2019 (10) TMI 570 - AAR - GST

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

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 - plant and machinery - blocked credits under section 17(5) - apportionment under section 17(1) and 17(2) - captively consumed electricity - deemed supply on banking of energyInput tax credit - capital goods - plant and machinery - blocked credits under section 17(5) - Entitlement to input tax credit in respect of items used for erection, installation and commissioning of the solar power plant and whether such items qualify as inputs or capital goods/plant and machinery for availability of credit. - HELD THAT: - The definition of 'input' excludes capital goods; goods the value of which is capitalised in the books will not be regarded as inputs and therefore credit in relation to such goods cannot be allowed. The Annexure list did not disclose capitalization details; hence a blanket determination item-by-item could not be made. The Explanation to Section 17 describes 'plant and machinery' as apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making outward supply; only goods meeting that definition qualify as plant and machinery. Goods that do not meet this definition attract the restriction in Section 17(5)(c) and related provisions, and credit would not be available for such goods or for works contract services in relation to immovable property other than plant and machinery. [Paras 21, 22]Input tax credit is available for goods other than capital goods; only apparatus, equipment and machinery fixed to earth by foundation or structural support qualify as 'plant and machinery' for purposes of Section 17(5), and other goods/works-contract-related inputs are not eligible.Captively consumed electricity - apportionment under section 17(1) and 17(2) - input tax credit - Whether the applicant may avail the entire input tax credit on inputs used for generation of electricity at a geographically separate captive solar plant and utilize the same against output tax on cement. - HELD THAT: - Where electricity generated at a geographically separate solar plant is entirely for captive consumption by the taxpayer's manufacturing units (and no part is sold or discharged into the grid), the generation activity is an intermediate process in manufacture and does not constitute a separate supply that would attract apportionment under Section 17(1)/17(2). Accordingly, eligible input credits (subject to the limits in question 1) may be claimed in full provided the entire production is captively consumed and nothing is sold into the market or injected as a supply. [Paras 23]The applicant is entitled to the eligible input credits in entirety provided the entire production is captively consumed.Deemed supply on banking of energy - exempt supply - input tax credit - Whether input tax credit must be reversed when banked electricity remains unutilized after six months and is deemed to be taken by the ESCOM under the wheeling and banking agreement. - HELD THAT: - The wheeling and banking agreement provides that unutilized banked energy remaining at the end of six months shall be deemed to have been purchased by the ESCOM and the applicant is paid for that energy. That arrangement demonstrates a supply of electricity by the applicant for consideration. Electricity is an exempted item under the relevant notifications; therefore the supply of such surplus energy to ESCOM is an exempt supply. Where the applicant effects such exempt supplies by virtue of the banking provision and receives consideration, reversal of input tax credit is required in respect of the unutilized banked energy. [Paras 24]The applicant must reverse input tax credit on unutilized banked electricity which accrues to and is paid for by the ESCOM, such accrual constituting an exempt supply.Final Conclusion: The Authority ruled that (i) credit is available only for goods that are not capitalised and only apparatus/equipment fixed by foundation/structural support qualify as 'plant and machinery' for exclusion from blocked credits; (ii) where all electricity generated is wholly captively consumed, eligible input tax credit may be claimed in full; and (iii) input tax credit must be reversed for banked energy unutilized after six months which accrues to and is paid for by the ESCOM (constituting an exempt supply). 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.