No ITC on Electricity for Township Maintenance or Exempt Supplies Before 5-7-2022 Amendment Under Section 16(1) CGST Act

The HC held that the petitioner is not entitled to ITC on electricity consumed for township maintenance as it is not in the course or furtherance of business under Section 16(1) CGST Act. Further, ITC was not available on exempt supply of DCS before the 5-7-2022 amendment excluding DCS from aggregate exempt supplies under Rule 42. The amendment was held to be clarificatory and prospective, not retrospective, and thus ITC benefit cannot be claimed before 5-7-2022. The petitioner's appeals were dismissed, affirming that ITC is a concession, not a right, and the benefit of the amendment applies only post-5-7-2022. All writ petitions were accordingly dismissed.

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ISSUES:

Whether maintenance of a residential township and supply of electricity thereto constitutes "business" in the course or furtherance of business under Section 2(17) read with Section 16(1) of the CGST Act, entitling the claimant to Input Tax Credit (ITC) on GST Compensation Cess paid on coal used for electricity generation'Whether ITC is available on exempt supplies, specifically on the sale of Duty Credit Scrips (DCS), prior to the amendment dated 5-7-2022 inserting Explanation 1(d) to Rule 43 of the CGST Rules?

RULINGS / HOLDINGS:

The Court held that supply of electricity to the residential township is not "intrinsically connected" to the business activity and therefore does not amount to business activity under Section 2(17) of the CGST Act; accordingly, ITC on the compensation cess attributable to electricity supplied to the township must be reversed under Rule 42 of the CGST Rules. The petitioner is not entitled to ITC on electricity consumed for township maintenance, following the Supreme Court decisions in Maruti Suzuki Limited and Gujarat Narmada Fertilizers Company Limited.The Court held that the amendment inserting Explanation 1(d) to Rule 43 of the CGST Rules, which excludes the value of supply of Duty Credit Scrips from the aggregate value of exempt supplies, is not clarificatory or retrospective in nature but a substantive amendment with prospective effect from 5-7-2022. Therefore, ITC on exempt supply of DCS prior to this amendment is not available.

RATIONALE:

The Court applied the statutory definitions under the CGST Act, particularly Sections 2(17), 2(59), 2(60), and 16(1), emphasizing that ITC is a concession and not a substantive right, available only for inputs used "in the course or furtherance of business." The Court relied on authoritative Supreme Court precedents which restrict ITC to inputs used for business activities and exclude inputs used for non-business or welfare activities, such as supply of electricity to township residents. The Court interpreted "business" as activities integrally related to manufacturing operations and not ancillary welfare activities.Regarding the amendment to Rule 43, the Court analyzed Section 164(3) of the CGST Act empowering rule-making authority to make rules retrospective but noted the absence of express retrospective effect in the relevant notification. The Court applied principles of statutory interpretation, referencing Justice G.P. Singh's treatise and Supreme Court jurisprudence, which hold that an explanation or clarification must be truly clarificatory of a previously ambiguous or vague provision to be given retrospective effect. Since the amendment expanded the scope of exempt supplies excluded from reversal, it was substantive and prospective. The Court distinguished cases cited by the petitioner as factually and legally inapposite.

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