In re GACL NALCO Alkalies & Chemical Pvt. Ltd. (GST AAR Gujarat)
Whether GNAL is entitled to claim Input Tax Credit of the GST paid on the services provided by GACL in the form of agreeing to surrender/ relinquish its rights in the leasehold property in favour of GNAL?
Law makes it explicitly clear that ‘plant and machinery’ excludes land, as laid down in explanation following Section 17(5) CGST Act.
There must be an intent of Legislature to explicitly exclude the word ‘land’ in the expression. With this expression of Plant and Machinery excluding land, explicitly incorporated in the Blocked Credit section 17(5) CGST Act, We hold that Legislature has expressed its intent that ITC shall not be available in respect of services pertaining to land received by a taxable person for construction of an immovable property on his own account including when such services are used in the course or furtherance of business.
For if there was no such legislative intention, the word ‘land’ need not have been used in the said exclusion expression of ‘plant and machinery’.
The power plant civil and structural works shall cover all buildings, structures, equipment & structure foundations required for installation of the power plant.
Thus we hold that subject GST borne by GNAL is blocked credit under Section 17(5)(d) CGST Act for the land leased to it will be for the construction of civil structures, administrative block/ factory et al. Thus the plain meaning of the words of Section 17(5)(d) blocks the subject amount from credit admissibility.
GNAL during personal hearing informed that the construction activities and installation of their plant and machinery shall be capitalised and reflected in the financial accounts as ‘Plant and Machinery’. We are of the opinion that treatment of capitalising an expenditure under ‘ Plant and Machinery’ in the Balance Sheet does not have a bearing on the blocking of GST portion borne by GNAL for the subject leasing activity, as the subject leasing service received by a GNAL for the new construction of immovable property such as factory building/ shed/ administrative block, et al by GNAL. Also, GNAL have given us a faint impression that certain of their pipes fitted on supporting structures may be installed in the open, i.e, outside a shed but on a supporting structure. We are of the opinion that the proportion of plot area used for the construction of civil structures/ administrative block/ factory/ building sheds (having plant and machinery inside it ) vis-a-vis the proportion of plot area used for installation of pipes fitted on supporting structures in the open on the land, if that be the case, cannot be taken as a basis for awarding a proportionate credit, for the CGST Act and Rules have not envisaged such a mechanism to award proportionate credit for GST in such cases.
AAR held that GST amount borne by GNAL on subject service received is blocked credit vide Section 17(5)(d) CGST Act and thereby ineligible for availment.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, GUJARAT
M/s GACL-NALCO Alkalies & Chemicals Private Limited (hereinafter referred to as GNAL for the sake of brevity) is a joint venture of M/s. Gujarat Alkalies and Chemical Limited (hereinafter referred to as “GACL”) and National Aluminium Company Limited. GNAL is engaged in the production of caustic soda and submits that it is developing a Greenfield project of caustic soda plant.
2. GIDC leased/ allotted a plot of land at Dahej Industrial Estate to GACL . On 31-1017, GACL approached GIDC for a sub-division of the plot and had surrendered its leasehold rights of 3,91,000 sq. mtrs. of land in favour of GNAL . Thus GNAL was allotted the said plot on long-term lease for developing a greenfield project of caustic soda plant vide Deed of Rectification executed between GIDC and GNAL on 8-1-18, for which GACL invoiced GNAL for Rs. 85,89,97,520/- (72,79,64,000/- as consideration plus GST of Rs. 13,10,33,520/-) for the act of agreeing to surrender/ transfer its leasehold rights of the plot in favour of GNAL.
3. GNAL submits as follows:
(i) One time consideration paid by GNAL to GACL cannot be taken as Sale Price of the Land on the ground that it is neither the Sale of Immovable Property nor is the Sub-Lease of Property. As the ownership of the land remains with GIDC permanently and hence it is just an act of relinquishment of rights in the Leasehold Land. Hence, the said transaction doesn’t fall under the purview of Section 17(5)(d).
(ii) The rights in the plot of land have been acquired by the GNAL for developing a Greenfield project for manufacturing caustic soda. Therefore, one can conclude that the consideration paid by the GNAL to GACL towards acquiring the rights over the plot of land is in the course of or for the furtherance of business.
4. GNAL has satisfied all the conditions laid down under Section 16 (2) of CGST Act in order to be eligible to claim Input Tax Credit and is of the view that the Input Tax Credit shall be available to it.
5. GNAL vide its letter dated 23-9-21, submitted as follows:
a) Kind attention is invited to Section 16(1), 2(17), 2(62), 2(63), 17(5)(d) of the CGST Act 2017. For the purposes of GST laws, it can be construed that ITC of tax charged on any supply of goods or services can be availed qua activities in relation to the business/ furtherance of its business. The Applicant company is engaged in the business of manufacture and supply of Caustic Soda and in order to undertake manufacturing of Caustic Soda, they have acquired the leasehold rights from its promoters as per the agreement of Joint shareholders agreement and is setting up Caustic Soda and Captive Power Plant on the leased property to manufacture Caustic Soda. After manufacturing of Caustic Soda through aforesaid two plants, the Caustic Soda which will be supplied to customers including its promoters, which qualifies as taxable outward supply under GST.
b) As the leasehold rights are acquired for setting-up including erection, installation and commissioning of the said two plants for rendering taxable outward supplies, ITC of GST chargeable on transfer of leasehold rights should be eligible in terms of Section 16 of the CGST Act as the same is to be used in the course or furtherance of business.
c) Section 17(5)(d) of the CGST Act provides for restriction on availment of ITC qua the goods and/or services received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business. However, the said provision carves out a specific exception for construction of ‘Plant and Machinery’. Test of movability/immovability is, therefore, immaterial to determine the eligibility of ITC once the items in question qualify as ‘Plant and machinery’. As the two plants are intended to be used for manufacture and supply of Caustic Soda by them, it qualifies as a ‘Plant and Machinery’.
d) The said two plants once fully constructed, will be capitalized as a ‘Plant and Machinery’ in their Books of Accounts. Hence the facts of the present case do not fall under any of the exclusion category stipulated under the definition of ‘Plant and machinery’. In other words, as Caustic Soda Plant & Power Plant qualify as a ‘Plant and machinery’, GST chargeable, if any, on transfer of leasehold rights is rightly admissible to them as the bar placed under Section 17(5)(d) of the CGST Act does not apply in a case where goods and/or services are procured for construction of a ‘Plant and Machinery’.
e) The criteria for eligibility and conditions to take input tax credit of Central Goods and Service Tax (‘CGST’) and State Goods and Services Tax (‘SGST’) have been prescribed under Section 16 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) and Section 16 of the Gujarat State Goods and Services Tax, Act 2017 (‘SGST Act’) respectively. Section 16(1) of the CGST Act and SGST Act allows a registered person to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. Therefore, in order to avail credit, the person should be a ‘registered person’ and the services supplied to him should be used in the course or furtherance of his business.
f) The words “input service” have been defined in section 2(16) the CGST Act, 2017 and SGST Act, 2017 as follows:
“input service ” means any service used or intended to be used by a supplier in the course or furtherance of his business.”
The definition of input service is inclusive and not exhaustive. The statute has enlarged the scope of input services by the usage of the word “any service”. The definition does not provide for only specific activity relating to supply. Thus, all input services used in activities in relation to or for furtherance of business are ‘input services’, whatever may be its purpose. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. The definition of input service seeks to cover every conceivable service used in provision of outward supply. Therefore, the charges for lease of land is an input services in terms of section 2(16) of the CGST Act, 2017 and SGST Act, 2017.
g) The word “business” is to be understood as continuous activity and not confined or restricted to mere manufacture of the product or provision of a service. Activities in relation to the business cover all activities that are related to the functioning of the business. Words “in the course or furtherance” further widens the scope. The functions primarily encompass the entire gamut of activities involved in the process of manufacture of goods or provision of service. The other functions are in the realm of obligations – some self-imposed and others by way of laws enacted for the welfare of the working class. The definition of ‘input services’ clearly highlights the dichotomy of multifarious functions any business organization is required to undertake while pursuing their objectives. Therefore, it is apparently clear that the lease charges paid for land has been used in course of business and eligible for input credit under Section 16(1) of the CGST Act, 2017 and SGST Act, 2017.
h) GST is basically value added tax, which, in turn, is a destination based consumption tax. It is a consumption tax which ultimately must be borne by the consumer. It is operative through credit mechanism wherein the input relief is to neutralize cascading effect of tax. A “consumption tax” derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business companies are allowed to take credit of tax paid on inputs supplied/received by them. If therefore input credit is denied to the input service received by the assessee, they will become burden to the assessee, which is against the very grain or principle of GST being a consumption tax. Therefore, the Applicants are eligible to avail input credit of GST paid on lease charges of land.
i) Section 16(2) of CGST Act and SGST Act lays down the pre-conditions to avail input tax credit. The conditions prescribed under Sec 16(2) of the Act are as follows:
i) Possession of Tax Invoice : They are in possession of tax invoice issued by the lessor.
ii) Receipt of Services: They entered into a long-term lease agreement with the lessor vide Lease Agreement dated 8th January 2018. Accordingly, the effective date of commencement of lease is 8th January, 2018. They have the legal right over the land and are in possession of land (for achieving their objective of furtherance of business by construction of plant and machineries for setting up the Caustic soda plant and Power Plant) with effect from 8th January 2018 and as such they are in receipt of services.
iii) Payment of tax: They have already paid tax of Rs.13,10,33,520/- to the lessor and the payment of tax by the lessor to the Government is evident from the copy of GSTR-2A returns. The screenshot of the GSTR 2A return available online is attached herewith and marked Annexure-1.
j) Section 17(5) of the CGST Act, 2017 and SGST Act, 2017 provides the list of input services on which input credit is not available. Section 17(5) of the CGST Act, 2017 and SGST Act, 2017 is reproduced below for your ready reference.
“(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:-
(a) motor vehicles and other conveyances except when they are used –
(i) for making the following taxable supplies, namely:-
(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods;
(b) the following supply of goods or services or both:-
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
(iii) rent-a-cab, life insurance and health insurance except where —
(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
(iv) travel benefits extended to employees on vacation such as leave or home travel concession;
(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 re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.”
k) GST paid by the applicant company on the lease charges doesn’t get covered in the ineligible list of input services as reproduced above. Moreover, the Hon’ble Supreme Court in Bajaj Tempo Ltd. Mumbai v. CIT (1992) = 1992 (4) TMI 4 – SUPREME COURT observed that while interpreting the statute, provision granting incentives for promoting economic growth and development should be liberally construed. Restriction placed on it by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision. Therefore, the leasing service received by them is not an ineligible input service and they have rightfully availed services on the same.
l) Schedule III of the CGST Act, 2017 provides the list of activities or transactions which shall neither be treated as a supply of goods nor a supply of services. Clause 5 of Schedule III includes sale of land or building and as such sale of land will be regarded as outside the scope of GST. The activity of leasing of land is not included in Schedule III of Act and as such the activity of leasing of land amounts to Supply under Section 7 of the Act. Further, the activity of leasing of land has specifically been included in Schedule II of GST Act as supply of service and is thus liable to GST. In order to substantiate the same the Applicant would like to refer the recent judgement by Hon’ble High Court of Bombay in Builders Association of Navi Mumbai & Anr. Vs. Union of India and Ors [TS-108-HC-2018 (BOM) – NT] = 2018 (4) TMI 461 – BOMBAY HIGH COURT wherein the Hon’ble High Court held that :
“…………… expression “supply ” includes all forms of supply of goods and/or services made or agreed to be made for a consideration by a person in the course or furtherance of business, and activities enlisted under Schedule II either as supply of goods or services would also be included therein;…. As per Schedule II of CGST Act (Item No. 2), any lease, tenancy, license to occupy land and lease / letting out of a building for business is a supply of ‘service’,. “Once this law, in terms of the substantive provisions and the Schedule, treats the activity as supply of goods or supply of services, particularly in relation to land and building and includes a lease, then, the consideration therefore as a premium/one-time premium is a measure on which the tax is levied, assessed and recovered.”; ……………………. it is entirely for the legislature to exercise powers conferred by Section 7(2) of CGST Act and issue requisite Notification sans which, merely going by status of CIDCO, it cannot be held that lease premium would not attract / invite liability to pay GST;
In view of the above judgement, it is clear that the activity of leasing of land is liable to GST as supply of service and accordingly, they are eligible to avail the GST levied by the lessor on supply of land on lease.
m) Thus, in the absence of any restriction on availment of credit under the GST Act on tax paid on leasing of land service (as an objective of furtherance of business for the construction of plant and machineries for setting up Caustic Soda plant, as explained above) and fulfilment of all the conditions to avail credit, the Applicants are eligible to avail credit of CGST and SGST paid to lessor on acquiring land on lease for business activities.
6. GNAL vide its letter dated 30-9-21, submitted as follows:
i We have already obtained GST registration on 01.07.2017 and our Dahej Plant site address has been added as Additional Place of Business in our Registration Certificate. The copy of our Registration Certificate is submitted herewith as Annexure – 1.
ii We hereby confirm that, no residential colony has been constructed till date and the Company does not have any plan to construct any residential colony in future on the above land for the Project Site at Dahej for which GACL has agreed to surrender their leasehold rights in favour of GNAL.
iii The total area of land for the project site is 3,90,999.90 sq.mtrs. (aggregate of 35,830.50 Sq.mtr. for Plot No. D/II/9/1 & 3,55,169.40 sq.mtr. for Plot No.D/II/9/2). The land is utilised for the construction of Caustic Soda Plant & Power Plant as per the guidelines and compliances prescribed by GIDC and also required for the environment clearance by GPCB as well as the requirements of the Factories Act.
iv In order to operate and maintain the plant safely, the company has provided supervisory and controlled units for offices of supervisory staff required for safe operation and maintenance of the plants. The total area of land utilised exclusively for this purpose is 580 Sq.Mtrs. which is amounting to 0.148% (less than 1%) of the total land area of 3,90,999.90 Sq.Mtrs.
v Based on the above details, the proportion of the consideration paid to GACL and the GST amount has been worked out for (a) Land Area used for the construction of Caustic Soda Plant and Power Plant and (b) Land Area utilised for the construction of supervisory / controlled units are as under:
