2025 (8) TMI 1326 - AAR - GST

GST on electrical works for new factory treated as immovable property; input tax credit disallowed under section 17(5)(c)

In Re: M/s. Shibaura Machine India Private Limited

AAR held that the contract for supply, installation, testing and commissioning of electrical works is a composite works contract whose electrical ... Eligibility to avail ITC - electrical works carried out for expansion of factory for manufacturing activity - basis to arrive the timeline to avail ITC on tax invoice raised by Supplier to bill “Advance Component” of the Contract and Subsequent Adjustment of Advance in the Service Bills showing both Gross and Net amount - HELD THAT:- From the scope of the contract entered into between the parties, it could be seen that the agreement is not just for installation/commissioning of electrical works, and it is a composite one of ‘Works Contract’ Service involving “Supply, Installation, Testing and Commissioning of Electrical Works”, as indicated in the table above, wherein the break-up of the cost involved on Supply and Installation of Electrical works has been provided separately. In this regard, it is observed that when a comprehensive electrical installation for a new factory set-up begins, the electrical fittings are mostly concealed into the wall/floor of the building - irrespective of the fact whether a particular thing is directly attached to earth, or permanently fastened to anything that is attached to earth like the walls, pillars, etc., it becomes part of such immovable property. It could be seen that electrical installations are normally fastened to the wall or roof of the building which in turn is attached to earth, thereby becoming part of the immovable property. The fact that a clause in the contract itself, specifies the permanent and immovable nature of the executed project, viz., “(3) The Contractor shall complete the Work and deliver the Permanent Work to the owner in accordance with the Contract,”, proves the case in point. Thus, it is seen that the Accounting Standards prescribe accounting of revenue expenses and capital expenses. If the expenses are in the nature of capital expenses and are related to fixed assets, then they are capitalised. Merely, accounting an immovable property as a movable property or accounting a particular item under a different head, does not preclude the immovable nature of the item being accounted. Whether the resultant electrical installation for the factory gets categorised as ‘Plant and Machinery’ or not? - HELD THAT:- The comprehensive electrical installation involving various items like LT panels, bus-ducts, electrical LT works, lightning protection and light fixtures are meant to perform a whole lot of functions including regulating and conducting the flow of electrical energy, providing lighting, etc., in relation to the entire factory set-up, which is very much general in nature. Whereas, a Machinery, Apparatus, or an Equipment on the other hand are seen as individual units, meant for a specific or an intended function. It is opined that the overall electrical installation meant to carry out varied functions cannot be considered as an apparatus, equipment or machinery - As far as the phrase ‘fixed to earth either by foundation or by structural support’, goes, it clearly conveys the fact that the apparatus, equipment or machinery is to be either fixed to earth or supported through a structure. Whereas, the electrical installation in the instant case get assimilated into the building/infrastructure, thereby becoming a part of the immovable property. The GST paid on the receipt of ‘Works Contract’ service involving electrical installations for the new factory project, do not become eligible for availment of ITC as they are blocked under clause (c) of the Section 17(5) of the CGST Act, 2017. Notwithstanding the same, even in the event of considering the said supply as an independent ‘Construction’ or ‘Installation’ service, the same again stands blocked under clause (d) of the Section 17(5) of the Act, ibid. Once it is held that the ITC related to electrical installation for the new factory is not available to the applicant in the instant case, the question of answering the other query, viz., “What should be the basis to arrive the timeline to avail ITC on tax invoice raised by Supplier to bill “Advance Component” of the Contract and Subsequent Adjustment of Advance in the Service Bills showing both Gross and Net amount.”, does not arise, as the same is directly related to the specific contract involved in the instant case, and is very much dependent on the main query. ISSUES PRESENTED AND CONSIDERED 1. Whether input tax credit (ITC) is eligible on GST paid for electrical works (supply, installation, testing & commissioning) executed for expansion of a factory used for manufacturing. 2. If ITC on such supplies is available, what is the appropriate timeline to avail ITC in respect of a supplier's tax invoice issued for an advance payment and subsequent adjustments in running/RA bills (i.e., timing of availment where advance is invoiced prior to receipt of supply)? ISSUE-WISE DETAILED ANALYSIS - Issue 1: Eligibility of ITC on electrical works for factory expansion Legal framework: Section 16(1) entitles registered persons to claim ITC on supplies 'used or intended to be used in the course or furtherance of business' subject to prescribed conditions and restrictions. Section 17(5) prescribes blocked credits including (c) works contract services supplied for construction of immovable property (other than plant and machinery) and (d) goods or services received for construction of immovable property (other than plant and machinery) on own account; Explanation defines 'construction' to include capitalization. The Explanation to Section 17 defines 'plant and machinery' as apparatus, equipment and machinery fixed to earth by foundation or structural support used for making outward supply of goods or services and includes such foundations/structural supports but excludes land, buildings and specified items. Composite supply and works contract definitions (Sections 2(30) and 2(119)) and Schedule II para 6 (works contract treated as service) are applied to determine character of the contract. Precedent treatment: Applicant relied on AAR Maharashtra (Nipro), AAR Gujarat (Elixir) and CESTAT Delhi (Steel Authority) where credits on certain electrical installations/cables/fixtures were held admissible. The Authority distinguished these precedents on facts: Elixir involved removable cables in ducts and transmission from power station; Nipro's ruling treated systems individually and predates contrary AAR/Appellate Authority orders (Embassy, Varachha) that found similar works to be ineligible. The Authority treated those decisions as persuasive at best and distinguished them on factual and later-authority grounds. Interpretation and reasoning: The contract before the Authority was a composite 'works contract' for supply and installation of comprehensive electrical systems for a new factory. Contract terms obliged the contractor to deliver 'Permanent Work' and the cost abstract separates supply and installation but contemplates delivery of a permanent electrical installation. Electrical fittings and associated civil works are ordinarily concealed/fastened to the building (walls/roof/pillars) and thereby become part of immovable property under General Clauses Act Section 3(26) (include things attached to the earth or permanently fastened to anything attached to the earth). The Authority emphasized that whether items are labelled 'plant and machinery' in accounting does not determine their legal character. The statutory definition of 'plant and machinery' requires (i) apparatus/equipment/machinery, (ii) fixed to earth by foundation or structural support, and (iii) used for making outward supply of goods or services. The electrical installation in question: (a) forms an integrated system serving the factory generally (not an individual apparatus/equipment/machinery performing a specific function), (b) becomes assimilated into the building as permanent work (thus fixed to earth or permanently fastened), and (c) does not itself make an outward supply of goods or services (it facilitates the factory but does not directly perform production output). Consequently the installation does not fall within the statutory 'plant and machinery' exclusion from Sections 17(5)(c)/(d) and is captured by the blocked categories. The Authority also considered that the transaction is a works contract (Section 2(119)) and Schedule II para 6 treats it as service, reinforcing blockage under 17(5)(c)/(d). Accounting characterisation and portability arguments (movability) were rejected because permanence and integration into immovable property govern the legal classification. Ratio vs. Obiter: Ratio - Where a contract delivers an electrical installation that is a permanent work assimilated into a building and does not qualify as 'plant and machinery' under the statutory explanation (i.e., not apparatus/equipment/machinery fixed by foundation/structural support and used for outward supply), ITC on GST paid for such works is blocked under Sections 17(5)(c) and 17(5)(d). Distinguishing observations about precedents (Elixir, Nipro) and factual comparisons are obiter or persuasive commentary insofar as they address differences in facts and subsequent contrary rulings. Conclusion (Issue 1): The GST paid on the electrical installation work for the factory expansion is not eligible for ITC; such credit is blocked under Sections 17(5)(c) and 17(5)(d) of the CGST/TNGST Acts given the contractual obligation to deliver permanent immovable work, the composite/works-contract nature of the supply, and the installations' assimilation into immovable property rather than qualifying as 'plant and machinery' within the statutory meaning. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Timing to avail ITC in respect of advance invoicing and subsequent adjustments Legal framework: Section 16(2) lists conditions for availing ITC including possession of tax invoice and receipt of goods or services; Section 16(4) prescribes a time limit-no entitlement to claim ITC after 30th November following the end of the financial year to which the invoice pertains (or furnishing the relevant annual return), whichever is earlier. Precedent treatment: Applicant cited pre-GST jurisprudence (Allahabad High Court - Century Laminating) to argue procedural rules should not defeat substantive credit where delays are bona fide. The Authority observed that Section 16(2)'s non-obstante clause must be read harmoniously with Section 16(4) and other statutory provisions; however, because the primary question of eligibility was answered negatively, detailed determination of timing was rendered unnecessary. Interpretation and reasoning: The Authority noted that ITC can be availed only upon fulfilment of conditions in Section 16(2), including receipt of goods/services; where an advance invoice is issued before receipt, the condition is not met until actual receipt or until the advance is adjusted in subsequent invoices reflecting supply receipt. Section 16(4) imposes an outer temporal limit which, on its plain reading, may expire before receipt/adjustment occurs. The Authority acknowledged the doctrine of harmonious construction and the non-obstante clause in Section 16(2) but did not adjudicate a general rule resolving conflicts between Section 16(2) and 16(4) because Issue 1 was decided against the applicant. Ratio vs. Obiter: Obiter - Observations on timing, interaction of Sections 16(2) and 16(4), and reliance on pre-GST authority are ancillary; no binding conclusion on the timing issue was reached since eligibility was negatived. Conclusion (Issue 2): The question of timeline to avail ITC in respect of the advance component does not arise in the present ruling because ITC on the underlying contract was held ineligible; therefore the Authority did not determine a binding rule on timing for advance invoicing adjustments. CROSS-REFERENCES AND ADDITIONAL FINDINGS 1. Precedents cited by the applicant were considered but distinguished on facts or superseded by later authority holding otherwise; advance rulings are binding only on the applicant but persuasive value was assessed. 2. Accounting classification (capitalization as plant & machinery or CWIP) and assertions of removability/movability do not override statutory tests for immovability or the specific definition of 'plant and machinery' under Section 17. 3. Because the main query was answered adversely, any further question dependent on eligibility (including timing of availing credit for advances) is moot and was left unanswered.