ANALYSIS OF ELIGIBILITY OF INPUT TAX CREDIT ON CAPITAL GOODS

As per Section 2(119) of the CGST Act, 2017

“Works Contract” means a contract of building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein the transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”

As per Section 17(5)(c ) and 17(5)(d)-

(c) Works contract services when supplied for construction of immovable property, other than plant & machinery, except where it is an input service for further supply of works contract;

(d) Goods or services received by a taxable person for construction of immovable property on his own account, other than plant & machinery, even when used in course or furtherance of business;

Comments:

1. If the Works Contract service availed for the further supply of Works Contract Service, Input Tax Credit can be claimed.

2. Goods or Services procured for the construction of Immovable Property which is further used for the supply of Works Contract Service is eligible for the claim of credit of Input Tax.

As per Explanation to Section 17(5)

Explanation. – For the purposes of clauses (c) and (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation. – For the purposes of this Chapter and Chapter VI, the expression ‘plant and machinery’ means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes’

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises

Comments:

1. Input Tax Credit on Structural Support to the Plant & Machinery could be Claimed

2. Structural Support in nature of Civil Structure has been excluded from the ambit of Plant Machinery for the purpose of claiming of Credit of Input Tax.

3. Land/ Building on which such Plant & Machinery Commissioned shall not be eligible for Input Tax Credit.

4. If the Works Contract services being in the nature of repairs and maintenance are not capitalized are eligible for the claim of credit of Input Tax.

5. If the goods and services are used for the repairs of the Immovable Property, then tax paid on such supply of goods and services are eligible for the claim of credit of Input Tax.

In Re : Maruti Ispat and Energy Pvt. Ltd. (GST AAR Andhra Pradesh)

The argument of the applicant to treat civil structures as structural support for plant and machinery is not tenable. The civil structures under consideration is squarely falls other civil structures which is excluded as per the explanation to the proviso as stated above. Hence, this authority is of the opinion the claim of the applicant is not justifiable.

According to the provision of Sec. 17(5) read with the explanation to it, credit of civil structure is covered under blocked credits however, if the said civil structure is affixed as foundation or structural support to the plant and machinery then the input tax credit shall be admissible. Here, the definition of plant and machinery is also unique in including foundation and support which could be a works contract service for which credit is allowed but excludes ‘any other civil structure’. The intention appears to be put to rest the disputes in the past where foundation and structure which may include civil construction which are part of the plant and machinery would be eligible for credit.

In Re : Nipro India Corporation Private Limited (GST AAR Maharashtra)

Input tax credit – input services – cost of civil works incurred under Extension project – Mechanical Works – Electrical Works – Applicant submits that input tax credit in relation to ‘Mechanical Works’ and ‘Electrical Works should be admissible as such costs pertain to construction of plant and machinery.

Whether on facts and circumstances of the case, the input tax credit of tax paid on costs proposed to be incurred in relation to Mechanical Works’ and ‘Electrical Works’ under the Extension Project can be treated as ‘admissible under the Central Goods and Services Tax Act, 2017?

Held that: – Most of the services were held to be admissible. The credit on following services denied: Structural work, external finishing work, internal finishing work, M and E related civil work – M and E related civil works – Plumbing – Gardening water supply system – dismantling work – Fire protection work – sprinkler works – Extinguishers – fire documentation – relocation work – process waste water supply system (pipelines outside factory premises and civil work even inside factory) – works related to civil construction – demolition work.

Ruling : – Cenvat credit on most services allowed except those mentioned above.

As per FAQ issued by Central Board of Indirect Taxes-

Q4. Does Input Tax Includes Tax (CGST/IGST/SGST) paid on input goods, input services and capital goods?

Ans. Yes, it includes taxes paid on input goods, input services and capital goods. Credit of tax paid on capital goods is permitted to be availed in one instalment.

Definition of Capital Goods: Section 2(19) of CGST Act, 2017- “capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.

Comments: If the goods so procured are not capitalized in books of accounts, then goods so procured does not part take the character of Capital Goods. Hence the Input Tax Credit availment in respect of capital goods shall only be availed upon capitalization in books of accounts.

Q47. Whether input tax credit of tax paid on ‘works contract service’ or on goods or services used for construction of immoveable property (other than plant and machinery)? If yes, to what extent?

Ans. Yes, subject to the condition that such construction of immovable property is not capitalised. [Explanation to section 17(5)(d) of CGST Act]

Comments: If the Works Contract service received are capitalized, then such Works Contact service part takes character of Immovable Property and the Input Tax Credit on such service availed is not allowed by virtue of Section 17(5)(d).

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