2019 (6) TMI 761 - AAR - GST

Applicants Denied Input Tax Credit for Pipeline Construction Outside FSRU Factory

The judgment concluded that the applicants are not eligible to avail Input Tax Credit (ITC) on GST paid for goods and services used in constructing the ... Input tax credit - existence of pipeline within factory or outside factory premises - goods and services used for construction of Tie-in pipeline, for delivery of re-gasified LNG from FSR U to the National Grid - whether they are eligible to avail ITC of GST paid on goods and services used for the construction of the pipelines? - HELD THAT:- The eligibility for taking input tax credit is dealt in the Sections 16 and 17 of the CGST Act. Section 16 states that a registered person shall be entitled to take ITC on goods and services used or intended used in the course or furtherance of his business and Section 17(5) of the CGST Act provides that in certain cases, input tax credit will not be available even if the goods or services are used in the course or furtherance of business. It is very clear from clause no. (iii) of the Explanation that credit is not available in respect of pipelines laid outside the factory premises. However, the applicant contended that, the pipelines that willbe constructed should not be seen as “pipelines outside the factory”, since the FSRU cannot be considered as a factory. To support their contention that the FSRU is not a factory, the applicant stating that the term “factory” is not defined under the CGST Act, has relied on dictionary meanings and brought out that it is essential to have ‘building’ for anything to be called a factory and since there is no ‘building’ in place there, the FRSU cannot be called a factory. In the subject case the FSRU is a place where there are workers who are working and the process that takes place there, is one of conversion of LNG to gaseous form. A pipeline cannot exist in vacuum without a factory. The expression “pipelines outside the factory” signifies that the pipeline is to transport some product from the factory to the end user. In the instant case the LNG, re-gasified in the ship, is transported through the pipeline which is outside the factory ship. Hence, we are of the view that the said pipeline is a “pipeline outside the factory”. Having found that the FRSU is a ‘factory’ and that the pipeline to be laid is ‘outside the factory’ and that the said pipeline does not qualify to be an ‘equipment, apparatus or machinery’ for the purpose of claiming ITC, the restriction on availment of ITC under Section and 17(5)(d) is applicable in the present case. The applicants are not eligible to avail ITC of GST paid on goods and services used for construction of Tie-in pipeline, for delivery of re-gasified LNG from FSRU to the National Grid. Issues:1. Eligibility to avail Input Tax Credit (ITC) on GST paid for goods and services used in constructing the Tie-in pipeline.2. Definition and interpretation of 'factory' in the context of the Central Goods and Services Tax Act, 2017 (CGST Act).3. Classification of the Tie-in pipeline as 'plant and machinery' under Section 17(5) of the CGST Act.4. Applicability of the exclusion clause for pipelines laid outside the factory premises.Detailed Analysis:1. Eligibility to Avail ITC on GST Paid for Construction of Tie-in Pipeline:The applicant sought an advance ruling on whether they can avail ITC on GST paid for goods and services used in constructing a Tie-in pipeline for delivering re-gasified LNG from a Floating Storage Regasification Unit (FSRU) to the National Grid. The eligibility for ITC is governed by Sections 16 and 17 of the CGST Act, which outline conditions and restrictions for availing ITC.2. Definition and Interpretation of 'Factory':The applicant contended that the FSRU is not a factory because it lacks a building, relying on dictionary definitions and a Kerala High Court ruling. They argued that a factory must be a structure over land. However, the ruling referenced the Factories Act, 1948, which defines a factory as any premises where workers are engaged in a manufacturing process. The FSRU, being a place where LNG is re-gasified, qualifies as a factory under this definition. The judgment emphasized that the essence of a factory is the manufacturing process, not the presence of a building.3. Classification of the Tie-in Pipeline as 'Plant and Machinery':The applicant argued that the Tie-in pipeline should be considered 'plant and machinery' as it is embedded in the earth and fitted with various equipment and devices. However, the judgment clarified that Section 17(5) of the CGST Act excludes pipelines laid outside the factory premises from the definition of 'plant and machinery.' The ruling concluded that the Tie-in pipeline, being outside the FSRU (considered a factory), does not qualify as 'plant and machinery' for ITC purposes.4. Applicability of the Exclusion Clause for Pipelines Laid Outside the Factory Premises:The judgment focused on the exclusion clause in Section 17(5) of the CGST Act, which states that ITC is not available for pipelines laid outside the factory premises. The applicant's argument that the FSRU is not a factory and thus the pipeline should not be excluded was rejected. The ruling determined that the FSRU is a factory, and the pipeline laid from the FSRU to the National Grid is outside the factory premises, making the exclusion clause applicable.Conclusion:The judgment concluded that the applicants are not eligible to avail ITC on GST paid for goods and services used in constructing the Tie-in pipeline. The FSRU qualifies as a factory, and the pipeline laid outside it falls under the exclusion clause of Section 17(5) of the CGST Act, thereby disallowing ITC.Order:Question: Whether the applicants are eligible to avail ITC of GST paid on goods and services used for the construction of the Tie-in pipeline for delivery of re-gasified LNG from FSRU to the National GridRs.Answer: The applicants are not eligible to avail ITC of GST paid on goods and services used for the construction of the Tie-in pipeline for delivery of re-gasified LNG from FSRU to the National Grid.