Confusion created by considering supply of air conditioning plant as a composite supply in case of ruling passed by AAR (Maharastra) for M/s Nikhil Comforts.
As GST is a single tax levied across India (right from manufacture of goods/ services till it reaches the end customer), the chain does not get broken and everybody is able to take benefit of the same and there is seamless flow of credit.
Conditions for eligibility and availability of Input tax Credit
As per Section 16, every registered person is eligible to take ITC of goods and services intended to be used in the course or furtherance of business subject to other condition as mentioned in section 16(2) are fulfilled
Blocked Credit- Restrictions on availability of Input tax Credit
Section 17(5) restrict ITC on certain good or service although intended to be used in the course or furtherance of business.
Further Sec 17(5)(c) restrict the credit with respect to
“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”
Further section 17(5)(d) restrict ITC on
“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 2 to section 17(5) 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
Now we discuss the ruling passed by AAR(Maharastra) in case of M/s Nikhil Comforts
Brief facts :- M/s Nikhil Comforts entered into an agreement with Goa State Infrastructure Development Corporation Ltd.(in short GSIDC) for execution of Additional Air-conditioning work for the New building of Director of Education at Porvorim, Goa.” GSIDC desires to get air-conditioning work for new building of Directorate of Education at Goa & Nikhil Comforts has agreed to do the works of supply of goods and services for agreed price.
Questions Sought by applicant:-
” Whether Supply of Air Conditioning plant is “Work Contract Services” , “Composite Supply” or ” Mixed Supply” ???
Submission by applicant:-
Applicant had submitted various documents and information with number of court cases and judgements given by Judiciary system in previous tax laws that ” Air Conditioning Plant is immovable property and the same work is covered under the definition 2(119) i.e Work Contract Services.
If applicant covered under Work Contract Services the rate applicable for discharging liability on work contract services is 9% CGST and 9% SGST. But if applicant covered under the supply determined as per sec 8 i.e Composite Supply and Mixed Supply under 2(30) and 2(74), and the rate applicable to applicant is 14% CGST and 14% SGST.
Facts and Findings- As per concerned officer:
Supply covered under work contract services shall first pass the test of permanency. To see whether the machinery or equipment after installation is permanently fastened or embedded to the earth, so that the activity would be treated as “works contract “under GST.
Plain reading of Section 3 (26), shows that it defines “immovable property as things attached to the earth or permanently fastened to anything attached to the earth.
The term “attached to the earth” has not been defined in the General Clauses Act, 1897, Section 3 of the Transfer of Property Act, however, gives the following meaning to the expression “attached to the earth”:
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls and buildings;
(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached.
As the activities carried out by the applicant does not involve assimilation with the property and the work carried out by the applicant is only making the plant for a ‘wobble free operation’. And thus activity undertaken by the applicant cannot be considered as an immovable property by applying permanency test’.
The officer had putted various case laws and judgement given by higher courts on permanency test of immovable property, the judgement given by supreme court in case of Commissioner of Central Excise, Ahmedabad v Solid and Correct Engineering Works & Ors (2010 (5) SCC 122) is to divide the nature of work into goods and services.
if the ratio of Commissioner of Central Excise, Ahmedabad v Solid and Correct Engineering Works & Ors (2010 (5) SCC 122) is followed the activity of the applicant will be considered as supply of goods and being a natural bundle of goods + services the activity would be considered as Composite supply and the rate of tax of principal supply will be applicable. Therefore, it is requested that the activity referred by the applicant would be termed as composite supply.
Order and Creation of Litigation
Order :- The transaction would not be classifiable to cover under the definition of “works contact” liable to CGST/SGST/IGST. Due to failure to pass permanency test of immovable property.
Litigation:- Supply of Air Conditioning plant is not immovable property covered under the definition of “Work Contract Services”. Hence restriction covered under Sec 17(5)(c) for Non-availability of Input Tax Credit in case of work contract services is not applicable further more.
Order :- The transaction would be classifiable as ” Composite Supply” and the supply is principal supply and the rate applicable on principal supply shall be applied. So the principal supply is supply of Air- Conditioner and the rate applicable for the same is 28%
Litigation:- Supply of Air -Conditioning plant is treated as “Composite Supply” and the principle supply is supply of goods, Hence it covered under definition of Input i.e
“Input means any goods other than capital goods and which are used or intended to be used in the course or furtherance of business”
So As per Section 17(5)(d):- It restrict ITC on “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”
Point of Litigation :- In case of Supplier of Air conditioning plant the authority is treating as Composite Supply and Levying higher rate of tax i.e. 28% to maximize govt. revenue. And at the same time when we look from recipient point of view sec 17(5)(d) restrict ITC ” goods and services used on account of construction of immovable property.
” ARE BHAIYA SUPPLIER kk LIYE PROPERTY IMMOVABLE NHI HHH. TOH RECIPIENT kk LIYE BHI WO IMMOVABLE NHI HONA CHAHIYEH”
From the above dialogue it clearly seems that ITC with respect to Air conditioning plant to recipient will be available.