ITC admissibility on inputs used for manufacture of capital goods

[Satish Talnikar]

Dear Sirs,

Where inputs and inputs services are procured for manufacture of solar panels which are capitalized as assets in the books of accounts. Such solar panels are installed at the premises of client for supply of electricity to the client. As per the contractual agreement, the client is required to keep a security deposit with the solar panel manufacturer for 10 years. During this period, the solar panel manufacturer shall raise monthly bill for the number of units of electricity generated and supplied through the solar panel. Supply of electricity is exempted from payment of GST in terms of Notification 1/2017-CGST (Rate) dated 24.6.2017 (S.No. 104). After a period of 10 years, the solar panel system will be sold to the client and the security deposit amount shall be treated as sale value of the solar panel. Whether, the solar panel manufacturer is required to reverse the ITC on inputs and input services used for manufacture of solar panel which is used for supply of exempted goods? Whether such ITC can be utilized for payment of GST after 10 years when such solar panel is sold to the client. Whether for such sale, the written down value (WDV) of the solar panel shall be considered as the transaction value for payment of GST?

Requesting for valued opinion.

Thanks and regards!

[Shilpi Jain]

The terms of the agreement would be very relevant in this case. If the agreement states it is a sale of solar equipment and the consideration for this is ascertained by way of the amount of electricity consumed, etc. then credit would be eligible.

However, if the contract it self is for sale of electricity now and an optional sale to the recipient, then taking credit could be disputed.

AI Summary

Input tax credit eligibility hinges on contract characterisation; credit may be denied where supply is treated as exempt electricity. Admissibility of input tax credit on inputs and input services used to manufacture capital solar panels installed to supply exempt electricity depends on the contractual characterisation and allocation of consideration. If the contract evidences a sale of equipment with consideration tied to electricity supplied and the security deposit treated as sale consideration, ITC may be argued as eligible; if the contract is primarily for supply of exempt electricity with an optional later transfer, the credit claim may be disputed and reversal obligations may arise.