ITC on Works Contract’ of Construction of ‘Integrated Factory Premises’

In re Coral Manufacturing Works India Private Limited (GST AAR Tamilnadu)

The applicant claims the Input Tax Credit of the GST paid on the Steel, cement and other consumables used in proportion to the additional reinforcements. From the submissions, it is seen that the applicant has procured composite supply of works contract of increased foundation and structural support laid from the Subground level and added to the walls of the building, to strengthen the load bearing capacity. The applicant claims that as the side walls/factory foundations are strengthened for the bearing of the load of ‘Plant and Machinery’, the same should be considered as foundation for ‘Plant and Machinery’ and the proportionate GST paid on Steel, Cement and other consumables used are to be eligible for credit as ‘Plant and machinery’. In the case at hand, the supply received by the applicant results in construction of a civil structure which is in the form of a factory. The factory is nothing but a building where people use machines to produce goods or services or both. The foundation and walls though are strengthened is again only a part of the factory, which is in the genre of ‘Civil Structure’. Any factory premises will be designed and constructed to support the ‘Plant and Machinery’ to be housed in it for the operation/ production of the goods for which such factory is intended. The entire construction of the ‘Integrated factory premises’ with the strengthening of the walls, increase in the volume/ size of plinth beam, etc are only part of Civil structures of the Factory housing the ‘Plant and Machinery’ and are not the foundation with which such ‘Plant and Machinery’ are fixed to earth. The same, at best is an added measure to bear the load of the ‘Plant and Machinery’ installed in the factory. Therefore, the additional foundation/beams are to be considered as ‘any other civil structure’, excluded from the explanation of ‘Plant and Machinery’. Further, it is seen that the works are procured as ‘composite supply of Works Contract’ in which the supplier raises invoices only for “Works’ executed at the milestones as has been agreed in the agreement and it has not been established that the applicant makes the individual supply of Steel, Cement and other consumables and the invoices are in their names, which is again a pre-condition for availment of credit.

To sum up, the applicant procures services of Works Contract’ of Construction of ‘Integrated Factory Premises’ designed to take the load of various ‘Plant and Machinery’ to be housed for operations. The incremental foundations made is not the ‘foundation with which the Plant and Machinery are fixed to earth’, which is held as eligible along with the ‘Plant and Machinery’ as per the Explanation under Section 17 of the GST Act. Also, the applicant has not established that they individually procures steel, cement and other consumables for the works executed by their suppliers, thus the invoices for such goods have not been established to be in the name of the applicant. Therefore, the credit of steel, cement and other consumables even in proportion to the incremental volume of the earth foundation, side walls, beams, etc are not available as credit to the applicant. No ruling is extended on the ‘Pre-cast, Reinforcements, supports’ said to have been purchased as it is by the applicant and ‘Other Capital goods’ as the required facts of procurement and documentary substantiation is not made before us.

Read AAAR Order: ITC Eligibility on Structural Support for Overhead Crane & Integrated Factory Building

FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, TAMILNADU

Note: Any appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai under Sub-section (1) of Section 100 of CGST ACT/TNGST Act 2017 within 30 days from the date on which the ruling sought to be appealed against is communicated.

At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.

Coral Manufacturing Works India Private Limited, No. 150, Villarasampatti Naal Road, Nasiyanur Road, Villarasampatti, Erode, Tamil Nadu, 638 107. (hereinafter called the ‘Applicant’) is registered under GST Vide GSTIN 33AAICC4646F1ZT. They have sought Advance Ruling on the following questions:

Whether input tax credit of GST is admissible for supply of the following goods :-

(a) steel, cement and other consumables (Annexure attached) to the extent of their actual usage in the execution of the works contract service when supplied for construction of immovable property, in the form of the factory which is an Integrated Factory building with Gantry Beam, which in turn used for mounting across the pre-cast concrete beams, poles and over which the crane would be operated;

(b) Structures, Pre cast, reinforced concrete beams, poles etc. (purchased as it is) which are used as supports to mount and operate the crane over 10 metres from ground, as shown in the pictures attached; and

(c) Other capital goods, like rails which are fixed over the concrete arms for smooth travel of the over-head crane

The Applicant has submitted the copy of application in Form GST ARA – 01 and also submitted a copy of Challan evidencing payment of application fees of Rs.5,000/- each under sub-rule (1) of Rule 104 of CGST rules 2017 and SGST Rules 2017.

2.1 The Applicant has stated that they are in the process of completing the establishment of an Integrated Factory Building to manufacture and supply generators for wind operated electricity generators (WOEG). They suffer input tax on building materials such as steel, cement, structures, Pre cast, reinforced concrete beams, poles etc. and also works contract service, all supplied for construction of an immovable property in the form of the Integrated Factory Building with pillars and Gantry Beams, which support mounting, operations of crane over 10 metres from ground and other capital goods, like rails which are fixed over the concrete arms for smooth travel of the crane.

2.2 They have stated that according to Explanation in section 17 of the GST Act, ITC is available for works contract services received by them when supplied for construction of foundation or structural support for apparatus, equipment, and machinery fixed to earth by such foundation or structural support. They have stated that there is no definitive provision when such foundation or structural support simultaneously carries the load of a roof or function as side wall also, although the role of the foundation or structural support to the crane and other capital goods may be considered to be significant and dominant than their role to the roof / side walls. Hence advance ruling is sought on the extent of ITC eligibility for goods and services which get consumed in Annexure specified activities and other capital goods, like rails which are fixed over the concrete arms for smooth travel of the over-head crane, for the specific end-use to which these goods are put to.

3.1 Due to the prevailing PANDEMIC situation and in order not to delay the proceedings the applicant was addressed through the Email Address mentioned in the application to seek their willingness to participate in a virtual Personal Hearing in Digital media and hearing was scheduled to be heard on 22.10.2021. The applicant sought adjournment, which was acceded to and the case was posted for hearing again on 09.11.2021. The applicant vide their e-mail dated 26.10.2021 communicated that they preferred to be heard physically and not virtually. The hearing was held on 26.11.2021.

3.2 The Authorized representative, Shri. V. Ravindran, Advocate appeared for the hearing and reiterated the submissions. He submitted a synopsis and purchase order for the reinforcement work (sample). He stated that Beam and the walls are strengthened to take the load of the moving crane for daily operation of WOEG, though these walls and beams are part of the factory. They are getting it done as Works Contract Service (WCS) and the invoice of steel, cement etc., are not in their name. It was stated that the entire WCS is being capitalized in their books of accounts. He further stated that the ruling is sought on whether they are eligible for ITC on the WCS service, rails installed on the beams which will become immovable property. The authorized representative stated that they claim credit proportionate to the incremental quantity required to support the construction towards the plant as the structure is not only a plant but also housing the plant. The indicative plan of the support structure; the invoice copies/Purchase orders/ Agreement for Works Contract Services for which ITC is sought for goods/services mentioned in the application; the details of whether credit has already been availed; details of returns filed with copies; certified accounts to establish the capitalization; working of the proportionate claim certified by Cost Accountant/Certified Engineer were asked to be furnished.

3.3 In the Written synopsis submitted during the personal hearing on 26-11-2021, it was inter-alia stated that:-

(a) Their factory is being constructed with usual concrete foundation. Earth work, foundation, plinth beams, and tie beams are designed to support the precast concrete gantry beams.

(b) The civil engineering is done at enhanced levels for the erection of the gantry beams and eventual mounting and operation of the overhead cranes. The civil engineering on the above aspects at a higher level is not at all needed for the normal requirements for the construction of a conventional factory building comprising merely the walls and roof. The higher extent of the civil works in the present case is essentially to meet the need to install the gantry, rails with a view to install and operate the overhead cranes. Incidentally, the above said stronger structure supports the roof and sidewalls of the factory also.

(c) Additionally, considering the nature and activity of the factory, its pillars and gantry beams to support the mounting, and operations of overhead cranes, were also designed and erected.

(d) Rails etc. are being fixed over the concrete structure for the overhead crane movement.

(e) In other words, the stronger civil structure of the factory as explained above is sine qua non for the installation of the plant and machinery viz. the overhead cranes on the rails. Such stronger structure is used to bear the additional load/range of force and pressures that may arise to the structure on account of the movement of the overhead cranes by themselves and the weight (load of materials/components) that these cranes would be handling (while lifting, moving, shifting) besides the weight of the sidewalls and the roof for the factory as well.

(f) It would be duplication to create an envelope of another set of normal civil works and structures to raise the sidewalls and to rest the factory roof to house the said plant and machinery and such duplication would not be contributing to the value addition for the end-products made.

(g) The said foundation and structural supports are used to fix the apparatus, equipment, and machinery namely the gantry, the rails and the overhead cranes. The said foundation and structural supports are constructed by means of the inward supply of Steel, Cement and other building materials listed in the application, reaching the applicant through the works contract service for the erection of the plant and machinery. Consequently, it does not fall within the exclusion of “any other civil structures” (emphasis added} in the Explanation under Section 17 of the CGST Act. For this submission, we place emphasis on the word used in the said explanation viz. “other”, which expression is crucial. It is obvious that the supplies (of goods and services) for civil structure towards construction of plant and machinery which require such foundation and structural support are excluded here in this Explanation by the word “other”.

(h) Section 17(5)(c)&(d) with the Explanation thereto make it amply clear that the construction of plant and machinery that, by definition, are fixed to earth by foundation or structural support is outside the list of “blocked credits” enumerated in Section 17(5). Therefore, the GST suffered by the applicant on the tax invoices for the inward supplies for such foundation and structural support for the gantry are eligible for input tax credit. They place reliance on the ratio of the decision of the Honble Supreme Court in the case of Jayaswal Neco Ltd. Vs Commissioner of Central Excise, Raipur [2015 (4) TMI 569 S.C.] in support for favourable ruling of ITC eligibility to the GST paid on goods mentioned in the application dated 26.07.2021. They also place reliance on the Ruling given by this Authority on 31.03.2021 in the case of M/s. SHV Energy Private Ltd., [TN/ 10/ARA/2021] [reported in 2021 (4) TMI 882 – AUTHORITY FOR ADVANCE RULING, TAMILNADU], wherein the admissibility to ITC was affirmed in similar situation.

(i) Such foundation and structural support bearing the load of factory walls and the roof does not detract from the fact of such special/additional and secured foundation and structure being essentially to install the plant and machinery of the overhead cranes, along with the other goods mentioned in the application dated 26.07.2021. They will not claim ITC for the GST suffered for the construction of the sidewalls and the roof for the factory.

Further they will be capitalizing the in their books of accounts as Plant and Machinery and not as Immovable Property.

3.4 The applicant furnished the following Additional documents on 08-12-2021 in pursuance of the virtual personal hearing held on 26-11-2021:-

1. Indicative plan of factory, plant and machinery

2. Invoice copies (supply of works contract service plus supply of goods)

3. Agreements dated 04.08.2020 with Teemage Builders Pvt.Ltd. their letters 02.09.2020, 04-09-2020, and 22-10-2020

4. GSTR1 and GSTR3B filed for January 2020 to October 2021

5. Chartered Engineer’s certificate

6. Chartered Accountant’s certificate for capitalization of plant and machinery, based on which the proportionate claim of ITC was made

7. CD showing the inauguration of the plant & photos

4. The Center Jurisdictional Authority, vide their letter TECHN/Misc/72/2021/CRU dated 06.09.2021 submitted that there are no pending proceedings in the applicant’s case in their jurisdiction on the issue raised by the applicant in the application and has further stated that the ITC is not admissible for all the mentioned goods and services as per Section 17(5)(d) of the Act.

5.1 The State Jurisdictional Authority, Assistant Commissioner (ST) Thindal Assessment Circle, Erode, who has the administrative Jurisdiction over the applicant has remarked that According to Explanation in section 17(5)(c ) and 17(5)(d) of the CGST Act 2017 the applicant seems to be not eligible to avail ITC on the civil constructions of an immovable property.

5.2 The State Jurisdiction Officer was requested vide this office letter Rc.Al/409/2021, dated 14.12.2021 to cause verification of the all the ITC availed in the returns GSTR 3B under the column SI. No.4A(5) from the months January 2021 to October 2021 for which they have filed the application for Advance Ruling to ascertain whether the credit, the eligibility of which is now sought has been availed before filing of this application. The State Jurisdiction Officer reported vide letter Ref.No. 1223/2021/A4 Dated : 01.03.2022 that the tax payer has availed an amount of Rs.2,44,47,231.00 towards ITC for the invoices received for the Services rendered (HSN Code:9954) for the month of March-2021 and reflected the same in the Electronic Credit Ledger as per Monthly returns filed in GSTR 3B for the month of September-2021 filed on 20.10.2021 (Total ITC for the month of September-2021 is Rs.2,45,09,694/-)

Further it was reported that on verification of the Credit Ledger of the applicant revealed that they have not utilized ITC for the period of January-2021 to October-2021 for the Goods and Services for which advance ruling is sought for and they had enclosed the following documents for verification.-

1. Copy of Purchase Bills – 8

2. Copy of Ledger-2

3. Copy of Sep-2021 – GSTR-3B return-1

4. Copy of Credit Ledger-1

6.1 We have gone through the facts of the case, oral and written submissions made by the applicant as well as the Jurisdictional Officers and the applicable provision of the GST Laws in this regard. The applicant has stated that they are in the process of completing the establishment of an Integrated Factory Building, to manufacture and supply generators for wind operated electricity generators (WOEG) and that they suffer input tax on purchases of building materials such as steel, cement, structures, Pre-cast, reinforced concrete beams, poles etc., and works contract services, all supplied for construction of an immovable property in the form of the above mentioned Integrated Factory Building with Pillars and Gantry Beams, which support mounting, operations of crane over 10 meters from ground and other capital goods, like rails which are fixed over the concrete arms for smooth travel of the crane. They have sought ruling on the following:-

Whether input tax credit to GST is admissible for supply of the following Goods and Services

(a) Steel, Cement and other consumables to the extent of their actual usage in the execution of the works contract service when supplied for construction of immovable property, in the form of the factory which is an Integrated Factory building with Gantry Beam, which in turn used for mounting across the pre-cast concrete beams, poles and over which the crane would be operated:

(b) Structures, Pre cast, reinforced concrete beams, and poles etc., (purchased as it is) which are used as supports to mount and operate the crane over 10 metres from ground, as shown in the pictures attached: and

(c) Other Capital goods, like rails which are fixed over the concrete arms for smooth travel of the over-head crane.

The above question relates to the eligibility of the GST paid on the goods/services received by the applicant as ITC. From the verification report of the State Jurisdiction Officer, it is seen that the applicant has ‘e’ filed their application on 23-7-2021 and submitted the hard copy of the same with the Registry on 26-7-2021 and the ITC on purchases in question amounting to Rs.2, 45, 09,694/- has been availed by filing the return in form GSTR 3B for the month of September 2021 on 20.10.2021 by the applicant. In the circumstances stated above it is ascertained that the application in form AR AOI has been filed well before the availing of the subject ITC and there is no pending proceedings before the State Jurisdiction Officer on this aspect at the time of filing of this application. Therefore, the application is admitted for issuing advance ruling on merits.

7.1 The applicants have stated that they have suffered input tax on building materials such as Steel, Cement, and other consumables, Structures, Pre-cast, reinforced concrete beams, poles etc., and also works contract service for construction of the factory building. They would not claim ITC for the GST suffered goods for the normal construction of the sidewalls and the roof for the factory and wanted to ascertain whether they are eligible to avail and utilize ITC on goods purchased for the civil engineering done at the enhanced levels for the erection of the gantry beams and eventual mounting and operation of the overhead cranes as they would be capitalizing in their books of accounts as plant and machinery and not as immovable property. Also they have claimed their eligibility to credit in respect of Structures, Pre-cast, Reinforced concrete beams, Poles, etc purchased as such, used as support to mount and operate the crane; and other capital goods like rails which are fixed over concrete arms. Thus, the issues to be decided before us is whether the credit of GST tax paid on the (1) Steel, Cement and other consumables used for reinforcing the foundation and structures is available to them in proportion to the increase in ‘foundation/structural support’ (2) Pre-casts, reinforcements, supports(procured as such) and (3) other capital goods, like rails.

7.2 The applicant has furnished ‘Proposed Construction of an Industrial Building -Description of the Structure’ certified by a Structural Engineer, which gives the ‘Item of Work’ for ‘Scenario-A-Isolated Factory Building alone (Without integration with Gantry beam structure)’ and ‘Scenario B(Actual)-Integrated Factory Building(Integrated with Gantry Beam)’. From this it is seen that in respect of Integrated Factory Building, in addition to the standard requirements for an Isolated factory building’, there is ‘Increment in volume’ of Earth work Excavation, Foundation, Column to Stub/Floor level, Foundation refill; Increment in the size of Plinth Beam& Precast Tie Beam and Precast concrete Gantry Beams at the required heights to mount crane rails.

7.3 The applicant has furnished copy of agreement entered into by the applicant with M/s. Teemage Builders Private Limited dated 4th August 2020, in reference to the quotation Ref: Teem/sales/mvk/2002021/005 and the said quotation is not furnished. Therefore, the scope of work covered under this agreement is not explicit. The applicant has furnished copies of Invoice Sl.No.40/dt.24.03.2021 raised by M/s. ARCONS and it is seen that the same has been issued towards execution of works involving Civil work, Plumbing work, Bio-Digestive system and supply and installation of HVLS Fans. It is noticed that these supply of goods and services have been used for construction of the building for housing the factory and is not for commissioning any kind of plant and machinery. They have furnished copies of Invoices raised on them by M/s Teemage Builders (P) Ltd., with whom, they have entered into an agreement for carrying out the works connected with the Design and constructions of Industrial Building Using Precast Technology. The details of the furnished invoices are as follows:

Perusal of the agreement and above invoices reveal that all pertain to Composite supply of Works Contract services of Construction falling under SAC 9954 and availed towards construction of factory premises to the applicant. It is the contention of the applicant that as per the Explanation in Section 17 of the GST Act, ‘Plant and Machinery’ includes foundation and Structural Supports, however there is no definitive provision when such foundation or structural support simultaneously carries the load of a roof or function as side wall also. The applicant has not furnished any documentary proof for purchase of the Pre-cast/supports, as it is, for which the credit eligibility is sought. Also, the applicant has sought their eligibility to credit in respect of other capital goods like rails. Again the applicant has not furnished the details of ‘other capital goods’ and also the factual details as to whether ‘rails’ are procured by them per-se, or rails are also laid as a part of Works Contract services. The agreements and the copies of Invoices furnished in support of the questions raised by them shows that they have availed the services of Works Contract’ of construction of Integrated Factory.

7.4 Advance ruling is a facility extended to the applicants to have clarity on applicable taxes and the eligible credits based on the facts. In the case at hand, from the submissions, it is seen that the applicant procures services for construction and has not furnished any documentary substantiation for having procured ‘Pre-casts, Reinforcement concrete slabs, other supports’, as it is, as claimed by them and the details of specific Capital goods for which the eligibility to credit is sought. Ruling can be extended only on verification of the facts and therefore their eligibility to credit in respect of ‘Pre-casts, Reinforcement concrete slabs, other supports’ and ‘the Capital goods’ cannot be answered for want of substantiating documents. Thus, the question whether they are eligible to credit of GST Paid on Steel, Cement and other consumables in proportion to the increased volume of foundation adduced to the construction of factory building is alone taken up for decision.

8.1 The contentions raised by the applicants are examined with reference to the relevant provisions of the Goods and Services Act 2017. Section 17(5) (d) and the relevant explanations under the GST Act and definition of ‘Immovable Property’ under General Clauses Act is as follows:-

(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:-

(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 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- (i) land, building or any other civil structures; (ii) telecommunication towers; and (Hi) pipelines laid outside the factory premises.

8.2 The applicant claims the Input Tax Credit of the GST paid on the Steel, cement and other consumables used in proportion to the additional reinforcements. From the submissions, it is seen that the applicant has procured composite supply of works contract of increased foundation and structural support laid from the Subground level and added to the walls of the building, to strengthen the load bearing capacity. The applicant claims that as the side walls/factory foundations are strengthened for the bearing of the load of ‘Plant and Machinery’, the same should be considered as foundation for ‘Plant and Machinery’ and the proportionate GST paid on Steel, Cement and other consumables used are to be eligible for credit as ‘Plant and machinery’. In the case at hand, the supply received by the applicant results in construction of a civil structure which is in the form of a factory. The factory is nothing but a building where people use machines to produce goods or services or both. The foundation and walls though are strengthened is again only a part of the factory, which is in the genre of ‘Civil Structure’. Any factory premises will be designed and constructed to support the ‘Plant and Machinery’ to be housed in it for the operation/ production of the goods for which such factory is intended. The entire construction of the ‘Integrated factory premises’ with the strengthening of the walls, increase in the volume/ size of plinth beam, etc are only part of Civil structures of the Factory housing the ‘Plant and Machinery’ and are not the foundation with which such ‘Plant and Machinery’ are fixed to earth. The same, at best is an added measure to bear the load of the ‘Plant and Machinery’ installed in the factory. Therefore, the additional foundation/beams are to be considered as ‘any other civil structure’, excluded from the explanation of ‘Plant and Machinery’. Further, it is seen that the works are procured as ‘composite supply of Works Contract’ in which the supplier raises invoices only for “Works’ executed at the milestones as has been agreed in the agreement and it has not been established that the applicant makes the individual supply of Steel, Cement and other consumables and the invoices are in their names, which is again a pre-condition for availment of credit.

9 . To sum up, the applicant procures services of Works Contract’ of Construction of ‘Integrated Factory Premises’ designed to take the load of various ‘Plant and Machinery’ to be housed for operations. The incremental foundations made is not the ‘foundation with which the Plant and Machinery are fixed to earth’, which is held as eligible along with the ‘Plant and Machinery’ as per the Explanation under Section 17 of the GST Act. Also, the applicant has not established that they individually procures steel, cement and other consumables for the works executed by their suppliers, thus the invoices for such goods have not been established to be in the name of the applicant. Therefore, the credit of steel, cement and other consumables even in proportion to the incremental volume of the earth foundation, side walls, beams, etc are not available as credit to the applicant. No ruling is extended on the ‘Pre-cast, Reinforcements, supports’ said to have been purchased as it is by the applicant and ‘Other Capital goods’ as the required facts of procurement and documentary substantiation is not made before us.

10. In view of the above, we rule as under:

RULING

1. Input Tax Credit of GST paid on Steel, cement and other consumables are not available for the applicant as per the findings at Para 8 above.

2. The eligibility to credit of GST paid on structures, Pre cast, reinforced concrete beams, poles etc. (purchased as it is) and other capital goods are not answered as the question is not substantiated with the factual documents.