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GST update on admissibility of input tax credit on goods and services used for setting up of MRO facility 50/2020-21

GST update on admissibility of input tax credit on goods and services used for setting up of MRO facility 50/2020-21
The issue regarding allowing of availability of input tax credit on goods and services used for civil work or external development work has been a point of dispute between the taxpayer and department. The applicability of restriction of admissibility of input tax credit in terms of section 17(5)(d) has been a point of debate since inception of GST regime. This issue was considered by the Rajasthan Authority for Advance Ruling in the case of M/s Indag Rubber Limited and is the subject matter of discussion in the present update.
 
The applicant, M/s Indag Rubber Limited entered into an agreement with M/s Elcom Systems Pvt. Ltd. for construction of Maintenance Repair and Overhaul (MRO) Facility at Bhiwadi as per the specifications given by Elcom. The MRO facility after developed by the applicant will be given on lease to Elcom. The question raised by the applicant is regarding admissibility of input tax credit on goods and services used in construction of MRO facility which will be further leased to Elcom.
 
According to section 17(5)(d), ITC is denied in respect of GST paid ongoods 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. Therefore, input tax credit is admissible only for construction of plant and machinery and is disallowed for goods or services used in construction of immovable property. The AAR held that since the MRO facility leads to emergence of immovable property, the input tax credit of goods or services used therein is hit by the restriction contained in section 17(1)(d) of the CGST Act, 2017.
It is worth noting that the term 'immovable property' is not defined under the GST law and so we may have to depend on the definition of immovable property given in other Statutes such as, in Section 3(26) of the General Clauses Act, 1897, in terms of which, the term 'immovable property' shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth. In the erstwhile Central Excise Laws, there were various judicial pronouncements rendered by Hon’ble Supreme Court concluding when installation of machinery would be considered as immovable property. It was unanimously held that if the machinery is being attached to Earth with nuts and bolts in order to ensure wobble free operation of machine, then the said machinery is not to be considered as immovable property. However, if after installation of machinery, it is not possible to shift or move such machinery except dismantling it as scrap, then the said machinery is to be considered as immovable property. However, this aspect was not examined in the above advance ruling.
The reliance placed on the favourable decision given by the Hon’ble Orissa High Court in the case of Safari Retreats Private Limited allowing input tax credit on goods and services procured for construction of mall which was further let out was rejected. The Authority for Advance Ruling held that the purposive dimension of the section 17(1)(d) is blocking of credit for construction of immovable property. It was held that the present activity has two phases viz. construction of immovable property and leasing of the same for MRO purposes. The question raised by the applicant regarding ITC is restricted with first phase of construction itself. Therefore, contention of the applicant that output supply which will take place post construction is taxable or not is immaterial in determining eligibility of ITC. Hence, the input tax credit was held as inadmissible in the present case.
 
The question as regards whether the activity results in construction of immovable property is relative and subjective which is dependent on facts and circumstances of each case. However, the input tax credit should not be outrightly denied without examining the aspect that the activity results in construction of immovable property or not. In the present case, the scope of work of the applicant included civil work including electrical, sanitary fittings which result into immovable property. But, the admissibility of credit also needs to be examined in light of decision of the Orissa High Court in the case of M/s Safari Retreats Private Limited. Although, the matter is pending before Hon’ble Supreme Court and is sub-judice, but as of now, the judgment holds good and is required to be implemented by all the subordinate authorities. Mere filing of appeal against the High Court decision cannot be the grounds for the Authority for Advance Ruling not to follow the decision rendered by the Hon’ble Orissa High Court. Reference may be made to the landmark decision rendered by the Apex Court in the case of UNION OF INDIA VERSUS KAMLAKSHI FINANCE CORPORATION LTD. [1991 (55) E.L.T. 433 (S.C.)] wherein it was held that mere filing of appeal against the order cannot be ground for not following it and the revenue authorities are required to unreservedly follow the appellate authority’s order unless operation thereof suspended by a competent court. Therefore, in our opinion, the Authority for advance ruling cannot outrightly reject the reliance placed by the applicant on the decision of the Orissa High Court in the case of M/s Safari Retreats Private Limited.


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