ITC of GST paid on works contract services – Significance of nature of property ‘permanent or movable’ and related accounting treatment

Pursuant to Covid-19, the business across the globe has undergone various changes which not only includes changes in the working methodologies and IT processes but also includes changes in the physical working environment. The Corporate world has understood the meaning and importance about the concept of ‘work from home’.

The buzz of the current industry scenario is to take cost cutting calls and health related measures which are inter alia inclined towards reduction in office space or reshaping the workstations and the entire work space to ensure social distancing.

While undertaking these changes in the architecture of the workplace, it is estimated that hefty amount of money will be spent on interiors which includes both movable as well as immovable property.

From a GST perspective, the above discussed re-structuring of office leaves the taxpayer with the below concerns:

1. Whether receipt of goods and/or services for re-structuring of office or workplace would be treated as Works Contract?

2. If the answer to the above is affirmative, whether ITC is available for the same and if the answer is otherwise, what would be the resultant repercussions?

To answer the above questions, one has to go through the undermentioned key considerations:

A. Definition of Works contract

B. Meaning of Immovable Property

C. Eligibility criteria for taking ITC

D. Related rulings of judicial bodies/AAR/Appellate AAR in respect of goods and/or services availed for works contract or construction purposes

Part A: Definition of Works Contract

Legislation Under GST Under Service tax Regime Under VAT Regime
Relevant provision Section 2(119) of the CGST Act 2017 Section 65B of the Finance Act 1994 Article 366(29A) of the Constitution and various states VAT Legislations
Definition “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract “works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

By virtue of Section 66E of Finance Act, 1994, the service portion involved in the execution of works contract was a Declared service. Accordingly, Service tax could be levied only on the service element of the works contract. The principles of segregation of the value of goods were provided in Rule 2A of Service tax (Determination of value) Rules, 2006.

Article 366(29A) of the Constitution enables the State Governments to levy tax (VAT) on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

Under Rajasthan Value Added Tax Act 2003 the “Works Contract” has been defined under section 2(44). According to this section “Works Contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.

From a bare perusal of the above definitions, one can see that there is a significant change in the definition of Works contract wherein the meaning has been restricted to any work undertaken for an “Immovable Property” unlike the erstwhile VAT and Service Tax law provisions where works contracts for movable properties were also considered.  

Part B: Meaning of Immovable Property

Section 3(26) of the General Clause Act, 1897 defines the term “immovable property” as immovable property shall include land, benefit to arise out of land, and things attached to land or permanently fastened to anything attached to the Earth.

According to Section 2(6) of the Indian Registration Act 1908, “immovable property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth, or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass.

Further, there is plethora of interesting cases defining the scope and manner to decide what is movable or immovable property. Some of them are listed below:

i. Applicability of Central Excise on making of fixtures – Commissioner of Central Excise vs Solid and Correct Enggg Works

ii. Machine with bolts and nuts is movable or immovable property – Official Liquidator v. Sri Krishna Deo and Ors.

iii. Installation of lifts – State Of Andhra Pradesh vs M/S Kone Elevators (India)

iv. Whether paper making machines are movable asset – Sirpur Paper Mills Ltd. v. Collector of Central Excise, Hyderabad

The principles emerging from the above cases which are a guiding factor in deciding a property as movable or immovable are listed hereunder:

a. Post removal, is the identity of goods lost?

b. Whether the machinery or asset in question can be moved without dismantling, Whether the detachment from earth causes substantial damage to the goods?

c. What is the degree and nature/object of annexation, whether the same is required only for operational efficiency?

d. What is the intent of using goods – Whether to remove after a temporary use?

Part C: Eligibility criteria for taking ITC

According to Section 17(5) (c) of CGST Act 2017, ITC in respect of work contract services has been restricted to the recipient when supplied for the construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of work contract service.

Thus, ITC for works contract can be availed only by one who is in the same line of business and is using such services received for further supply of works contract service.

Further, the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

While 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.

Henceforth, under the GST regime while going by the above definitions, if there is a supply by the supplier to recipient which includes both goods and services, then the first test for the purpose of identifying that whether the same is works contract or not, is to identify that the said contract is for any immovable property.

If the answer is yes, then as per Para 6 (a) of Schedule II to the CGST Act 2017 read with the definition of works contracts as contained in Section 2(119) of the CGST Act 2017, it shall be treated as a supply of services.

However, if the answer is no, then the contract will be classified as composite supply or mixed supply depending on the facts and circumstances of the case respectively.

Part D: Related rulings of judicial bodies/AAR/AAAR in respect of goods and/or services availed for works contract or construction purposes

As per Rajasthan AAR in the case of Rambagh Palace Hotels Pvt. Ltd. [2019 (5) TMI 248], it was held that:

1. ITC will not be available to the extent of capitalization of building materials (like cement, bricks etc.) and labour supply meant for repair of building irrespective of the fact whether the same are supplied separately or in a composite manner by way of works contract services.

2. ITC will not be available to the extent of capitalization of electric installations (like cables, switches, NCB, electrical consumables) or Sanitary fittings (like tiles, commode, wash basins) and labour supply meant for repair of electric installations /sanitary fittings irrespective of the fact whether the same are supplied separately or in a composite manner by way of works contract services.

3. ITC will not be available to the extent of capitalization of furniture & fixtures (like wood, mica, paint and other consumables) and labour supply meant for repair of furniture & fixtures irrespective of the fact whether the same are supplied separately or in a composite manner by way of works contract services.

The above ruling laid emphasis on accounting treatment in the books of taxpayer – Whether an expense is capitalised or expenses off.

Classification of an expense between Capital and Revenue is done in the books of accounts as per relevant accounting standards or as per Income tax provisions, however the same is very subjective and may vary from one organization to other.

GST Law does not define the terms capital expenditure and revenue expenditure. Accordingly, one has to refer to their natural meaning or judicial decisions wherever they are defined.

However, there is another ruling which contradicts the principles derived as per the above case.

Karnataka AAR in the case of Embassy Industrial Park Private Limited [Advance Ruling No: KAR ADRG 109/2019 dated 30 September 2019] held that accounting treatment adopted by the taxpayer is of no relevance since what is important is the nature of the item so procured and the same cannot be altered by way of its accounting treatment.

In the instant case, it was observed that the movable inputs so procured by the Applicant does not have an independent existence and are part and parcel of the entire building. Once the immovable property comes into existence, they get merged into the common ‘building space with modern infrastructure facilities’ and hence are excluded from the definition of ‘plant and machinery’ as applicable to Section 17(5) (c) and (d) of the CGST Act.

In view thereof, Karnataka AAR ruled that the input GST credit cannot be availed by the applicant on the inputs i.e., electrical works, pumps, pumping system and tanks, lighting system, physical security system and fire system since comes under blocked credit.


For this, reliance can be placed on the decision of Karnataka AAAR in the case of M/s We Work India Management Private Limited [Order No. KAR/AAAR -17/2019-20] which has come to the rescue of taxpayer. In the instant case, the question before AAAR was whether the activity of fixing the detachable sliding and stackable glass partitions qualifies as “construction of an immovable property” or not, to trigger the restrictions prescribed under Section 17(5) (d) for availing ITC.

According to the Appellant, credit restriction under Section 17(5) is only with respect to inputs/input services that are used ‘for construction of an immovable property’ and the term ‘for’ used in the said provision is more specific than ‘in relation to’. Accordingly, ITC on goods or services which are directly used for construction of immovable property should be disallowed. Further, it was submitted that the detachable sliding and stacking glass partitions are not inextricably linked to the construction itself and, hence, should not be covered under the specific exclusion.

The AAAR with a view to ascertain whether the item is permanently attached to the earth or not, relied upon the two fold tests used by various courts in the past periods which were

(i) Extent of annexation – Annexation of the object or fixture by which it ceases to be detachable and requires demolition for removal.

(ii) Object of annexation – If the object of annexation of the movable property is permanent beneficial enjoyment of the immovable property, the object or fixture becomes an immovable property. On the other hand, if the intent of annexation is the beneficial enjoyment of the movable property, the same will remain movable.

It was held that glass partitions are not permanent and not embedded to earth. They can be dismantled and moved according to the requirements of the clients of the Appellant. Although, the same were fixed to the earth with nuts and bolts, they can be dismantled without demolishing the civil structure. Therefore, the detachable sliding and stackable glass partitions do not qualify as immovable property. Further, the AAAR also give due regard to the accounting treatment of the said goods by the Appellant in the instant case.

Another favourable decision was given by Maharashtra AAR in the case of Nipro India Corporation Private Limited [ARA-33/2017-18/B-41 Mumbai dated 28 May 2018] wherein the AAR bifurcated the details of electrical works and mechanical works embedded in the contract price and allowed credit to the applicant in respect of some portion of these works although the entire contract was taxed under HSN 9954 as ‘works contract service’.

The AAR has duly taken into consideration the definition of works contract and explanations provided under Section 17(5) of the CGST Act 2017 and determined the elements where credit can be allowed as per the provisions contained therein.

Having discussed the above rulings, another decision which merits consideration to complete this Article is that of Orissa High Court in the case of Safari Retreats Private Limited vs. Chief Commissioner of GST. As per the said case, the appellant was engaged in the business of constructing shopping malls and subsequently letting out the same to various tenants. In the instant case, the petitioner had purchased various goods and services for carrying out construction of one such shopping mall. However, due to the restriction imposed under section 17(5) (d) of the CGST Act 2017, the petitioner was not allowed ITC benefit by the revenue authorities.

The Orissa High Court allowed ITC on goods and services used for construction of immovable property meant for letting out for commercial purposes (in the course or furtherance of business). Though, it is a favourable judgement as the High Court has pronounced the ruling considering the intent of the law rather than the plain reading of the provisions contained therein.

However, it needs to be seen, whether the Hon’ble Supreme Court would agree with this view since the Department has filed an appeal against the same in the Apex Court.


To mitigate any dispute from Department side as regards the availment of ITC is concerned in cases where construction of immovable property involves works contract services and supply of goods and/or services akin to movable properties, a taxpayer should consider the below points before taking a final call about credit availment:

1. How he can take the benefit of the recent ruling in the case M/s We Work India Management Private Limited which has set a precedent as to what comes under immovable property where ITC is not allowed.

2. Determination/treatment of GST paid in relation to works contract services for immovable property to the extent of capitalization in the books of accounts.

3. Whether separate SOW’s have been executed for works contract services for immovable property to the extent it is expensed off in the books of accounts.

4. If ITC in relation to receipt of goods and/or services relating to movable property is availed, the same should be supported by appropriate documentary evidence as regards the nature of property is concerned.

Disclaimer: The contents of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, notification and/or circulars/ FAQs issued, information available on Govt. websites etc. before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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