ITC ON SOLAR PLANT - GST CENTRAL AUDIT TEAM WANT TO REVERSED AND CHARGE INTEREST

[RAVI MUNDRA]

We installed a solar power system at our manufacturing plant in the 2020-21 financial year. During a recent GST audit, the department has raised an objection and is demanding a reversal of Input Tax Credit (ITC) claimed on this solar installation. What potential grounds might the GST department be citing for this ITC reversal, and what would be the best course of action/solution to defend our ITC claim or minimize any potential liability?

 

[YAGAY andSUN]

The objection raised by the GST Department in respect of Input Tax Credit (ITC) claimed on the solar power system installed at the manufacturing premises in FY 2020–21 is likely premised on the restrictive provisions of Section 17(5)(d) of the CGST Act, 2017. This clause disallows ITC on goods or services used for construction of immovable property (other than plant and machinery) on one’s own account. The department may contend that the solar installation constitutes immovable property, thereby attracting the ITC restriction.

However, the statutory explanation to Section 17 clarifies that "plant and machinery" includes equipment and apparatus affixed to the earth by foundation or structural support, used in business operations. Solar generating systems, when used for captive power to support taxable manufacturing activity, fall within this definition. Judicial rulings, including Solex Energy Ltd. v. State of Gujarat, have recognized such installations as eligible plant and machinery, not civil structures. The mere attachment of the system to land or rooftops does not, by itself, render the asset immovable if it retains separability and serves a functional business use.

To defend the ITC claim, the assessee must substantiate that the solar system is capitalized as plant and machinery, not as part of building or civil works. Supporting evidence such as vendor invoices, CA certifications (non-claim of depreciation on tax component), asset registers, and consumption data linking power generation to manufacturing must be furnished. Technical specifications showing modularity and detachability of the system can reinforce the argument.

If a show cause notice is issued, a detailed legal response citing the Explanation to Section 17 and relevant case law should be submitted. In case of an adverse order, the matter may be appealed under Section 107. If reversal is made under protest, interest and penalty may be challenged under Section 73 by demonstrating absence of wilful default or suppression.

Conclusively, if the solar installation is used in the course of business and qualifies as plant and machinery, the ITC should be legally admissible. Proper classification, documentation, and a reasoned legal reply will be key to defending the claim.

[RAVI MUNDRA]

Dear Sir, 

Thanks for your Reply. But as per yesterdays discussion with GSt Department, the are disallowing on the basis of

Electricity Supply Exempt from GST; ITC Claim on Solar Power Denied by AAR

Tamil Nadu Authority for Advance Ruling (AAR) recently ruled on the input tax credit (ITC) eligibility of Kanishk Steel Industries Limited regarding their solar power plant. The company, engaged in steel manufacturing, sought clarification on whether ITC could be availed on goods and services used for the design, installation, and maintenance of a 10.2 MW solar power plant. The plant was intended for captive consumption, with generated electricity transferred to TANGEDCO, which would provide credits against the company?
 

Request you to Please guide

[KASTURI SETHI]

Dear Querist,

In order to contest the objection of the Audit, read the following decisions of AARs word for word. Although the decision of AAR/AAAAR has not precedential value yet it has persuasive value. Each case has different facts and circumstances.  You can extract strong points in your favour from these decisions.

2020 (10) TMI 808 - AUTHORITY FOR ADVANCE RULING, TAMILNADU - IN RE : KUMARAN OIL MILL

 

[KASTURI SETHI]

2024 (1) TMI 659 - AUTHORITY FOR ADVANCE RULING, GUJARAT - IN RE : UNIQUE WELDING PRODUCTS (P.) LTD.

 

[KASTURI SETHI]

2023 (10) TMI 473 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT - IN RE : THE VARACHHA CO-OP. BANK LTD.

 

[Shilpi Jain]

If the power is capitvely consumed for making a taxable supply finally, then credit should be eligible.

AI Summary

Manufacturer defends solar power system ITC claim under Section 17 against department's immovable property argument A manufacturer installed a solar power system at their plant in 2020-21 and claimed Input Tax Credit (ITC). During a GST audit, the department demanded ITC reversal, citing Section 17(5)(d) of CGST Act 2017, which restricts ITC on goods used for constructing immovable property. The department argued solar installations constitute immovable property, making ITC ineligible. Legal experts advised that solar systems qualify as 'plant and machinery' under Section 17's explanation when used for captive power generation supporting taxable manufacturing activities. The Solex Energy Ltd. v. State of Gujarat case supports this position. To defend the claim, the manufacturer should provide evidence showing the system is capitalized as plant and machinery, including vendor invoices, CA certifications, asset registers, and consumption data linking power generation to manufacturing. The department also referenced a Tamil Nadu AAR ruling denying ITC where electricity supply is exempt from GST. However, multiple AAR decisions provide varying interpretations based on specific facts and circumstances, offering persuasive value for defense strategies.