Availability of Input Tax Credit on the Contruction of Railway lines

[Bibhu Tripathy]

Respected Experts,

Kindly clarify the following queries:

Whether Input tax credit is available on the works contract service bills received towards the construction of Railway lines, Bridges etc. The recepinet of the service is constructing the Railway line on his own account.

[Rajagopalan Ranganathan]

Sir,

According to Section 17 (5) (d) of CGST Act, 2017 in the case of"goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business input tax credit shall not be available.

Explanation. - For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property."

The railway line constructed, though it is used in furtherance of business, is an immovable property. Hence ITC of tax paid on such works contract service is not available as per law.

[Bibhu Tripathy]

Thank you sir, but the doubt arises as to whether the railway tracks are classified as plant and machinery as per explanation to Sec. 17(6). Kindly through light on it.

[Alkesh Jani]

Shri

I would like to know some details in the matter,

1. The railway tracks are to laid down by your own or Railway department will undertake such work?

2. Is there any transfer of title of goods ( Railway lines including parts) or land ?

3. Any amount is deposited to Railway Department for certain period.

Thanks

[KASTURI SETHI]

In my view, ITC is allowed. It is covered under Explanation below Section 17(6) of CGST Act. It qualifies for the definition of 'plant and machinery', especially, in the expression , "Foundation and Structural supports" .

Also see para no. 2.14, of AAR Gujrat reported as 2020 (4) TMI 631 - AUTHORITY FOR ADVANCE RULING GUJARAT in respect of IN RE: M/S. SATYESH BRINECHEM PRIVATE LIMITED decided on 11.9.19.

Other Judgments of Hon’ble Supreme Court squarely support the applicant :

2.14 The applicant is also supported in its submission by the judgment of Hon’ble Supreme Court in the case of M/s Jayaswal Neco Ltd. Versus Commissioner of Central Excise, Raipur - 2015 (4) TMI 569 - Supreme Court. In this case railway tracks were used in transporting hot metal in ladle placed on ladle car from blast furnace to pig casting machine through ladle car where hot metal was poured into pig casting machine for manufacture of pig iron. The system also helped in taking the hot pig iron from the pig casting machine to the pig storage yard wherein hot pig iron was dumped for cooling and making ready for dispatchers. The railway tracks were also used in handling of raw materials. The question was whether railway tracks qualified as capital goods and therefore whether Modvat credit was admissible in respect of goods used for constructing railway tracks. Hon’ble Supreme Court observed that the railway tracks had been installed by the assessee within the plant as a part of handling system for raw material and processed material. It was held by Hon’ble Supreme Court that “railway track material used for handling raw materials and process goods” was capital goods and hence the assessee had rightly claimed Modvat credit in respect of the said item.

This decision of AAR can help you arrive at concrete decision.

[Bibhu Tripathy]

The details are provided below:

A working under a Concession Agreement on Built Own Operate and Transfer [BOOT] basis.

The title of land acquired will however continue to remain with Railway and the company hold the leasehold rights on the Land till the period of Concession Agreement .The Leasehold Land acquired will remain the property of the company till the period of Concession Agreement and thereafter will revert to Railways.

The constructions carried out by the company and are recognised as assets of the company. The entire expenditures are carried out by the company. After the commencement of the operations a portion of revenue will be given to the company by Railways.

Under such circumstances, whether the ITC will be taken by the Company

[Alkesh Jani]

Shri

Thanks for giving the details. The definition of works contract is reproduced below

“(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;”

The Schedule-II of the Act, at Para 6 states as follows:-

6. Composite supply

The following composite supplies shall be treated as a supply of services, namely:-

works contract as defined in clause (119) of section 2; and"

From the given details, it can be assumed that only land on leasehold is given by railway to the company and further fitting out or commissioning will be undertaken by the company, but transfer of property in goods is not seen here. Therefore, I am of the view that Leasehold of land is supply of service by the railway to the company, while any other fitting out or commissioning is borne by the company, so company can take the credit of goods, if capitalised, Section 16(3) should be taken in account.

[Bibhu Tripathy]

M questions are:

1. Whether the ITC is available even if these are immovable properties. C these be considered as Plant and machinery.

2. If the ITC is available , then for providing which services. Can the ITC will be utilised for payment of GST on the share received from Railways

[Alkesh Jani]

Shri

I am of the view that this cannot be considered as “Plant and Machinery” however you can book them as “Capital Goods”.

In this case, no service other than leasehold of land is provided by the Railway department, company is making expense for business, ITC of Goods or Services during the course or furtherance of business is available depending on each transactions (Supply).

Please note that the reply is as per the details furnished, you are requested to go through the agreement, terms and conditions between railway and your company to arrive at proper conclusion and in either case consult an expert from your city who can verify the details personally and can guide you best.

[KASTURI SETHI]

In view of divergent views, it is better and safer to opt for Advance Ruling Authority.

AI Summary

Input tax credit on railway construction depends on whether tracks qualify as plant and machinery rather than excluded immovable property. Whether ITC is admissible on works contract services for construction of railway lines depends on Section 17(5)(d) denying credit for construction of immovable property (other than plant or machinery); the key issue is whether tracks and related installations qualify as plant and machinery or as capital goods such that ITC may be claimed when capitalised. Determination requires factual analysis of transfer of title, functionality within operations, capitalization and contract terms, and where doubt exists an advance ruling is advisable.