2019 (10) TMI 570 - AAR - GST

Restrictions on Input Tax Credit for Plant and Machinery in Tax Ruling

In Re: M/s. Shri Keshav Cement and Infra Limited,

The ruling in this case determined that input tax credit (ITC) is not available for goods capitalized in the books of account, with only apparatus, ... Input tax credit - inputs/capital goods/input services -Section 16 and 17 of the CGST/ KGST/ IGST Act - whether the capital goods and. inputs constitute plant and machinery of the Applicant which are used in the business of Manufacturing Cement and hence not blocked input tax credit under section 17(5) of the CGST/ KGST/ IGST Act? - HELD THAT:- The applicant is entitled to credit of input tax charged on any supply of goods and/or services made to the applicant and used by the applicant in furtherance of his business. Here the electricity is produced by the solar power plant. Therefore the supplies of goods and/or services that go into the setting up of the solar power plant can be rightly construed as supplies made and used by the applicant in furtherance of his business. However this is subject to the conditions and restrictions as specified in Section 16(2) and Section 17 of the CGST Act, 2017. Input Tax Credit - items being used towards the electric energy generated from the captive power plant and transmitted to the cement manufacturing plants which are physically located at distinct locations within the State of Karnataka - section 17(1) and 17(2) of the CGST/KGST/IGST Act - permission for utilization of the credit for payment of output tax - HELD THAT:-The activity of production of electric energy is a supply to self as the electricity produced is captively used. In fact the production of electricity in a solar power plant geographically separated from the manufacturing site is an intermediate process in the manufacture of cement akin to the use of generators sets within the factory premises to produce electricity for consumption in the manufacturing process. The operation of generator sets within the factory would not constitute a separate supply. Similarly the operation of the solar power plant shall not constitute a separate supply warranting the application of Section 17(1) and /or 17(2) - the applicant shall be entitled to the eligible input credits in entirety provided the entire production is captively consumed. Reversal of Input Tax Credit - electric energy generated by it at its plant and banked with the KPTCL, GESCOM & HESCOM and which is unutilized at the end of six months from the date of banking and is deemed to be consumed by KPTCL, GESCOM and HESCOM at the end of six months - HELD THAT:- Electrical energy is an exempted item in terms of CGST-Notification 2/2017-Central Tax (Rate) dated 28.06.2017 (Serial No. 104) & KGST-Notification GD48 CSL 2017 dated 29.06.2017. The applicant also agrees to this, as per para 12 of Annexure 3 to their application. Therefore in respect of the supply of surplus electric energy it is evident that the applicant is engaged in supply of exempted goods - The applicant company is required to reverse input tax credit on the unutilized electric energy banked with KPTCL, GESCOM & HESCOM and for which the applicant receives a consideration in terms of the Wheeling and banking agreement. Issues Involved:1. Eligibility to take input tax credit (ITC) for inputs, capital goods, or input services used in the solar power plant.2. Availment of ITC for items used in generating electric energy transmitted to cement manufacturing plants.3. Requirement to reverse ITC on unutilized electric energy banked with KPTCL, GESCOM, and HESCOM.Detailed Analysis:Issue 1: Eligibility to Take Input Tax Credit (ITC)The applicant, engaged in manufacturing cement, installed a solar power plant for captive consumption. They sought clarification on the eligibility of ITC for inputs, capital goods, and input services used in setting up the solar power plant.- Applicant's Contention:- The applicant argued that their business activities qualify as 'business' under Section 2(17) of the CGST/KGST Act.- They claimed eligibility for ITC under Section 16(1) of the CGST/KGST Act as the inputs, input services, and capital goods are used in furtherance of their business.- They relied on the definition of 'inputs' and 'input services' under Sections 2(59) and 2(60) respectively, and argued that the solar equipment qualifies as 'plant and machinery' under Section 17.- Authority's Findings:- The authority acknowledged that the electricity generated is for captive consumption at the cement manufacturing units.- Section 16(1) entitles the applicant to ITC for goods and services used in furtherance of business, subject to conditions in Sections 16(2) and 17.- Under Section 17(5)(c), ITC is not available for works contract services unless related to plant and machinery.- The definition of 'plant and machinery' includes apparatus, equipment, and machinery fixed to earth by foundation or structural support but excludes land, buildings, and civil structures.- Ruling:- Goods capitalized in the books of account are not considered as inputs, and ITC is not available for such goods.- Only apparatus, equipment, and machinery fixed to earth by foundation or structural support qualify as 'plant and machinery' eligible for ITC. Other goods are subject to Section 17(5)(c) and ITC is not available.Issue 2: Availment of ITC for Items Used in Generating Electric EnergyThe applicant sought to avail ITC for items used in generating electric energy at the solar power plant, transmitted to cement manufacturing plants.- Applicant's Contention:- The applicant argued that the electricity generated is for captive use in manufacturing cement, which is a taxable supply.- They contended that the solar power plant and cement plants, though at different locations, are covered under the same GSTIN, making the ITC eligible for set-off.- Authority's Findings:- The authority noted that the production of electricity is an intermediate process in manufacturing cement and does not constitute a separate supply.- Therefore, the applicant is entitled to ITC provided the entire electricity generated is captively consumed and not sold or discharged into the grid.- Ruling:- The applicant is entitled to eligible ITC in entirety, provided the entire production is captively consumed.Issue 3: Requirement to Reverse ITC on Unutilized Electric EnergyThe applicant questioned whether they need to reverse ITC on unutilized electric energy banked with KPTCL, GESCOM, and HESCOM, deemed consumed after six months.- Applicant's Contention:- The applicant argued that the lapsed energy does not amount to an exempt supply as it is an act of the statute.- Authority's Findings:- The authority referred to the Wheeling and Banking Agreement, which states that unutilized energy is deemed purchased by ESCOM and paid for at a specified rate.- This constitutes a supply of exempt goods (electric energy) for which the applicant receives consideration.- Ruling:- The applicant is required to reverse ITC on the unutilized electric energy banked with KPTCL, GESCOM, and HESCOM, for which they receive consideration.Conclusion:1. ITC is not available for goods capitalized in the books of account. Only apparatus, equipment, and machinery fixed to earth by foundation or structural support qualify as 'plant and machinery' eligible for ITC.2. The applicant is entitled to eligible ITC in entirety, provided the entire production is captively consumed.3. The applicant must reverse ITC on unutilized electric energy banked with KPTCL, GESCOM, and HESCOM, for which they receive consideration.