2020 (4) TMI 631 - AAR - GST

Input tax credit allowed on GST for constructing bunds if used for zero-rated supplies

The Authority for Advance Ruling (AAR) ruled that the input tax credit (ITC) of GST paid on goods and services used to construct the bunds is admissible ... Input tax credit - plant and machinery - zero-rated supplies - exclusion for construction of immovable property under Section 17(5) (clauses (c) and (d)) - functional test for plantInput tax credit - plant and machinery - zero-rated supplies - exclusion for construction of immovable property under Section 17(5) (clauses (c) and (d)) - functional test for plant - Admissibility of input tax credit on goods and services used to construct bunds/crystallizers for manufacture of salt and bromine chemicals. - HELD THAT: - The Authority examined the scheme of the GST Acts, noting that input tax credit is generally available for supplies used in the course or furtherance of business and that section 16(2) of the IGST Act permits credit for inputs/input services used to make zero-rated supplies subject to the exceptions in section 17(5) of the CGST Act. Clauses (c) and (d) of section 17(5) exclude credit for works contract services and goods/services for construction of immovable property except where such construction amounts to plant and machinery. The Explanation to section 17 defines 'plant and machinery' as apparatus, equipment and machinery fixed by foundation or structural support used for making outward supply, but excludes land, building or any other civil structures. Applying the established functional test endorsed by higher courts, the Authority accepted that where bunds/crystallizers are integral apparatus used in the manufacture of salt and bromine (such that manufacture is impossible without them), they qualify as 'plant and machinery' rather than mere civil structures. Consequently, GST paid on goods and services used to construct such bunds is not barred by section 17(5) and credit is claimable, provided the bunds both (a) are used for making zero-rated supplies and (b) fulfil the conditions necessary to be treated as plant and machinery under the statutory explanation and the functional test. [Paras 10, 11]Input tax credit of GST paid on goods and services used to construct the bunds is admissible to the applicant, provided the bunds are used for making zero-rated supplies and satisfy the conditions to be treated as 'plant and machinery'.Final Conclusion: The Authority ruled that GST credit on construction of bunds/crystallizers is allowable to M/s. Satyesh Brinechem Pvt. Ltd. subject to (i) the bunds being used for zero-rated supplies and (ii) the bunds meeting the statutory and functional criteria of 'plant and machinery' (i.e., not being excluded civil structures). Issues Involved:1. Admissibility of Input Tax Credit (ITC) under GST Acts for bunds used in manufacturing salt and bromine chemicals.2. Classification of bunds as 'plant and machinery' under GST Acts.3. Applicability of Section 17(5) of the GST Acts regarding ITC on immovable property.Issue-wise Detailed Analysis:1. Admissibility of Input Tax Credit (ITC) under GST Acts for bunds used in manufacturing salt and bromine chemicals:The applicant, a private limited company engaged in manufacturing and supplying salt and bromine chemicals, sought clarification on whether ITC is admissible for bunds constructed and used in their manufacturing process. The salt produced is zero-rated under Section 16 of the IGST Act due to its export requirement. The manufacturing process involves constructing bunds (crystallizers) to facilitate solar evaporation of seawater, essential for producing salt and bromine chemicals. The applicant argued that since the bunds are indispensable for their manufacturing process, ITC should be admissible under Section 16(1) of the GST Acts, which allows ITC for goods and services used in the course or furtherance of business.2. Classification of bunds as 'plant and machinery' under GST Acts:The applicant contended that bunds qualify as 'plant and machinery' as defined in the Explanation to Section 17 of the GST Acts. According to this definition, plant and machinery include apparatus, equipment, and machinery fixed to earth by foundation or structural support used for making outward supply of goods or services. The applicant cited several judgments, including the Supreme Court's decision in Scientific Engineering House (P) Ltd. vs. Commissioner of Income Tax, where technical know-how was considered plant due to its essential role in manufacturing. Applying the functional test, the applicant argued that bunds, being integral to the manufacturing process, should be classified as plant and machinery, thus making ITC admissible.3. Applicability of Section 17(5) of the GST Acts regarding ITC on immovable property:Section 17(5) of the GST Acts restricts ITC on works contract services and goods/services for constructing immovable property, excluding plant and machinery. The applicant argued that bunds do not fall under the restrictive clauses of Section 17(5) since they are essential for the manufacturing process and should be treated as plant and machinery. The applicant also referenced the Gujarat High Court's judgment in State of Gujarat vs. Pipavav Defense and Offshore Engineering Company Ltd., which held that goods used for constructing essential infrastructure for manufacturing qualify as plant and machinery, thus making ITC admissible.Judgment:The Authority for Advance Ruling (AAR) considered the applicant's submissions and the relevant legal provisions. It was noted that the applicant's manufactured salt is zero-rated under Section 16 of the IGST Act due to its export requirement. The AAR acknowledged that Section 16(2) of the IGST Act allows ITC for inputs and input services used to make zero-rated supplies, subject to the provisions of Section 17(5) of the CGST Act. The AAR ruled that ITC of GST paid on goods and services used to construct bunds is admissible, provided that the bunds are used for making zero-rated supplies and fulfill the conditions necessary for treating them as plant and machinery.Ruling:Input tax credit of GST paid on goods and services used to construct the bunds is admissible to the applicant, provided that the bunds are used for making zero-rated supplies and fulfill the conditions necessary for treating the bunds as plant and machinery.