The case before the High Court of Chhattisgarh (Bharat Aluminium Company Limited Versus State of Chhattisgarh, Joint Commissioner (Appeals), State Tax, Bilaspur, Assistant Commissioner, State Tax, Korba. - 2025 (8) TMI 245 - CHHATTISGARH HIGH COURT) concerns the entitlement of Input Tax Credit (ITC) under GST for electricity used at the petitioner’s residential township and the applicability of rule 42 of the CGST Rules on account of exempt supplies of sale of Duty Credit Scrips (DCS).
Facts:
Bharat Aluminium Company Limited (BALCO) operates aluminium manufacturing plants in Korba, Chhattisgarh. It uses coal for generating electricity via two power plants. This power is:
- Captively consumed in manufacturing aluminium products which are also exported,
- Sold to the State Electricity Board, and
- Partly supplied to maintain a residential township for its employees.
BALCO claimed ITC of GST and Compensation Cess paid on coal used for generating electricity, including the portion supplied to the township, arguing that township maintenance is a business activity integral to its manufacturing operations.
Additionally, BALCO claimed that no reversal of ITC would be warranted under rule 42 of the CGST Rules against the sale of Duty Credit Scrips (DCS), considering the retrospective application of an amendment provided in the CGST Rules to exclude such supplies from the value of exempt supplies.
Issue:
- Whether supplying electricity to the township for employees’ residential use constitutes an activity “in the course or furtherance of business” under GST, thereby entitling BALCO to ITC on inputs (coal) used for generating that electricity.
- Whether reversal of ITC is warranted under Rule 42 of the CGST Rules on account of supply of Duty Credit Scrips, in light of the question as to whether the amendment (Notification No. 14/2022 dated 5-7-2022) has retrospective application.
Court’s Analysis and decision:
On the first issue, the Court relied heavily on precedents including the Supreme Court decisions in Commnr. of Central Excise Versus M/s. Gujarat Narmada Fertilizers Co. Ltd. - 2009 (8) TMI 15 - Supreme Court and M/s. Maruti Suzuki Ltd. Versus Commissioner of Central Excise, Delhi-III - 2009 (8) TMI 14 - Supreme Court, which clarify that ITC can only be claimed for inputs used in activities integrally connected to business and manufacturing. The Court held that supplying electricity to the township is a welfare activity incidental to business but not part of the business itself.
Since the electricity consumed in the township is not for manufacturing or business operations, ITC on coal attributable to this supply must be reversed as per Rule 42 of CGST Rules. The Court emphasized that ITC is a concession, not a substantive right, and its availability depends strictly on statutory provisions and conditions.
On the second issue, the Court examined the amendment to Rule 43 of the CGST Rules inserting Explanation 1(d), which excluded the value of exempt supplies of DCS from the aggregate exempt supply value used for ITC reversal calculations.
The Court observed that while the rule-making authority has power to make rules retrospectively under Section 164(3) of the CGST Act, the amendment did not expressly state retrospective effect.
The Court applied principles of statutory interpretation and Supreme Court precedents holding that an explanation or clarification must address prior ambiguity or vagueness to justify retrospective application. Since this amendment was based on GST Council recommendations, it was substantive and prospective, not clarificatory or retrospective. Thus, the petitioner could claim ITC benefits only from 5-7-2022 onward, not for prior periods.
Comments
With due respect to the Court’s decision, in the paper writer’s view, the following aspects need to also be considered:
On the issue of restriction of ITC towards supply of Electricity to Township
- Business is a very wide term: The availability of credit under GST is dependent on whether the expense is a business expense i.e. whether it is used in the course or furtherance of business. ‘Business’ is a very wide term as was held by the High court in the case of Coca Cola India Pvt. Ltd.[1]
- Decisions allowing credit related to township: The following decisions would be relevant to refer
- It has been held by the Tribunal in the case of Mangalam Cement Ltd. that the residential colony was constructed adjacent to the factory because of the reason that the factory manufacturing cement, which runs round the clock, is located at a remote place which is away from the city. Unless the residential colony is constructed near the factory, the appellant will not be in a position to get the proper/adequate manpower for running its plant/activities. Thus, the credit was held to be available for the expenses incurred for maintenance of the township regarding it as a business expense.
- The AP HC in the case of ITC Limited [2] The staff colony, provided by the respondent-Company, being directly and intrinsically linked to its manufacturing activity.
Though this is not a completely settled issue as there are certain decisions pending in other cases before the Courts and under GST also, we have some advance rulings that are not in favour.
- Not supply of maintenance services: In the present case, the electricity is used at the township for maintenance activities. Thus, if this is not a case of supply of electricity to the residents of the township the reliance on the decisions of Maruti Suzuki supra and Gujarat Narmada Fertilisers supra, can be distinguished.
- No supply does not mean credit not eligible: Further, in case no charges are collected from the residents for this maintenance activity, this would not be a supply at all to the residents. Just because it is not a supply does it mean that there is no credit available. No.
This view is also accepted by the Court since it has agreed that the electricity that is captively consumed for manufacturing is an eligible credit since it is a business expense and the business of the Petitioner being a taxable one, credit should not be denied.
On the same grounds, for the electricity that is used in the township, one has to understand that the township is a necessity for the business of the Petitioner to exist. If not for the township, maybe the Petitioner would not be able to get workforce or there could be delays in production leading to shut down or losses. Thereby, township, more than a welfare activity is a necessity for the business of the Petitioner.
- Business expenses in books should be regarded as used in course or furtherance of business: What is a business expense is not defined under the GST law. In this background, an easy yardstick could be that, when the expense is regarded as a business expense for the purposes of accounting in books/for the purposes of income tax, the same should be accepted as a business expense for GST as well. This is similar to how the capital goods are defined under GST, i.e. capital goods are those goods that are capitalised in the books of the assessee.
- No mechanism to reverse common credit pertaining to non-business purpose: Even if one assumes that the usage of electricity requires reversal of credit since it is not a business expense, there is no mechanism in the law to quantify the credit that is attributable to the usage in the township.
This is for the reason that if it is assumed that ITC of coal is not eligible to the extent used in the township, then it is a common credit i.e. used for both taxable supplies and for welfare purposes.
Whereas, rule 42 which provides mechanism for reversal of credit, provides for reversal of credit that is exclusive to non-business expense. It does not provide the manner of computing for identifying the ITC attributable to non-business purpose from a common credit.
In such a situation, one can take a view that when no mechanism is provided, the reversal is not required to be done. When the law has not envisaged this situation, a view can be taken that no credit needs to be reversed for the electricity that is used at the township. Though there are also decisions in the past which have held that in such scenarios the credit should be reversed on a reasonable basis. Hence, one may have to take a reasoned decision based on amount involved and the risk appetite.
On the issue of applicability of Rule 42 against the sale of DCS prior to 05.07.2022
The explanation inserted to exclude value of supply of duty credit scrips shall be construed to be effective with retrospective effect, since the purpose of explanation is to explain/give clarity to a provision. An explanation harmonizes and clears up ambiguity in the main provision. As the said amendment is aimed at providing a remedy which the legislature initially failed to provide.
Originally, when the CGST Act, 2017 came into force, there was no explanation provided after Rule 43, for exclusion of any exempted turnover for computation of reversal under Rule 42. It was only vide the following notifications that the list of exclusions had been provided, on the basis on recommendations of the GST Council
- Notification No. 55/2017-Central Tax dt 15.11.2017 excluded Supply of services having place of supply in Nepal or Bhutan, against payment in Indian Rupees
- Notification No. 03/2018 – Central Tax dt 23.01.2018 excluded
(b) the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances; and
(c) the value of supply of services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India.
- Notification No. 14/2022 – Central Tax, dated 05.07.2022excluded the value of supply of Duty Credit Scrips
At this juncture, it is important to assess whether the amendment made in January 2018 to exclude interest income from the value of exempt supply, had a retrospective application (being clarificatory in nature) or was a prospective amendment.
In this regard, it is pertinent to draw reference to volume-I of ‘Agenda for 25th GST Council Meeting’, wherein in Page 270 the proposal made to the GST Council was to introduce an amendment to exclude interest income for the purpose of reversal of ITC under Rule 42, which would restore/continue the position as was existing under the erstwhile service tax regime. The said agenda item was also duly approved by the GST Council, in the 25th GST Council Meeting, which resulted in the issuance of Notification No. 03/2018 – Central Tax dt 23.01.2018.
Though the said Notification is silent on the retrospective operation of the said amendment, it is clear beyond doubt that the intention of the GST Council was the position under the service tax regime shall be continued and that no reversal of ITC would be required on account of such interest income. Hence, the said amendment shall be construed to have retrospective application.
Similarly, reference to page 224 of the volume-I of ‘Agenda for 47th GST Council Meeting’ indicates that the proposal to exclude value of supply of duty credit scrips was clarificatory in nature and not a prospective change. This can be specifically noted in the language of the proposed amendment in the said agenda note, which provided as follows
“2.2 Various representations have been received from field formations and trade and industry seeking clarification as to whether the registered persons, who make such exempted supply of DCSs, are required to reverse ITC under rule 42 on common inputs and input services used for both taxable (including zero-rated) supply as well as the said exempted supply of DCSs.
2.3 The issue was deliberated by the Law Committee. The Law Committee opined that though supply of MEIS/Duty Credit Scrip by the exporters is an exempt supply under GST, the credit availed on inputs and input services by the exported for making taxable supplies including zero rated supplies should not be considered as common credit on such taxable supplies and the exempted supply of DCS. Therefore, there should be no requirement of reversal of input tax credit for such exempted supply of DCS by the exporters. Accordingly, the Law Committee recommended that clause (d) may be inserted in Explanation 1 after rule 43 of CGST Rules,2017 to clarify the aforesaid stand.”
The aforesaid agenda makes it clear that the proposal was to clarify that no reversal of ITC would be required under Rule 42 of the CGST Rules,2017 against the sale of duty credit scrips, which is based on the recommendation of the Law Committee.
The GST Council being a Constitutional Body, comprises of the Union Finance Minister as the Chairman and all the State Finance Ministers as its members. Hence, in case of doubt, one can refer to the basis of the recommendation of the GST Council, to understand the intention behind such amendments.
In case of any ambiguity prevailing in law, the intention of the legislature should be analysed in interpreting the provisions of the statute as held by the Hon’ble Supreme Court in the case OF K.P. VARGHESE v. THE INCOME TAX OFFICER [3].
In Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited [4], the Hon’ble Supreme Court held that under certain circumstances, a particular amendment can be treated as clarificatory or declaratory in nature. The circumstances under which provisions can be termed as “declaratory statutes” was explained by Justice G.P. Singh as under
In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.
It also appears that the reversal of ITC under Rule 42 towards supply of duty credit scrips has been done including the value of ITC availed against the coal purchased for generation of power, which was partly used for manufacture of goods. This in itself appears to be a gross error (even assuming for a case scenario that the reversal of ITC is required under Rule 42), as the base of common ITC against sale of duty credit scrip cannot be extended to include inputs and input services used for manufacture of goods.
In the humble opinion of the authors, the decision of the Hon’ble High Court does not appear to be in line with the provisions and the spirit of the GST law, for the reasons explained above. This could be due to various reasons which could also include the arguments put forth/the arguments not considered by the Court or any other reason. Accordingly, it would be interesting to see how the case is argued at the Apex Court including how would such Court consider these aspects and resolve the said dispute, if the matter is challenged by the Petitioner before the highest Court of the Country.
The views expressed are strictly personal and cannot be regarded as an opinion. For any queries or feedback please write to [email protected] or [email protected]
[1] M/s. Coca Cola India Pvt. Ltd. Versus The Commissioner of Central Excise, Pune-III - 2009 (8) TMI 50 - BOMBAY HIGH COURT
[2]COMMISSIONER OF CUS. & C. EX., HYDERABAD-III Versus ITC LIMITED - 2011 (11) TMI 516 - ANDHRA PRADESH HIGH COURT
[3]KP Varghese Versus Income-Tax Officer, Ernakulam, And Another - 1981 (9) TMI 1 - Supreme Court
[4]Commissioner of Income Tax (Central) -I, New Delhi Versus Vatika Township Private Limited - 2014 (9) TMI 576 - Supreme Court (LB)