In re Indag Rubber Limited (GST AAAR Rajasthan)
Appeal has been rejected. The appellant has constructed specific civil structure i.e. building, rooms and roads on his own plot to lease out the same on rent. It was held that construction is on his own a/c and also not covers in the definitions of plant & machinery, therefore, ITC of inputs and input services are not available.
Read AAR Order No ITC of GST related to setting up of MRO facility for applicant
FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING, RAJASTHAN
At the outset, we would like to make it clear that the provisions of both the Central GST Act, 2017 and the Rajasthan GST Act, 2017 are same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central GST Act, 2017 would also mean a reference to the same provisions under Rajasthan GST Act, 2017.
2. The present appeal has been filed under Section 100 of the Central GST Act, 2017 (hereinafter also referred to as ‘the CGST Act’) read with Section 100 of the Rajasthan GST Act, 2017(hereinafter also referred to as ‘the RGST Act’) by M/s Indag Rubber Limited, SP 86-88, Industrial Area Bhiwadi, Bhiwadi, Alwar, Rajasthan 301019 (hereinafter also referred to as ‘the Appellant’) against the Advance Ruling No. RAJ/AAR/2019-20/23 dated 21.10.2019.
BRIEF FACTS OF THE CASE
3. M/s Indag Rubber Limited, SP 86-88, Industrial Area Bhiwadi, Bhiwadi, Alwar, Rajasthan 301019 is holder of GST Registration No. 08AAACI0868D1ZS ( hereinafter refer as Appellant). The Appellant inter-alia manufactures precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes for the tyre retreading industry. M/s Elcom Systems Pvt. Ltd (hereinafter referred to as “Elcom”) is a private limited company incorporated in India and is engaged in the business of repair, maintenance, overhaul, upgrade and modernization of Unmanned Aerial Vehicles (UAV). Elcom has approached Appellant for taking on lease a Maintenance Repair and Overhaul facility (hereinafter referred to as “MRO”). According to the agreement between the Appellant and Elcom, the Appellant will construct MRO facility at Bhiwadi as per the specifications given by Elcom. The said MRO facility will thereafter be given on lease to Elcom by the Appellant. Elcom will install its equipments in the MRO facility and will render MRO services to Israel Aerospace Industries (IAI in short).The said sub-lease for the MRO facility is for the period of 9 years and 6 months. In case of early termination of this sub-lease deed, Elcom shall ensure that IAI makes its best efforts for alternative arrangements to continue operations at the MRO Centre for remainder of the 9 years lock in period, so that the appellant shall not suffer loss. In such case, the Elcom shall continue to make monthly payment to the Appellant of the lease rentals and other costs and expenses which are payable by Elcom under this sub-lease deed, until the Appellant enters in a fresh deed with new tenant for the unexpired term. The scope of work of Appellant for setting up the MRO facilities would include the following:-
i. Civil Work (Earth work, concrete work, brick work, steel work, wood work, aluminium/ metal work, waterproofing, flooring/ skirting, finishing)
ii. External Development Works(Area Grading, site developing and roads)
iii. Fire-fighting system(Fire pumps, internal hydrant, sprinkler system, fire extinguishers, external fire hydrant system, electrical works)
iv. Internal and External Plumbing and sanitary works (Sanitary fixtures and fittings, internal drainage, internal water supply, external sewage, external water supply, pumps, treatment station)
v. Heating, ventilation and Air Conditioning (‘HVAC’) in Hanger Building, warehouse building and paint shop (variable refrigerant flow system, air handling system, air distribution system, piping, insulation, ventilation system and electrical works)
vi. Electrical installations (11KV HT Panel, transformers, 11KV HT cable, bus duct, diesel generator, UPS, Battery charger cum DCDB, earthing, lighting protection, LT Cables, cable trays, wirings, distribution board, poles, fixtures & fans, civil and miscellaneous works, fire alarm and public-address system, CCTV, voice, video & data networking, LT Panels).
3.1 Appellant procures inputs and input services for undertaking work with respect to point no. iii. to vi. In respect of these inputs and input services, input tax credit is being availed by the Appellant.
3.2 The Appellant has entered into agreement with M/s Akanksha Contracts Pvt. Ltd. for supplying various goods and services for setting up the MRO facility on the Industrial Land. The Appellant issues purchase order on M/s Akanksha Contracts Pvt. Ltd for supplying the goods and services for setting up of MRO facility. The goods are procured by M/s Akanksha Contracts Pvt. Ltd on a bill to ship to basis. In the invoice issued by the supplier, the bill to party is M/s Akanksha Contracts Pvt. Ltd. and ship to party is the Appellant. Against the material receipts, the Appellant has paid Rs. 97.37 lacs amount in advance for procuring of goods and services. Further, it has been agreed that M/s Akanksha Contracts Pvt. will raise a consolidate invoice for each month, which will include value of both goods and services so supplied along with adjustments regarding the advance so received. M/s Akanksha Contracts Pvt. Ltd is charging applicable rate of Goods and Services Tax (hereinafter referred to as “GST”) on the goods and services being supplied to the Appellant. Further, when the Appellant will lease out the MRO facility to Elcom, it will be paying GST at applicable rate on the amount of rent received for leasing out of MRO facility.
4. The appellant has filed application for advance ruling before the Authority for Advance Ruling, Rajasthan whether the Appellant is eligible to claim credit of the GST charged by vendor at the time of supply of goods and services to it, which are used for carrying out the following activities for setting up of MRO facility which will be rented out,-
a. Civil work
b. External Development works
5. Authority for Advance Ruling, Rajasthan has observed that the provisions of Section 17(5)(d) of CGST Act, 2017 is clear that if the goods or services are used for the construction of an immovable property, the ITC shall not be available irrespective of use of the said property and issued Ruling that the applicant is not eligible to claim credit of the GST charged by vendor for supply of goods and services to it, which are used for carrying out the activities (Civil Work and External Developmental works for setting up of MRO facility.
6. Aggrieved by the Ruling above, the appellant has filed appeal before this forum at online portal on 30.11.2019 and in hard copy on 04.11.2020. The Appellant in its appeal has, inter-alia, mentioned the following grounds of appeal:
6.1 IMPUGNED RULING IS A NON-SPEAKING ORDER AND HAS BEEN PASSED IN GROSS VIOLATION OF THE PRINCIPLE OF NATURAL JUSTICE.
6.1.1. It is submitted that the ruling passed by the Authority neither records nor considers the complete written and oral submissions made by the Applicant. Thus, the same stands in violation of principle of natural justice.
6.1.2. It is pertinent to mention that one of the submissions of the Appellant was that it is covered by the judgment of Safari Retreats and thus, is eligible to take credit. Further, the Appellant made detailed additional submission regarding applicability of the principle of stare decisis. However, the Authority neither recorded nor considered submissions in this regard in the impugned ruling.
6.1.3. Further, the Appellant in order to substantiate its view, had relied on the advance ruling in the matter of In Re: K.P.H. Dream Cricket Pvt. Ltd., 2018 (18) GSTL 278 (AAR-GST), where the credit of input services was allowed to the applicant therein, for carrying out an output activity of supplying complimentary ticket as the same was taxable in nature. The Authority has not distinguished the principle laid down in this ruling.
6.1.4. It is submitted that being a quasi-judicial body deciding the rights and liabilities of the Appellant, the Authority is bound to follow the principles of natural justice. However, the Authority by not considering the submissions (oral as well as written) of the Appellant has violated the said principles (audi alteram partem).
6.1.5. Further, it is submitted that the Authority while passing the ruling has not given reasons and basis for such ruling. It is pertinent to mention that the Authority has merely recorded that the purposive dimension of the provision of Section 17 (5) (d) of the CGST Act is blocking of credit for construction of immovable property. However, the Authority has failed to substantiate this observation with any cogent reasoning.
6.1.6 It is submitted that it is a settled principle of law that non-speaking orders or the orders passed without recording the complete submissions and reasons for passing the final order are non-est in law. Thus, the impugned ruling being devoid of any reason/basis is non-speaking and thus, unsustainable in law. This further, establishes the fact that the impugned ruling is violative of principle of natural justice.
6.1.7. The Appellant submits that the principles of natural justice have been enshrined and regularly affirmed with the utmost favour by the Hon’ble Supreme Court and all other judicial flora. As per the settled judicial position, principles of natural justice are the minimum standards of fair decision-making imposed on persons or bodies acting in a judicial or quasi-judicial capacity, like the Authority for advance ruling. Where an Authority or body is required to determine questions of law or fact in circumstances where its decisions will have a direct impact on the rights or legitimate expectations of the assessee concerned, there exists an implied obligation to observe the principles of natural justice. One of the shades of the rules of natural justice is to consider the submissions made by an assessee. It is submitted that considering the submissions made by the assessee before passing an order leads to a fair opportunity to assessee and to present its own view point.
It is submitted that it is a settled law that a quasi-judicial authority is obligated to provide cogent reasons while passing any order. The same has been emphasized in the case of Kranti Associates Pvt. Ltd. and A nr. Vs Shri Masood Ahmed Khan and Ors., reported at 2010 9 SCC 496.
6.1.8 In Union of India v. Mohan Lal Capoor and Others, reported at AIR 1974 SC 87, the Hon’ble Supreme Court while dealing with the question of selection under Indian Administrative Service/Indian Police Service (Appointment by Promotion Regulation) held that the expression “reasons for the proposed supersession” should not be mere rubber stamp reasons. Such reasons must disclose how mind was applied to the subject matter for a decision regardless of the fact whether such a decision is purely administrative or quasi-judicial. The Hon’ble Court held that the reasons in such context would mean the link between materials which are considered and the conclusions which are reached. Reasons must reveal a rational nexus between the two.
6.1.9. In this regard, reliance is also placed on the decision of the Hon’ble High Court in the case of Anil Products Limited vs. CCE, Ahmedabad-II reported at 2010 (257) E.L.T. 523 (Guj.), wherein the Hon’ble High Court has held that mere reproduction of submissions in the body of order is not enough but finding of deciding authority on these submissions is equally necessary. The Hon’ble High Court further held that the adjudicating / appellate authority must give its specific findings on various submissions made, judgments relied upon and the distinguishing features pointed out by assessee before them, in their final order. It is further submitted that In pursuance of directions given by Hon’ble CESTAT in the case of Commissioner of Customs (Import), Chennai vs. Do Best Infoway reported at 2016 (336) E.L.T. 156 (Tri. – Chennai) to CBEC to Issue appropriate guidelines for the quasi- judicial authorities to discharge their duties keeping in view the spirit of the ratio laid down by Apex Court in the case of Gordhandas Bhanji [1952 AIR 16 SC], the CBIC had issued guidelines vide Instruction F. No. 390/CESTAT/24/2016-JC, dated 13-4-2016. In para 5(d) of the said Instructions, the CBIC has categorically mentioned that the quasi-judicial orders have to be necessarily be the speaking orders recording every fact and reason leading to the final decision in the matter. Non-speaking orders or the orders passed without recording the submissions and reasons for passing the final order is nonest in law. In view of the aforesaid legal position, it is submitted that the impugned ruling has been passed in gross violation of the principles of natural justice as it fails to consider the submissions made by the Appellant and is passed without providing any reasons.
6.2 . THE APPELLANT IS ELIGIBLE TO AVAIL CREDIT FOR THE INPUTS AND THE INPUT SERVICES RECEIVED BY APPELLANT USED FOR MRO FACILITY WHICH IS RENTED BY IT.
6.2.1. It is submitted that in view of the Appellant, it is eligible to claim credit for the inputs and input services used for MRO facility which is rented to Elcom, as the same is an outward taxable supply. The impugned ruling denying the credit to the Appellant using a restricted reading of Section 17(5)(d) of the CGST Act is incorrect and is liable to be set aside.
6.2.2. It is submitted that Section 16 (1) of the CGST Act specifically provides that every registered person shall be entitled to take credit of the input tax charged on any supply of goods or services or both made to him, which are used or intended to be used in the course or furtherance of his business. Such entitlement is subject to fulfillment of certain conditions such as possession of invoice, receipt of goods/service, payment of tax to Government etc.
6.2.3. It can be seen that one of the objective behind introduction of GST viz. seamless flow of credit is being fulfilled with Section 16(1) of the CGST Act. The major intent behind GST is that wherever, the supplier is engaged in providing taxable supply, it should be given credit of the inputs and input services used by it for providing the said supply.
6.2.4. It is further submitted that the eligibility of credit is subject to fulfillment of conditions under Section 16(2) of the CGST Act. The relevant portion of Section 16 of the CGST Act is extracted below:-
“Section 16 – Eligibility and conditions for taking input tax credit.
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services,-
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.]
(c) subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”
6.2.5. In the instant case, the Appellant before availing the credit will be fulfilling all the conditions such as receipt of tax invoice, receipt of goods/service, payment of tax to Government by supplier, furnishing of returns etc.
6.2.6. It is submitted that Section 17(5) of the CGST Act is a non-obstante clause to Section 16(1) of the CGST Act. Section 17(5) of the CGST Act provides certain cases in which credit is not available. Clause (d) of Section 17(5) provides that goods and services received by taxable person for construction of an immovable property (except plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business. The relevant portion of Section 17 is extracted below for kind reference:-
“Section 17 – Apportionment of credit and blocked credits.
(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(d) 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.”
6.2.7. In the light of objective and provisions under GST, it can be said that Section 17(5)(d) deals with unavailability of credit of inputs/input services in case where the output is not taxable. Thus, in case where the outward activity undertaken by an assessee is not taxable, the provision of Section 17(5)(d) will apply and credit will not be available. In order to further explain the same, reference is made to Entry No. 5 of Schedule III. Schedule III deals with activities which are to be treated neither as supply of goods nor supply of service.
6.2.8. Sale of building interalia is neither supply of service nor supply of goods by virtue of Entry no. 5 of Schedule III. Thus, on a combined reading of this provision alongwith the earlier paragraph, it can be said that in case if inputs/input services are used for construction of a building which is to be sold, restriction under Section 17(5) (d) will be applicable.
6.2.9. It is pertinent to mention that according to Entry No. 5 of Schedule II, renting of immovable property is a supply of service. Further, lease of building is also supply of service under Entry No. 2 of Schedule II. Accordingly, the Appellant at the time of renting the MRO facility will be liable to pay tax as the same is a taxable supply of service. Hence, the outward activity undertaken by the Appellant is a taxable supply.
6.2.10. In order to substantiate the understanding of the Appellant, reference is made to Circular No. 74/2018 dated 08.12.2018 which provides that credit will be available for construction materials, capital goods and input services used for construction of flats, houses, etc. where completion certificate has not been issued. It is pertinent to mention that on receipt of completion certificate, a building ceases to be goods and thus, GST is not applicable.
6.2.11. It can thus be concluded that the intent behind incorporating Section 17(5)(d) of the GST Act is to restrict the credit where the immovable property is being supplied after the completion certificate, as supply of immovable property does not attract levy of GST. However, for all other cases, such as renting/leasing of immovable property, as supply of service is being undertaken, credit of inputs and input services is available.
6.2.12. In the light of aforementioned, it is submitted that where the immovable property is constructed for the purpose of leasing out, the tax chain is not broken and accordingly, credit is available.
6.2.13. It is submitted that in the instant case, the Appellant is involved in setting up of MRO facility and further leasing it out to Elcom. Therefore, the Appellant is liable to pay GST on the outward supply, i.e. renting of MRO facility. Accordingly, the Appellant is eligible to claim credit of the tax charged by M/s Akanksha Contracts Pvt. while supplying the goods and services to the Appellant, on fulfillment of conditions enunciated under Section 16(2) of the CGST Act.
6.2.14. In this regard reliance is placed on the case of M/s Safari Retreats(Supra), wherein the credit has been allowed on goods and services procured for the construction of shopping malls and then letting out the same. Relevant portion of the judgment is extracted below for your kind reference:
“19. The very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation.
Therefore, the contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16 (1)(2) where restriction has been put-forward by the legislation for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of Interpretation put-forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in t case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case e property is sold prior to completion certificate, he would not e required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.
20. In that view of the matter, in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in (1999) 2 SCC 361 (supra),the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.
21. In. that view of the matter, prayer (a) is required to be granted. However, we are not inclined to hold it to be ultra vires. Prayer (b) is not accepted.”
6.2.15. It is submitted that when the output is taxable, the inputs and input services used for undertaking the output supply are eligible for credit. In this regard, reliance is placed on the case of Eicher Motors Ltd. v. Union of India(1999) 2 SCC 361, wherein it has been observed that the credit of the tax paid on inputs shall be available, if the tax has been paid on such goods on the basis of the fact that these goods will be utilised as inputs in the manufacture of further products.
6.2.16. Similar view has been taken in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., (1999) 7 SCC 448 wherein it has been observed that the credit is an indefeasible right of the assessee.
6.2.17. Further reliance in this regard is required to be made to the ruling of Punjab Authority of Advance Ruling in the matter of In Re: K.P.H. Dream Cricket Private Limited, 2018 (18) G.S.T.L. 278 (A.A.R. – GST), credit of inputs and input services was allowed to the assessee for the act of providing complimentary tickets, as this act was taxable. It is pertinent to mention here that in this application, as the outward activity was taxable, credit was held to be available to the assessee/applicant.
6.2.18. On the basis of the aforementioned submissions, it is submitted that as the Appellant is engaged in the provision of renting of immovable property which is a taxable supply, the goods and services procured by it for making such supply are ‘eligible for credit.
6.2.19 Further reliance in this regard is placed on the case of Oxford University Press v. Commissioner of Income Tax, (2001) 3 SCC 359, wherein purposeful interpretation of a statutory provision was validated.
6.2.20. Furthermore, in the case of K.P. Varghese v. Income-Tax Officer, Ernakulam and another, Vol.131 (1981) ITR 597, it has been observed that literal construction in certain cases leads to an absurd interpretation of a statutory provision and such practice is required to be avoided.
6.2.21 .In the light of aforementioned submissions, it is submitted that in the view of the Appellant, the restriction under Section 17(5) (d) of the CGST Act is not applicable in cases where the inputs and input services are used for making a taxable output supply.
Rebuttals to the findings of the impugned ruling
6.2.22. The Authority has observed that credit is not available for the construction of an immovable property even when such goods or services are used in the course or furtherance of business. However, no reasoning behind such observation is provided. The Authority has not provided any reason as to why the decision of Safari Retreats(supra) is not applicable.
6.2.23. The Authority has also observed that the interpretation of Section 17 (5) (d) of the CGST Act of the Appellant that it deals with unavailability of credit of inputs/ input services when output is not taxable, is implicit and one dimensional in nature and is not the intentional outcome of the said provision. In this regard, it is submitted that the decision of Safari Retreats (supra) and earlier advance ruling of K.P.H. Dream (supra) substantiates the view of the Appellant. The Authority also recorded that the purposive dimension of the said provision is blocking of credit for construction of immovable property. However, it is submitted that this observation of the Authority is without any reason and is against the principles laid down by the cases cited by the Appellant in its application.
6.2.24.It is submitted that the Authority observed that there are 2 phases in the instant transaction, i.e. construction of immovable property and leasing of the same for MRO purposes and the issue in the Application only relates to the 1st phase. The Authority concluded that the taxability of the output supply post construction is immaterial in determining the eligibility of credit. In this regard, it is submitted that the observation of the Authority is incorrect. The taxable event under GST is “supply”. Thus, the question of availing credit will apply only when a supply take place. In this case, the inputs/input services are being supplied to the Appellant and being a recipient, it will be eligible to take credit on the same, on fulfillment of conditions mentioned under Section 16. In case if a subsequent transaction of the Appellant fall under the restriction under Section 17(5), requirement of reversal of credit (by way of addition in output tax liability) will arise. Since, the instant case does not fall under the restriction under Section 17(5), the Appellant is eligible to take credit.
6.2.25.Moreover, in this regard it is also submitted that the Authority failed to analyze the transaction as a whole. It is submitted that the MRO facility is not merely created with an intent for construction of immovable property. It has been created keeping in mind the specifications given by Elcom with the objective to be given on lease to it.
6.2.26.Therefore, it is submitted that the Authority failed to appreciate the transaction as a whole and only based its findings on the basis of one limb of the transaction, ignoring the fact that the other limb is equally important to determine the taxability.
6.2. 27.It is submitted that the Authority further clarified that if goods or services are used for the construction of an immovable property, the credit shall not be available, irrespective of the use of the said property, i.e in accordance with Section 17 (5) (d) of the CGST Act. In this regard, it is submitted that the Authority failed to provide any reason behind the said interpretation, i.e. the use of the said property shall not be an issue while deciding the eligibility of credit and application of the provision of Section 17 (5) (d) of the CGST Act. Further, the findings of the Authority is not in conformity with the principle laid down in the cases relied by the Appellant in its application.
6.2.28.It is further submitted that Clause 9.2 of the sub-lease deed between the Appellant and Elcom provides that even if such sub-lease deed is terminated before the predetermined period, Elcom will make good the loss of the rentals till the Appellant finds a new tenant for the MRO facility. Therefore, it can be construed that the ultimate aim behind construction of MRO facility was only to rent it further and nothing else.
6.2.29. It has been observed by the Authority that the following case laws are not relevant in the present case as the facts are different from the facts referred in these cases:-
