INTRODUCTIONIn the previous article, we discussed clause (h) of Section 17(5) of the CGST Act, 2017 which deals with the restriction on claim of input tax credit in cases where goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples. In this article, we will discuss clauses (c) & (d) of Section 17(5) which restrict claim of input tax credit on goods or services received in the construction of an immovable property.
PROVISIONS UNDER GST REGIME
Let us first refer to the relevant provisions for ease of reference:
‘(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (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’;
Clause (c) above restricts the availability of input tax credit in respect of works contract services supplied for construction of immovable property other than plant and machinery while clause (d) restricts the availability of input tax credit on goods or services or both received for construction of 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 his own business. On a plain reading, one may feel that clauses (c) and (d) are similar, with the only distinction being that the former applies to works contract services received while the latter applies to independent goods or services being received for the same activity, i.e., construction of immovable property. However, there are various nuances, which will be discussed later.
THERE SHOULD BE AN IMMOVABLE PROPERTY
This is the primary condition for an inward supply to be covered under the blocked credit list. It, therefore, becomes important to analyse the scope of the term ‘immovable property’. While the same is not defined under the GST law, one may refer to the definition u/s 2(26) of the General Clauses Act, 1897, which defines the same as under:
‘Immovable Property includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.’
Even the Real Estate (Regulation & Development) Act, 2016 defines the term ‘immovable property’ in a similar manner:
‘Immovable property includes land, buildings, rights of ways, lights or any other benefit arising out of land and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, standing crops or grass.’
Ongoing through the above set of definitions, it is apparent that land, along with anything attached or fastened to it, is an immovable property. However, when something is attached/ fastened to an immovable property, the nature of attachment/ fastening needs to be looked into before concluding if such thing is also a part of the immovable property. In Triveni Engineering & Industries Limited [2000 (120) ELT 0273 SC], the Hon’ble SC had held that installation or erection of turbo alternator on the concrete base specially constructed on the land cannot be treated as a common base and, therefore, it follows that the resultant structure would be an immovable property and therefore, cannot be treated as ‘excisable goods’.
On the contrary, in the case of Solid & Correct Engineering Works [2010 (252) E.L.T. 481 (S.C.)], the Court held that attachment of plant with nuts and bolts intended to provide stability and prevent vibration not covered as attached to the earth and hence not immovable property. It was more so as such attachment was easily detachable from foundation and not permanent in nature.
In Craft Interiors Private Limited [2006 (203) ELT 529 (SC)], the SC dealt with the issue of whether furniture attached to an immovable property can be treated as immovable property or not? The SC held that furniture items, such as storage cabinets, kitchen counters, etc., which are erected at customer site and cannot be dismantled/removed in complete or semi-knocked conditions, are immovable in nature and, therefore, not excisable. On the other hand, the Court also held that items like desks and chairs, are easily movable and therefore, excisable.
In WeWork India Management Private Limited [2020 (37) GSTL 136 (AAAR – GST – Kar)], the issue before the Appellate Authority was eligibility to claim the input tax credit on detachable sliding & glass partitions. Observing that the sliding/ partitions could be removed without any damage, the Authority held that the same was a movable property and, therefore, the same was not hit by clause (c)/(d) of Section 17(5).
Therefore, while determining whether a property is movable or not, following needs to be taken care of:
• What is the degree of permanency of the attachment to the land?
• Whether the goods attached/ fastened can be detached without causing substantial damage to it?
• Is the identity of the goods post-removal lost?
THE IMMOVEABLE PROPERTY SHOULD NOT BE IN THE NATURE OF PLANT AND MACHINERY
In case the resultant immovable property is in the nature of ‘plant and machinery’, the credit is not blocked. What constitutes ‘plant and machinery’ has been explained by way of explanation to Section 17(5) as under:
‘For the purposes of this Chapter and Chapter VI, 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’.
The terms ‘apparatus’, ‘equipment’ and ‘machinery’ are not defined under the CGST Act, 2017 or the rules made thereunder. Therefore, to understand the said terms, let us refer to their dictionary meaning:
|
|
Apparatus
|
Equipment
|
Machinery
|
|
Oxford Dictionary
|
The equipment needed for a particular activity or purpose
|
The items needed for a particular purpose
|
Machines as a whole or parts of machine
|
|
Collin’s Dictionary
|
Apparatus is the equipment, such as tools and machines, which is
used to do a particular job or activity
|
Equipment consists of the things which are used for a particular
purpose
|
Machines, machine parts, or machine systems collectively
|
|
MacMillan Dictionary
|
The machines, tools and equipments needed for doing something,
especially something technical or scientific
|
The tools, machines, or other things that you need for a
particular job or activity
|
The moving or working parts of a machinery
|
|
Black’s Law Dictionary
|
An outfit of tools, utensils or
instruments adapted to accomplishment of any branch of work or for
performance of experiment or operation. A group or set of organs concerned in
performance of single function.
|
Whatever is needed in equipping; the articles comprised in an
outfit
|
Complex combination of mechanical parts
|
|
(continued)
|
A generic word of the most comprehensive significance
which may mean implements
and an equipment of things provided, and adapted as a means to some end
|
|
|
Ongoing through the above, anything which can perform a specific function or operation or undertaking any process can qualify as apparatus or equipment or machinery and will, therefore, consequently be treated as ‘plant and machinery’.
The above explanation refers only to such plant and machinery which has been fixed to earth by foundation or structural support, i.e., this explanation is specifically for cases where there can be a dispute as to whether the ‘plant and machinery’ are classifiable as immovable property or not. For instance, elevators for a building are plant and machinery, but are of such a nature that once installed, it is impossible to uninstall them without any damage to the structure. However, it is apparent that the elevator is machinery, and therefore, the legislature has specifically carved out an exception that permits the claim of input tax credit for such transactions.
However, in the case of Las Palmas CHS [2020 (41) GSTL 548 (AAAR-Mah)], the issue raised before the Appellate Authority was whether input tax credit could be claimed on receipt of inward supply of elevator, if the cost of such elevator was recovered from the members? The Authority held in the negative as Section 17(5)(c) applied only when the input works contract services were used for further making an outward supply of works contract services. However, it seems that the Authority has not analysed whether the elevator qualified as ‘plant and machinery’ and thereby eligible for input tax credit.
In P K Mahapatra [2020 (40) GSTL 99 (AAAR – GST – Chhattisgarh)], the issue before the Appellate Authority was to determine whether input tax credit could be claimed on the installation of private railway siding? Once again, the Authority denied the benefit concluding that the same amounted to an immovable property, without going into whether the railway siding could have been treated as plant and machinery or not? In fact, the CESTAT has, in the case of India Cements Ltd. [2017 (3) GSTL 144 (Tri – Hyd)], already held that CENVAT credit can be claimed on railway siding.
This takes us to the includes clause which provides that foundation and structural supports in relation to apparatus, equipment or machinery will also be included within the scope of ‘plant and machinery’. This would primarily cover expenses incurred towards civil works done for installing the goods purchased. However, in Maruti Ispat & Energy Private Limited [2018 (18) GSTL 847 (AAR – GST)], the Authority held that input tax credit on inputs/ input services used for constructing a foundation for installation of ‘plant and machinery’ was hit by Section 17(5)(c) as the same was ‘other structures’ referred to in Explanation to Section 17(5) defining the scope of ‘plant and machinery’.
What is important is the third clause, i.e., the excludes clause, which excludes the following from the scope of ‘plant and machinery’:
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.
It is imperative to note that an inward supply may fall under the means or includes clause and therefore be classifiable as ‘plant and machinery’. However, if such inward supply gets covered under any of the above entries provided in the excludes clause, the same would not be considered ‘plant and machinery’ and, therefore, covered under the blocked credits.
The above provisions bring to limelight the interplay between the concept of land, building and civil structures and ‘plant and machinery’. Indeed, in the past, various decisions have held that if the land, building or any other civil structure thereon is so constructed to act as a plant, the functional utility of the asset would be pre-dominant and the asset could indeed be classified as a ‘plant and machinery.’ For instance, the House of Lords, in the case of IRC vs. Barclay Curle & Co. has held that a concrete dry dock is a plant [76 ITR 62 (House of Lords)]. Similarly, one may also refer to the following decisions, though in the context of Income Tax, where different civil structures have been held to be a plant:
• Dam – Tata Hydro Electric Power Supply [(122 ITR 288 (Bom)]
• Nursing Home – Dr. B Venkata Rao [243 ITR 81(S.C)]
• Cold Storage – Kanodia Cold Storage [(100 ITR 155(All)]
• Safe deposit vault – Central Bank of India [(102 ITR 270 (Bom)]
The claim of input tax credit on the above structures, which otherwise are classifiable as plant is hit, in view of the excludes clause in the definition of ‘plant and machinery’. The next two entries, i.e., telecommunication towers and pipelines laid outside the factory premises, are industry-specific restrictions on claim of credit, similar to the restriction on the claim of an input tax credit on the purchase of motor vehicles and there, does not appear to be much scope to escape from the purview of Section 17(5)(c) for the specific industries.
PLANT OR MACHINERY
As stated above, explanation to Section 17(5) defines the scope of ‘plant and machinery’ as a whole. However, clause (d) carves out an exception for ‘plant or machinery’ and not ‘plant and machinery’. This, unless one undertakes a liberal or purposive interpretation, the Explanation to Section 17(5) cannot be used to examine whether a particular item is ‘plant or machinery’ as the same deals with ‘plant and machinery’. Therefore, the common parlance meaning needs to be applied while analysing the said terms.
The dictionary meanings of term ‘plant’ are reproduced below for reference:
Oxford Dictionary – Machinery used in an industrial or manufacturing process.
Collin’s Dictionary – Plant is a large machinery that is used in industrial processes.
MacMillan Dictionary – Large machines and equipment’s used in factory.
Black’s Law Dictionary – The fixtures, tools, machinery and apparatus which are necessary to carry on a trade or business. Physical equipment to produce any desired result or an operating unit.
The above dictionary definitions give plant a wider scope for interpretation, and machinery is included within the purview of the term ‘plant’. The term ‘plant’ was interpreted on multiple occasions by Courts in the context of Income Tax, where it was defined to be an instrument which is utilized to carry on the business, and which is not merely the setting in which the business is carried on. The Courts have on multiple occasions held that when an immovable property has been so constructed as to facilitate the carrying on of the operations of a particular business, the said immovable property can be treated as ‘plant’ and not merely ‘building’.
One may refer to the decisions in the case of C.I.T vs. Kanodia Warehousing Corpn [121 ITR 996(All)], Benson vs. Yard Arm Club Ltd. [1979 Tax L.R 778(Cr.D)], C.I.T vs. Bank of India Ltd. [118 ITR 809 ,818-9 (Bom)], George Mathew vs. C.I.T [43 ITR 535 at 540 (Kar)], Mangalore Ganesh Beedi Works vs. C.I.T [52 ITR 615 (Mysore)] and C.I.T vs. Elecon Engineering Co Ltd. [96 ITR 672 at 686-689 (Guj)] affirmed by the Supreme Court [166 ITR 66 (S.C)] where an extremely wide meaning has been given to the term ‘plant’.
If a view that a particular immovable property is classifiable as a plant survives, one can escape from the purview of Section 17(5)(d) since the entry itself does not apply. Therefore, the phrase “on his own account” becomes irrelevant in such a case. However, the same would not apply for Section 17(5)(c) since the same refers to ‘plant and machinery’, which is specifically defined u/s 17(5).
THERE SHOULD BE CONSTRUCTION OF AN IMMOVABLE PROPERTY
Clauses (c) and (d) of Section 17(5) apply for the activity of construction. The term ‘construction’ has been defined by way of an explanation as under:
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 definition is provided in an inclusive manner, and therefore, the general parlance meaning of the word ‘construction’ would be applicable. Generally, the word construction is used in a situation where a new building or a structure comes into existence when none existed beforehand. In distinction, reconstruction would be a more appropriate term where an existing building is demolished, and a fresh structure is being brought into existence. Nevertheless, it was held that the general meaning of construction would take in its’ fold not only the creation of a new building but also a case of demolition of an existing building and re-construction of the building (Sadha Singh S Mulla Singh vs. District Board AIR 1962 Pun 204).
While the terms ‘construction’ and ‘re-construction’ both envisage a situation of a new civil structure coming into existence, the later inclusive words like renovation, addition or alteration or repairs are all intended to cover existing structures where certain activity is carried out. In this context, it may be useful to refer to the erstwhile service tax legislation wherein a distinction was made between construction, repair, renovation or restoration of a building or civil structure and ‘completion and finishing services’. Separate sub-clauses governed these activities under the positive list regime of service tax, and abatement was denied for ‘completion and finishing services’. Similarly, a separate valuation rule was provided for ‘completion and finishing services’. Various controversies arose in the said legislation where the assessee argued the classification of activities like plumbing, glazing, electrical work, painting, etc., as construction activities being eligible for the abatement/lower valuation, whereas the Revenue contended that the activities do not constitute construction but completion and finishing services. For example, whether plumbing activities would constitute completion and finishing or construction activity is a matter pending before the Supreme Court in the case of
Commissioner vs. Sai Shraddha Plumbing Private Limited 2019 (28) GSTL J71 (SC). The outcome of the said decision may perhaps open up an opportunity for claiming input tax credit.
Further, the Explanation restricts the scope of construction activity. Accordingly, a receipt of works contract services u/s 17(5)(c) or goods or services or both u/s 17(5)(d) can be said to be towards the construction of immovable property only to the extent the cost has been capitalized in the books of accounts.
To capitalize means to expense the cost over the useful life rather than in the period in which it is incurred. In accounting, capitalisation occurs when a cost is included in the value of an asset. The matching principle requires companies to record expenses in the same accounting period in which the related revenue is incurred. For example, office supplies are generally expensed in the period when they are incurred since they are expected to be consumed within a short period of time. However, some larger office equipment may benefit the business over more than one accounting period. These items are fixed assets, such as computers, cars, office buildings, significant renovation and repair works to the building, etc. The cost of these items is recorded on the general ledger as the historical cost of the asset. Hence, these costs are said to be capitalized,
not expensed.
Therefore, if the taxpayer has satisfied this condition also, whereby he has capitalised the cost of works contracts service or goods/ services received for repairs, renovation, alteration, etc. of immovable property, only then does the restriction under clauses (c) and (d) of Section 17(5) get triggered.
This also raises an interesting question. Let us take an example of a partnership firm that has constructed a shopping mall, to be given on rental basis post-construction. The activity of renting is liable to GST and for the purpose of income tax, is treated as income from house property. Being a partnership firm, it is not required to get its accounts audited under the Partnership Act or under the Income Tax Act, 1961 as Section 44AB does not apply since the rental income is treated as ‘income from house property’ and not ‘business income’. In such a circumstance, the firm can always take a view to expense out the entire construction cost upfront, in which case the inward supply received cannot be said to be used for construction of an immovable property and therefore, would entitle the partnership firm to claim full input tax credit. This view of course would be subject to litigation.
MEANING OF ‘OWN ACCOUNT’
One of the phrases used in Section 17(5)(d) and not in Section 17(5)(c) is that the construction of the immovable property should be on recipients ‘own account’. The term ‘own account’ is defined in various dictionaries
as under:
Collin’s Dictionary – If you take part in a business activity on your own account, you do it for yourself, and not as a representative or employee of a company
MacMillan Dictionary – for yourself, not for someone else
Lexico – For one’s own purpose; for oneself
Black’s Law Dictionary – To have a good legal title; to hold as property; to have a legal or rightful title to; to have; to possess.
Therefore, the construction of an immovable property on his ‘own account’ means something that a person or a company does for itself. The rights and benefits of the constructed immovable property are enjoyed by the person who has actually got the construction
work done.
This interpretation of term ‘own account’ is likely to cause disputes. A mall owner, while constructing a mall, has the intention to lease the entire mall and earn income from it. Although the asset appears in its books, and therefore legally one may say the construction is for own account, it can be argued that the intention is not to use it for his own operations but allow other tenants to use it, thereby the benefit of the construction is not to his ‘own account’. Therefore, the same should not be covered under the blocked credits list.
This aspect has already seen judicial scrutiny in the case of Safari Retreats Pvt. Ltd. & Others vs. Chief Commissionerof CGST [2019-TIOL-1088-HC-ORISSA-GST] wherein the Hon’ble High Court allowed ITC on the construction of a mall by laying a principle that the creation of an asset will generate revenue which will be subject to GST. The Appeal against the said order is pending before the Hon’ble Supreme Court, and the matter is awaiting finality.
CONCLUSION
The intention of clauses (c) and (d) is clear, which is to deny the input tax credit in relation to immovable property. However, the manner in which the provisions are worded and the possibility of varied interpretation makes the said clauses a land mine for litigation. Already, the Hon’ble Orissa HC, in the case of Safari Retreats, has agreed with one of the views perhaps contrary to the legislative intent. However, the fact cannot be ruled out that the intention of the Government is to deny the input tax credit on such inward supplies, and therefore, retrospective amendment of this provisions may not be ruled out. Consequently, one has to be careful while taking a position w.r.t claim of input tax credit having an overlap with clauses (c) and (d) of Section 17(5) of the CGST Act, 2017.
