Solar panels used exclusively for supplying exempted electrical energy to tenants ineligible for input tax credit under Section 17(2)

The AAR Tamil Nadu ruled that the applicant cannot claim input tax credit on solar power panels and related installation services. The applicant procured solar panels to generate electricity, which was supplied to tenants through separate invoices. Since electrical energy is classified as exempted goods under HSN 2706, the solar panels constitute capital goods used exclusively for supplying exempted goods. Under Section 17(2) read with Rule 43(a) of CGST/TNGST Act, input tax credit on capital goods used exclusively for exempted supplies is not eligible. The ruling clarifies that solar panels are considered plant and machinery for GST purposes.

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Issues Involved:
1. Eligibility of Input Tax Credit (ITC) on solar power panels under Section 17(5)(c) and (d) of CGST/TNGST Act, 2017.

Detailed Analysis:

Issue 1: Eligibility of Input Tax Credit (ITC) on Solar Power Panels under Section 17(5)(c) and (d) of CGST/TNGST Act, 2017

The applicant, a partnership firm engaged in maintaining an immovable property, sought an advance ruling on whether ITC on solar power panels procured and installed is blocked under Section 17(5)(c) and (d) of CGST/TNGST Act, 2017.

Applicant's Submission:
- The applicant argued that solar panels do not qualify as immovable property since they are not attached to the earth.
- They contended that solar panels should be classified as 'plant and machinery' as per the definition provided in the CGST Act, thus making them eligible for ITC.
- The applicant emphasized that the power generated from these panels is used for electrical consumption within the leased premises and not sold externally.

Authority's Analysis:
- The authority examined various documents, including lease deeds and maintenance agreements, to understand the nature and scope of the supply.
- It was noted that the applicant procured electricity from TNEB, which included electricity generated by the solar panels installed at their additional place of business.
- The applicant paid for net consumption after deducting solar-generated units but billed tenants for the gross consumption, implying the sale of solar-generated power to tenants.
- The authority highlighted that electrical energy is classified under HSN 2706 and is exempt from GST as per Notification No.02/2017 CT(R).

Legal Provisions Considered:
- Section 17(2) of CGST/TNGST Act: ITC is restricted to the extent attributable to taxable supplies.
- Section 17(5)(c) and (d) of CGST/TNGST Act: ITC is not available for works contract services or goods/services received for construction of immovable property except for plant and machinery.

Authority's Conclusion:
- The solar panels, while classified as 'plant and machinery,' are used for generating exempted electrical energy supplied to tenants.
- Since the generated electrical energy is an exempt supply, the ITC on solar panels is ineligible under Section 17(2) read with Rule 43(a).
- The authority refrained from commenting on the taxability of output supplies and the value of services provided by the applicant as a pure agent.

Ruling:
- The applicant is not eligible to claim ITC on goods/services used in the installation of solar power panels as per Section 17(2) of the CGST/TNGST Act read with Rule 43(a) of CGST/TNGST Rules 2017.

This comprehensive analysis addresses the eligibility of ITC on solar power panels, considering the relevant legal provisions and the specific circumstances of the applicant's business activities.

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