Applicability of GST – ITC Availment & Utilisation for Construction of Silos

Before we start we must understand the meaning of Silo – A silo is the on-site storage container that allows for the storage and distribution of different raw materials and finished products.

There is a gross doubt across cement industry whether to avail & utilise GST– ITC paid for the construction of civil portion of silos. Since Land, building or any other civil structures is specifically included in the block credit list.

Analysis of Present Scenario

1) Extract of the GST Act related to Input Tax Credit

As per section 17(5) (c) & (d) of the CGST Act 2017 listed for Blocked Input Tax Credit, input tax credit paid for the following clauses is not available. The clauses are as follows:-

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

(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.

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

The explanation to Section 17 defines the meaning of “plant & machinery” as follows: “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 support but excludes—

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

(ii) Telecommunication towers; and

(iii) Pipelines laid outside the factory premises.

Thus, from the above clauses it is interpreted that GST – ITC is available only for the construction activity of “Plant & Machinery”.

2) Can we treat silos as plant & machinery to avail & utilise GST paid as ITC ?

Now, the question arises whether Silo can be classified as “Plant & Machinery” and GST paid on the same can be availed as Input Tax Credit?

To ascertain the same we have analysed different case studies under different act. Extract summary of two such case laws are listed below:-

a) DCIT vs M/s. Chettinad Cement Corporation – Income Tax Act

In Income Tax case between DCIT vs M/s. Chettinad Cement Corp., the department has classified silo as “Buildings” and denied additional depreciation on the same whereas the Assesse has classified the same as “Plant & Machinery” and claimed depreciation accordingly.

In this case, ITAT has clarified – The cement silos are structures specifically designed for preserving the cement from dampening and to keep the finished product intact. Any leakage of wall, the products will be got damaged and cannot be put to use and the entire production gets spoiled. Therefore, the cement silos are required specific design and construction and can be used only for the purpose of preserving the finished product of cement. Such structures cannot be used for residential purposes by human beings. Therefore, cement silos cannot fall under the category of buildings for the purpose of depreciation. As held by Hon’ble Supreme Court in 247 ITR 268, the buildings specifically designed and integral part of generating station should be considered as plants entitled for higher depreciation. Similarly, the cement silos are to be treated as integral part of the cement plant for storage and distribution of final product.

“Therefore, we are considered the opinion that the cement silos are to be treated as plant and eligible for higher rate of depreciation.”

From the above case law one thing is to be noted that “the cement silos are required specific design and construction and can be used only for the purpose of preserving the finished product of cement. Such structures cannot be used for residential purposes by human beings.” Thus, cement silos were classified as “Plant & Machinery”.

The detailed judgement can be read from the below-mentioned link-

Cement silos are plant & eligible for higher rate of depreciation

b) State of Kerala v/s M/s Ambuja Cements Limited – Kerala Vat Act

In another case, between State of Kerala and M/s Ambuja Cements Limited, The assesse claimed input tax credit with respect to the value of capital goods that includes amount expended on construction of silos, in the assessment years 2007-2008 and 2008-2009, amounting to ₹ 14,80,071/- and ₹ 41,84,831/-respectively, by producing supporting evidence of purchase invoices. But the Assessing Authority disallowed the claim on finding that, the ‘civil structure’ and ‘immovable’ are exempted from the definition of ‘capital goods’, defined under Section 2 (x), by virtue of SRO 324/2005, which contains a negative list of capital goods. The Assessing Authority also found that, the purchases are relating to ‘steel and cement’, which are ‘building materials’ specifically included in the negative list.

The assesse took up the matter in appeal before the Deputy Commissioner (Appeals), Commercial Taxes, Ernakulam. Out of the 9 items of capital goods with respect to which input tax credit was claimed, the first appellate authority had allowed credit with respect to 2 items. With respect to the remaining 7 items it was found that, those are building materials, factories, civil structures and immovable goods coming within the negative list in SRO 324/2005. Hence the claim for input tax credit was declined with respect to those items.

In the second appeals filed before the Tribunal, findings rendered by the authorities below were reversed. It was concluded that, out of the 7 items with respect to which credit of input tax was declined, none will fall within the negative list contained in SRO 324/2005. Referring to various factors with respect to description of the capital goods, the Tribunal observed that, those items are forming integral part of the plant and machinery and therefore it cannot be considered as civil structure, included in the negative list. Accordingly the claim made by the assesse for input tax credit was allowed in total.

Aggrieved by the said decision the State had filed a petition in Kerala High Court. Among 9 different capital items, the court had referred in case of silos that “With respect to ‘silos’ the Tribunal had placed reliance on the decision in Nowrangroy Metals (P) Ltd. V. JCIT (2003) 262 ITR 231, CIT V. R.G. Ispat Ltd. (2004) 266 ITR 327 and various other rulings, rendered in the subject of Cenvat Credit. Based on those principle, it was held that, merely for the reason that some of the machinery or parts of ‘silos’ are made out of steel and cement, it will not fall within the exempted group of civil structure, not eligible for input tax credit. It further observed that, the ‘silos’ with various machineries form an integral part of it, need to be considered as plant and the ‘steel and cement’ used for construction of the ‘silo’ and the connected machineries, by itself will loss its identity as ‘steel and cement’, but it gets merged as a final plant with a specific purpose. Ongoing through the explanation extracted as above, with respect to the construction, purpose, mechanism and usage of the ‘silos’, we are in perfect agreement with the findings of the Tribunal that ‘silos’ cannot be identified as mere ‘civil structure’ falling within the negative list under SRO 324/2005. The ‘silos’ which forms integral part of the machinery has the real characteristics of a plant or machinery, mentioned in the definition contained in Section 2 (x) of the KVAT Act, which makes them to fall within the category ‘capital goods’ for which input tax credit can be allowed. Thus, input tax credit shall be allowed on construction of silos. The detailed judgement can be read from the below-mentioned link.

https://hckinfo.kerala.gov.in/digicourt/Casedetailssearch/fileview?token=MjExODAwMDAwNjMyMDE3XzEucGRm&lookups=b3JkZXJzLzIwMTc=

Please note aggrieved by the decision of Kerala High Court, the State of Kerala has filed a SLP having a case no. SLP (C) No. 004820 – 004821 / 2022 in the Supreme Court on 28th March, 2022 which is still pending.

Our Conclusion

From the above ITAT & High Court judgement, GST Act, discussion with some subject matter experts, we understand that GST paid on construction of silos may be available for ITC considering same as Plant & Machinery. However, the subject matter is litigative.

Therefore, in our view, the Company should take a legal advice on the same. However, since there is a time limit for availment of input tax credit, the Company could avail the GST – ITC credit in books of accounts without utilisation. Unless GST credit is utilised there is no interest or penalty on the same and once the legal experts give their endowment, the same could be utilised to pay output GST. It is also to be noted that company may take higher depreciation if silo is classified as plant & machinery rather than land & building.

I request subject matter experts to highlight their views on this article.

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Disclaimer: This article is for the purpose of information and shall not be treated as solicitation in any manner and for any other purpose whatsoever. It shall not be used as legal opinion and not to be used for rendering any professional advice. This article is written on the basis of author’s personal opinion and legal provision applicable as on date of writing of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however; if it still persists kindly intimate us to avoid such error for the benefits of others readers.