Electricity company cannot claim input tax credit on consumer-funded infrastructure creation under Section 17(2) CGST Act

AAR Delhi ruled that an electricity distribution company undertaking consumer-funded infrastructure creation cannot claim input tax credit on inputs used for creating transmission infrastructure. The Authority held that inputs for infrastructure creation are not used in the business of taxable supplies of electricity transmission and distribution services. The infrastructure created constitutes immovable property rather than plant and machinery, making it ineligible for input tax credit under Section 17(2) CGST Act and Rule 42 CGST Rules.

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Issues Involved:
1. Availability of input tax credit (ITC) for input and input services in undertaking "consumer funded jobs".
2. Availability of ITC for capital goods in undertaking "consumer funded jobs" i.e., creating infrastructure for electricity distribution.
3. Requirement to reverse any amount of ITC under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules if ITC for inputs and input services is available.
4. Requirement to reverse any part of ITC under Section 17(2) of the CGST Act read with Rule 43 of the CGST Rules if ITC for capital goods is available.

Summary:

1. Availability of ITC for Input and Input Services:
The Authority examined whether the input tax credit (ITC) for input and input services is available to the applicant in undertaking "consumer funded jobs". It was noted that the activities carried by DISCOMS against recovery of charges from consumers under the State Electricity Act are exempt from GST as per Circular No. 34/8/2018-GST dated 01.03.2018. The applicant's principal business is the transmission and distribution of electricity, which is exempt from GST. Therefore, the ITC for input and input services used in "consumer funded jobs" is not available to the applicant.

2. Availability of ITC for Capital Goods:
The Authority also considered whether ITC for capital goods is available to the applicant in creating infrastructure for electricity distribution. It was found that the infrastructure created by the applicant, such as transformers, cables, and substations, is used for the principal supply of "Electricity Transmission and Distribution" and not for taxable supplies. Citing a similar ruling by the Uttar Pradesh Authority for Advance Ruling, it was concluded that the infrastructure does not qualify as "plant and machinery" under Section 17(5) of the CGST Act. Hence, ITC for capital goods used in "consumer funded jobs" is not available to the applicant.

3. Requirement to Reverse ITC for Inputs and Input Services:
Given that ITC for input and input services is not available to the applicant, the question of reversing any amount of such ITC under Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules does not arise.

4. Requirement to Reverse ITC for Capital Goods:
Similarly, since ITC for capital goods is not available to the applicant, the question of reversing any part of such ITC under Section 17(2) of the CGST Act read with Rule 43 of the CGST Rules does not arise.

Order:
1. ITC for input and input services in undertaking "consumer funded jobs" is not available.
2. ITC for capital goods in creating infrastructure for electricity distribution is not available.
3. The requirement to reverse ITC for inputs and input services is not relevant.
4. The requirement to reverse ITC for capital goods is not relevant.

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