruling Authority in a recent ruling though the same is not well-reasoned or speaking [In Re: Maruti Ispat & Energy, Ruling dated 9-10-2018, Andhra Pradesh AAR] - 2018-TIOL-250-AAR-GST.

The rationale for maintaining a distinction between foundation or structural support beneath the plant and machinery and similar structure over the plant is inexplicable. In fact, there is none and, therefore, it cannot be explained. Such artificial distinction should be taken note of and provisions should be amended in the second year of GST so that industry does not suffer loss only because it chooses to protect its machinery. It is time that the expression 'civil structure' is defined and that too in a manner which will help businesses than the tax administration.

Benevolent amendments to wait

One of the amendments made to CGST Act recently pertains to the relaxation from the negative list in Section 17(5) in respect of certain goods or services where the same is obligatory for the employer to provide to employees under any law. In the case of CCE v. Ultratech Cement Ltd. - 2010-TIOL-745-HC-MUM-ST, Bombay High Court had held that Cenvat credit of service tax would be available on outdoor catering service when the same is/was mandatory under Factories Act and failure to provide the same would invite penal consequences under such other statute. This could have been integrated or codified in CGST Act from day one but the ruling not being in favour of the Revenue had to wait. The reluctance of tax administration to codify settled law is palpable in the delay.

The above amendment to extend credit on goods or services which are provided as mandated by some other statute is yet to come into force. The new proviso inserted for this purpose is placed under relevant clause (b) which deals with food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, life insurance and health insurance, travel benefits extended to employees, etc. Therefore, only these specified goods or services when provided by employer to employee as per statutory compulsion, will get the tag of eligibility for ITC. There may be host of other goods or services provided by employer to employee as required under applicable law but the same are not of any concern for ITC.

The above amendment was discussed in a recent advance ruling wherein the issue of ITC in respect of goods or services used in hospital maintained by the taxpayer company as mandated by ESI Act was also involved [In Re: National Aluminium Company, Advance Ruling dated 28-9-2018, Odisha AAR] - 2018-TIOL-204-AAR-GST. The authority noted that the amendment is yet to be made effective and as per the provisions as in force at present, ITC will not be admissible on such goods or services procured for discharging statutory obligation. The applicant had sought ruling on a host of goods and services for ascertaining ITC admissibility.

The AAR replied in negative on ITC eligibility for services used in residential colony for employees on the ground that such facility is provided to employees as perquisite and the same is an exempt supply. It was held that plantation undertaken by the company outside its premises is not in the course or furtherance of 'core' business of the applicant which is mining of bauxite and manufacturing of aluminium ingots. As per the ruling, activities may be in the course of discharge of CSR obligations but they are not certainly in the course of business.

When a person undertakes manufacturing business, by law or otherwise, it becomes necessary to create several ancillary facilities which will aid in the business of manufacturing and sale. Such ancillary activities may range from services availed at residential colony to pollution control but to stamp them as not related business is to deny the obvious. One does not put up dispensary for employees in the vicinity of factory premises only out of charity nor does one provide for vast accommodation facilities based on any religious dictum. Modern day business is not carried out exclusively with land, labour and capital. If the theory or rule of direct nexus is brought through indirect means i.e. only those goods and services which have close or direct nexus with the actual supply of goods or services, will be eligible for credit, then the edifice of liberal and seamless credit under GST regime falls. If the test of use in factory or particular premises is thrust, then we are back to Modvat days. Section 17(5) needs complete overhaul to insure the health of Indian industry. Let us hope second year of GST is used for the same.

(To be continued…)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are personal]

See : Part X