GST UPDATE No 203 ON ADMISSIBILITY OF CREDIT ON LNG JETTIES

The admissibility of input tax credit with respect to construction of plant and machineries which are affixed to Earth and are in the nature of civil constructions has been a matter of dispute since inception of GST laws. The input tax credit on civil constructions is restricted under the provisions of section 17(5) of the CGST Act, 2017. Recently, the matter regarding availability of input tax credit on LNG jetties constructed on sea shore was raised before Gujarat AAAR in the case of M/S SWAN LNG PVT LTD. The outcome of this decision is the subject matter of discussion of our present update.

M/s. Swan LNG Pvt. Ltd has entered into agreement with Gujarat Maritime Board and Government of Gujarat for development, construction, operation and maintenance of Liquefied Natural Gas i.e. LNG Port with a Floating Storage and Regasification Unit i.e. FRSU. After development of the said Import Terminal, the appellant intends to provide LNG regasification service to prospective customers. The appellant asked the question whether the jetties constructed by them will be considered as plant and machinery and if they can avail the ITC. They contended the jetties are constructed by them as foundation of plant and machinery and as per explanation to sec 17(6) of CGST Act, 2017, there is no bar on credit on foundation of plant and machinery but the explanation restricts ITC on land building or any kind of civil structure, telecommunication towers or the pipeline laid outside the factory premises. Accordingly, they contended that jetties should be treated as the foundation of plant and machinery which is necessary for outward supply and therefore ITC must be available.

After going through Sec 16 and Sec 17 of CGST Act, AAR contended that jetties are nothing but a civil structure. As per AAR, jetties are nothing but they are similar to the building made high above the sea shore. It cannot be considered as foundation instead it is a building made on the foundation. Moreover, to be considered as a plant and machinery, they must be located inside the factory. Therefore, AAR ruled that ITC on the same will not be available.

Subsequently, the appellant filed an appeal before the AAAR against the ruling of AAR. AAAR held that allowing input tax credit on construction of foundation cannot be decided in isolation without deciding as to whether items to be fixed on it falls within the definition of plant and machinery or not and further the same would be used for making outward supply of goods or services or both. LNG Jetties are nothing but civil structures which are excluded from the definition of foundation and structural supports. The foundation that is allowed in definition of plant and machinery is that which fixes the plant and machinery to the earth making it immovable. If certain portion of LNG jetties is used for directly fixing plant and machineries, then it will not make jetties foundation for plant and machineries but they are only in the nature of civil structures. The AAAR held that the appellant has also not produced any evidence to substantiate their claim that LNG jetties which according to them are foundation of plant and machineries will be used for outward supply of goods or services or both. AAAR concluded that the LNG Jetties being built by the appellant are not in the nature of plant and machinery being foundation for equipment, apparatus, machinery for re-gasification to be installed thereon. Therefore, input tax credit on inputs, input services and capital goods for the purpose of building these LNG Jetties is not admissible.

The above decision is yet another example of a stringent view taken as regards availability of input tax credit on construction of plant and machinery on the premise that it is to be considered as civil structure. The tussle as regards whether construction can be treated as that of plant and machinery or civil structure has its roots from erstwhile indirect tax regime wherein Courts have concluded that if it is not possible to shift the installed plant and machinery to another site as if the plant is dismantled, it will lead to its destruction, it results into immovable property. Similar analogy is being adopted in GST regime too for ascertaining whether the plant and machinery can be considered as civil structure and whether input tax credit would be available on it. It is hoped that government provides leverage to such cases so that the ITC chain is not disrupted as installation of plant and machinery involves huge capital expenditure.

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GST UPDATE No 203 ON ADMISSIBILITY OF CREDIT ON LNG JETTIES

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