JULY 13, 2019

By Krishnamachari Srinivasan, IRS (Retd)

IN the last two articles, the Author had deliberated on the ineligibility of ITC on expenses capitalised to immovable property and the exception of such ITC, being eligible in the event of such immovable property directly deployed for providing taxable services.

In this concluding part, the Author points out the over-defensive approach of Government in disallowing ITC, even in such exceptional cases, due to the popular myths surrounding them.

Let us take a recently decided case by the AAR, Madhya Pradesh. M/s Narsingh Transport, Indore - 2019-TIOL-112-AAR-GST wherein it was argued that the applicant is entitled to ITC of taxes paid on passenger cars purchased and further leased out to customers on lease rent.

In the above instance, the important factors that were considered are that the said cars intended for lease, whether were registered with the Transport authority as Motor Vehicle for commercial use and the further supply of those Motor Vehicles to customers on lease rent, was confirmed.

In light of fulfilment of the above that crucial aspects, the AAR held that in terms of Sec 16 & 17(5)(a)(A) read with Sec 7(1)(a) of the extant GST Act, the activities carried out by the applicant regarding supply of the tax-paid motor vehicles on monthly rent, qualifies for availing of ITC by the applicant, of the taxes paid by him while acquiring the cars.

In contrast, there are legacy issues of Hotel Industry still pending, wherein ITC of taxes availed on similar passenger cars when bought by those Hotels for renting out to their guests, were stoutly denied in innumerable instances.

In all such cases it is averred by the appellants that the Motor Cars were bought by them for renting out to Guests for pick-up and drop, sightseeing, business, etc.

The tax Credits accumulated at the time of purchase of cars were said to be disallowed to be set off against the Service tax payable on the rent-a-cab service provided by them by renting out the impugned cabs to their guests.

Coming to the rationale behind the allowance at present and the apprehension behind the disallowance of the same in the past, it needs to be understood that the said supply of motor vehicles for further use by customers on lease rent, satisfies the conditions of Sec 16 &17(5)(a)(A) read with Sec 7(1)(a) of the GST Act, 2017.

In view of the above AAR, Madhya Pradesh decision, it is clear beyond doubt that such legacy issues may be gainfully allowed to be settled, based on the rationale laid down in the above said case.

The misnomer of personal use that goes to colour the perception in this matter, also needs to be amply dispelled here before laying down the rationale underlying ITC on certain goods and services meant for further use.

When it is meant for further use of customers for personal use of those customers though, is a continuation of the supply chain and when it is consumed or retained by the business, it amounts to self-consumption.

Take for example, drinking water, in sealed containers of 20 Litres, taxable under Chapter heading 2201 attracting a GST of 6+6 percentage. It's eligibility of ITC to business is totally ruled out, if for end use by the business and is undoubtedly allowed if meant for further supply to a customer, in turn for end-customer's personal use though.

In the same manner, ITC on materials used for construction of an immovable property, retained by the business though for doing further business indirectly from it, is clearly distinguishable from an immovable property exclusively meant for renting out in a straight forward manner or for providing further taxable services with its help such as storage, warehousing service, etc. where the nexus theory is amply present.

Therefore, it will be absurd to argue that the former case of immovable property for use in the course or furtherance of business must be equated with the latter, where it is directly used for further deployment in the provision of taxable services.

Last but not the least, ITC on goods and services received by a business for providing in turn a taxable service, which does not terminate the supply chain at that stage.

In short, ITC chain must be allowed to continue though not as an endless chain but until it ends in the hands of a consumer who has no chance of passing on the parcel of taxes further.

Whether the above rationale will prevail over the minds of the tax administrators while administering the ITC laws is something which remains to be seen in the days to come.

But for now, so much for ITC and its eligibility on certain goods and services that are used directly for providing further taxable services and the right rationale to be adopted by Revenue for blocking the said credits under Sec 17(5) of the GST Law.

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Asssociate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal)

See Part I & Part II.