JANUARY 28, 2025

By S Rahul Jain, Partner M2K, Chartered Accountants

1.1 THE Central Goods and Services Tax (CGST) Act, 2017 provides a framework for the apportionment of input tax credit (ITC). However, Section 17(5) of the Act enumerates specific goods and services on which ITC is restricted, particularly those related to immovable property.

1.2 This article delves into the implications of Section 17(5) with respect to immovable property, analyzing landmark judicial pronouncements such as Bharti Airtel Ltd. v. Commissioner of Central Excise, Pune (SC) = 2024-TIOL-121-SC-CX, M/s Bharti Airtel Ltd. v. Commissioner, CGST (Delhi HC) -2024-TIOL-2151-HC-DEL-GST, and Sterling and Wilson Pvt. Ltd. v. The Joint Commissioner - 2025-TIOL-90-HC-AP-GST.

Understanding Section 17(5) of the CGST Act

1.3 Section 17(5) of the CGST Act, 2017 disallows ITC for certain goods and services used in the construction of an "immovable property" other than plant and machinery. The relevant provisions state:

- Clause (c): ITC shall not be available for works contract services supplied for the construction of an immovable property (excluding plant and machinery).

- Clause (d): ITC is not available for goods or services used for constructing immovable property on one's own account, even if used in business.

- Explanation: Plant and machinery exclude telecommunication towers and pipelines outside factory premises.

1.4 It flows from the above provision that the blockage of ITC under Section 17(5) would ipso facto be attracted only if the underlying transaction results in a construction of an immovable property. In other words, if the procurements as such do not result in the construction of an immovable property, the block of ITC under Section 17(5) does not get triggered.

1.5 The interpretation of what constitutes "immovable property" has been a contentious issue with various Supreme Court decisions in this matter. The present article would focus on three recent decisions which are directly on this issue.

A) Bharti Airtel Ltd. v. Commissioner of Central Excise, Pune (SC) 2024-TIOL-121-SC-CX

1.6 In this case, the assessee had sought to claim ITC on mobile towers and prefabricated buildings (PFBs), arguing that they were movable goods and qualified as "capital goods" under the CENVAT Credit Rules.

The Supreme Court held that mobile towers and PFBs do not constitute immovable property. The Key observations by the Court were

- Mobile towers can be dismantled and relocated without damage.

- The attachment to earth is for operational stability and not for permanent beneficial enjoyment.

- Thus, they retain their character as movable goods and are eligible for ITC under the CGST regime.

- The Court also provided six different overlapping tests relating to movability.

B. M/s Bharti Airtel Ltd. v. Commissioner, CGST - Delhi High Court 2024-TIOL-2151-HC-DEL-GST

1.7 The Delhi High Court was again on the very same question of law on which the Supreme Court had rendered its decision. The Question of law was whether telecommunication towers should be treated as immovable property, thereby falling within the ambit of Section 17(5)(d) of the CGST Act, leading to denial of ITC. Thus, the decision is directly relating to the question of movability in the context of GST.

1.8 The Delhi High Court ruled in favor of the taxpayer, on the following grounds:

- Telecommunication towers are not permanently affixed to the earth.

- The placement of towers on a concrete base does not classify them as immovable property.

- The exclusion of towers from the definition of plant and machinery does not automatically render them immovable. This aspect becomes very significant as the definition of plant and machinery excludes the following -

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

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises

1.9 While land and building more often than not be immovable, the ITC on other civil structures, telecom towers and pipelines outside factory are first required to be immovable to get blocked under Section 17(5) (C) and (d). If they are not immovable, the requirement to examine the definition of plant and machinery does not even get attracted in first place.

1.10 The court also emphasized that exclusion from ITC must be based on clear legislative intent and not a broad interpretation of "immovable property."

C. Sterling and Wilson Pvt. Ltd. v. The Joint Commissioner 2025-TIOL-90-HC-AP-GST

1.11 This case pertained to the classification of solar power generating systems and whether they constitute immovable property for ITC eligibility.

1.12 The Andhra Pradesh High Court ruled that:

- Solar modules affixed to civil foundations do not become immovable property.

- The purpose of the foundation is to support the equipment, not to render it permanently fixed.

- The project should be classified as a "composite supply," allowing for ITC claims.

2) Key Takeaways and Implications

Distinction Between Movable and Immovable Property:

2.1 Judicial decisions reinforce that the intent and purpose of attachment to the earth play a crucial role in determining whether an asset is movable or immovable. Merely affixing goods for operational efficiency does not make them immovable.

Industry-Specific Implications:

2.2 The tests of movability is highly relevant for multiple sectors including the Telecommunication, Energy, shipping, storage and warehousing and oil and gas. Apart from this, any procurements made by the general trade at large where ITC is blocked may require a fresh revisit.

Conclusion:

2.3 The interpretation of Section 17(5) concerning immovable property remains a dynamic area of GST litigation. Landmark rulings such as Bharti Airtel Ltd. and Sterling and Wilson Pvt. Ltd. have provided much-needed clarity, reinforcing that attachment to earth for operational stability does not necessarily classify an asset as immovable. Businesses need to stay abreast of evolving jurisprudence to optimize their tax positions and ensure compliance with GST provisions.

[The views expressed are strictly personal.]