JUNE 15, 2020

By CA S Vinodh and CA Aman Goyal

IT has been almost 3 years since the implementation of the Goods and Services tax (GST) regime. As the GST law is still evolving, there is ample scope for divergent interpretation on a legal front. One such area is the eligibility to input tax credit under the GST regime.

The input tax eligibility relating to setting up of the manufacturing / services operations by taxpayers, in particular, has its own challenges in form of a legacy under the erstwhile Cenvat law wherein the term 'setting up' was specifically removed from the definition of 'Input services' on April 1, 2011 which was the start of denial of credits relating to setting up operations.

Recently, the Appellate Advance Ruling of Authority of Karnataka in the case of Wework India Management Private Limited - 2020-TIOL-26-AAAR-GST had allowed Input tax credit ("ITC") on detachable sliding and glass partitions in a co-working space.

Advance Rulings have a very limited binding nature and there should not be any misplaced reliance (favourable or otherwise) as a substitute for any judicial precedent in GST. However, the principles relied in this Ruling leads to some interesting insights on the issue of credit relating to setting up activities of any business.

Eligibility to Credit on setting up

Section 16(1) of the Central Goods and Services Tax Act, 2017 ("CGST Act") provides eligibility to avail ITC, which reads as:

"Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person."

A bare reading of the aforesaid provision makes it clear that the pre-requisite for availment of credit of input taxes paid in respect of the inward supplies of goods and services, is that the said supplies shall be used or intended to be used in the course or furtherance of the business. This is the general principle to be applied in determining eligibility of ITC. However, for availment, there are further conditions and restrictions prescribed in Section 16(2) of the CGST Act. Further, there is always a carveout of general principle. Under GST, exceptions to the general principles of eligibility of credit is contained in Section 17(5) of the CGST Act.

Sub section 5 of section 17 starts with notwithstanding clause to general principles of ITC. More precisely, section 17(5) of the CGST Act, provides for various transactions in respect of which ITC shall not be available even if the same is used in the course or furtherance of business. Relevant clauses read as under:

"Section 17 -

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, Input tax credit shall not be available in respect of the following, namely:-

…

(c) works contract services when supplied for construction of an 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 or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation - For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;"

The above provision indicates that the ITC on goods or services or both used for construction is ineligible if:

- It is used for construction of immovable property or

- It is not used for construction of plant & machinery or

- It is capitalized in the books of accounts as immovable property

Immovability and judicial precedents under the Excise law

Considering the restriction in Section 17(5) of the CGST Act, it is worthwhile to understand the meaning of the term 'Immovable Property' under GST.

The term "immovable property" has not been defined under the GST law. In the absence of a definitive explanation under the GST Act, recourse is being taken to other allied Acts dealing with "property" to determine the definition of "Immovable property". Accordingly, reference is drawn to General Clauses Act, 1897 and Transfer of Property Act, 1882. The term immovable property has been defined under Section 3 of the Transfer of Property Act 1882, to not include standing timber, growing crops or grass. Reference is drawn to Section 3(26) of the General Clauses Act, 1897 which defines immovable property to include "land, benefits arising out of land and things attached to the earth, or permanently fastened to anything attached to the earth." This also does not provide a complete definition. However, the term "attached to earth" has been defined in Section 3 of the Transfer of Property Act, 1882 to mean:

(a) rooted in the earth, as in the case of trees and shrubs;

(b) imbedded in the earth, as in the case of walls or buildings; or

(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached."  

An essential characteristic that emerges from the above reference to the meaning of term immovable property is that anything which has been permanently attached to earth for the beneficial enjoyment of land/building warrants classification under immovable property. Hence, a principle of degree of attachment or fastened to earth requires analysis. Since GST law is nascent, it would be useful to refer to principles from judicial precedents of the erstwhile law.

Reliance in placed in the case of Triveni Engineering & Industries Ltd. & Anr. V. Commissioner of Central Excise - 2002-TIOL-14-SC-CX = 2002-TIOL-14-SC-CX-LB wherein apex court held that while determining whether an article is permanently fastened to anything attached to the earth both the intention as well as the factum of fastening has to be ascertained from the facts and circumstances of each case.

Further, the Hon'ble Supreme Court in the case of Commissioner of Central Excise, Ahmedabad vs Solid & Correct Engineering Works & Others - 2010-TIOL-25-SC-CX had analysed the term immovability. In that context, the Apex court held that the degree and nature of annexation has to be taken into consideration in determining immovability. Hence, test of whether the annexation is with the object of permanent beneficial enjoyment of the land or building has to be applied.

It is also notable that in the case of Vodafone Mobile Services Limited vs Commissioner - 2018-TIOL-2409-HC-DEL-ST, the Delhi High Court had relied on the principles of the above Apex Court Ruling and observed that telecom towers should not be construed as a immovable property; However, in view of the conflicting ruling by the Bombay High Court in the case of Bharti Airtel - 2014-TIOL-1452-HC-MUM-ST, the matter would be now decided by the Supreme Court.

Advance Rulings under GST

Further, under GST law, Authority for Advance Ruling (AAR) in few cases has examined the test identified by the apex court supra to determine the eligibility of ITC in relation to the goods and services used for construction of immovable property.

In case of Vindhya Telelinks Ltd - 2018-TIOL-167-AAR-GST, wherein the applicant has been dealing with mobile towers fixed to a pit with a concrete base, the Uttarakhand AAR has stated that, the intention is beneficial enjoyment of the mobile tower and not of the concrete base. Further, the mobile tower can, be easily dismantled and fixed elsewhere. The AAR accordingly treated the mobile tower infrastructure as movable property and allowed the ITC of goods and services used for errection of infrastructure for telecommunication operations.

In case of Tewari Warehousing Co Pvt Ltd - 2019-TIOL-52-AAR-GST, the applicant approached the AAR to determine the ITC eligibility on the inward supplies for construction of the prefabricated warehouses. The AAR stated that the warehouse is intended to be used as a permanent structure and associated with beneficial enjoyment of the land on which it is being built. The technology used for the construction of the warehouse involves the application of prefabricated structures and also civil work for supporting the pre-fabricated structure and developing the floor of the warehouse. The warehouse cannot be conceived without beneficial enjoyment of the civil structure embedded in earth. Accordingly AAR held that ITC is, therefore, not admissible on the inward supplies for construction of the prefabricated warehouse.

From reading of the above judicial precedents, the following tests would be useful to determine the immovability (a) Degree and Nature of annexation / permanence (b) Intention of permanence

In the AAAR under consideration (Wework India), it is quite interesting to note here that inspite of the fact that such sliding and partitions are generally intended to be permanent in nature (although it can be dismantled) these were treated as a movable property.

Plant and Machinery

It may be noted that the restriction under Section 17(5)(d) of the CGST Act would not apply in cases where such goods or services or both are used for setting up of a plant and machinery. The term "plant and machinery" has been defined in the Explanation to Section 17 of the CGST Act as under:

"Explanation.- For the purposes of this Chapter (ITC) and Chapter VI (Tax Invoice, Debit Note and Credit Notes), the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes -

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises."

It may be noted that the definition has 'means and exclusion clause'. To classify something as a plant and machinery, it should satisfy "the means" clause and also not fall under any of the exclusions.

Therefore, goods which are used towards plant and machinery would not fall within the purview of exclusion even though it may partake character of immovable structure like foundation or structural support. The issue whether plant and machinery can include such partitions / civil structures is not specifically addressed in the Ruling.

Capitalization in books of accounts

As stated above, Explanation to Section 17(5) of the CGST Act provides that "construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;".

The determination of treatment of capital goods based on capitalization under GST law is a departure from the erstwhile Cenvat provisions which was delinked from the treatment as per accounting books. However, few States like Maharashtra had similar provision in the context of erstwhile VAT laws. This opens up a challenge as the classification of goods under 'Buildings' or 'Plant and Machinery' as per Accounting principles would have a bearing on the treatment of the same under GST law.

There are other open issues including the classification of works contract (if not movable) and whether the classification needs to be examined from the supplier or recipient perspective.

Conclusion

In summary, immovability continues to be an area of intense dispute as regards eligibility to credit on setting up activities. While the precedents under the erstwhile laws have a persuasive value, it is an evolving aspect as regards the GST law. Although, the Appellate Authority of Advance ruling in the case of Wework is beneficial for the taxpayer, it is reasonable to assume that the issue is far from settled.

With modernization in the real estate sector and advancement in construction technology, the interpretation would need to align and the precedents/ principles have to be re-visited based on the specific facts. It would also be important to execute contracts to optimize the credit eligibility through demarcation of items which are immovable and movable and aligned with accounting aspects relating to capitalization.

[The views expressed are strictly personal.]