We know that among all the means of transportation of liquid products (like oil, Gas, water etc) pipeline is the most economical and efficient means of transportation.
A common question arises whether the Input Tax Credit (ITC) is available on pipeline cost. Pipeline cost are of two types
1. Erection cost of pipeline (Capital Expenditure)
2. Maintenance cost of pipeline (Revenue Expenditure)
Let’s examine the above question in light of provisions of Sec 16 and 17 of CGST Act and advance ruling cited on the above.
Section 16 of CGST Act 2017 provides that a registered person shall be entitled to take ITC on goods and services used or intended to be used in the course or furtherance of his business.
So ideally if a person is using the pipeline for the purpose of his business then he should be allowed ITC on the cost incurred for erection as well as maintenance of pipeline.
However Sec 17(5) of CGST Act 2017 (amended from time to time) provides for blocked credit and specifies the list of items on which ITC is not available even if such goods or services are used in the course or furtherance of business.
Among various list of goods and services on which ITC is specifically not allowed, sec 17(5) provides below:
(c) works contract services when supplied for construction of 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 and 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 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
(ii) ….. and
(iii) pipelines laid outside the factory premises
So on the combined reading of Sec 17(5)(c) , 17(5)(d) and explanation following can be concluded:
1. ITC (Input tax Credit) is available on plant and machinery (including the foundation and structural support cost) except on cost of pipeline laid outside the factory premises.
2. So if any pipeline is laid within the factory premises to connect different tanks or machinery then the same will be allowed as ITC.
3. There is restriction of ITC on the cost of pipeline laid outside the factory premises. However there is no restriction on ITC on repairs and maintenance cost incurred for maintaining this pipeline (i.e revenue expenditure)
The same view was taken in case of Western Concessions Private Limited by Maharashtra Appellate Authority for Advance Ruling (dated 22.02.2019) in which ITC on pipeline erection cost outside the factory premises was disallowed.
The above understanding can be summarized below:
|Pipeline Cost||Location of pipeline||ITC availability|
|Capital Expenditure for erection of pipeline||Within the Factory Premises||100% ITC allowed*|
|Outside the Factory Premises||No ITC allowed|
|Revenue Expenditure on maintenance of pipeline||Within the Factory Premises||100% ITC allowed*|
|Outside the Factory Premises||100% ITC allowed*|
*However if such pipeline is used for non-GST products (like petrol, diesel, crude oil etc) then ITC is not allowed.
So in cases where ITC is not allowed, the organization should capitalize such GST cost so that additional depreciation can be claimed under Income Tax Act.