CA Madhukar N Hiregange,
CA Anil Bezawada, Advocate, AP High Court
The concept of GST being ONLY a value added tax and consequently the understanding that there should be no cascading has been systematically diluted by the CBIC who have become the de facto GST law making authority in India. The legislature has abrogated its responsibility almost completely. The Courts decisions are escalated in an unending fashion and clarity in simple understanding is avoided if it is not in the revenue interest.
All were awaiting the judgment of hon’ble Supreme Court in Safari Retreats. However, it appears confusions & interpretations has been increased on blocking of ITC on construction expenses. In our view Supreme Court has provided some clarity on substantial issues. Some of our views as we understand from the judgement of the Hon’ble Supreme Court are as follows-
| Question |
Answer |
| 1. Whether input tax credit can be availed on goods and services procured for construction of a mall which is intended to be given on rent/lease? |
- Yes. Input tax credit can be availed. The restriction under Section 17(5)(d) does not apply when the construction is not on own account.
- The Hon’ble Supreme Court in Para No. 32 of the judgement has held that construction of an immovable property which is intended to be sold or given on lease or license cannot be said on be ‘on own account.’
- Further, in such cases, the discussion on requirement for satisfying the functionality test is merely academic.
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| 2. Whether input tax credit can be availed on the works contract services received for construction of a mall which is intended to be given on lease/license?
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- No. In case of works contract services, the restriction is provided under Section 17(5)(c) of the CGST Act, 2017. This is a plain reading.
- However, it can be argued that the works contract service is also a ‘service’ by a deeming fiction in terms of Entry No. 6(a) of Schedule II to the CGST Act, 2017 and therefore covered under Section 17(5)(d).
- Once if the works contract is also covered under Section 17(5)(d), works contract services used for the construction of Mall is also eligible for the credit as the mall is not for one’s own account. The GST department would litigate this as they litigate all cases.
- From now onwards, instead of giving the construction work on works contract basis, construction materials and services can be procured independently.
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| 3. Whether input tax credit can be availed on specialized civil structures which form an integral part of the manufacturing process or which are a part and parcel of the flow of the manufacturing process? These buildings cannot be separated from the machinery and the machinery cannot be worked without such special construction. |
- Yes. Input tax credit can be availed. When a building is planned and constructed in such a manner to meet any special technical requirements, the building qualifies as a plant as per the functionality test laid down by the Hon’ble Supreme Court in various judgments. Engineering drawing could support this view.
- The question of whether a structure qualifies as a plant within the meaning of the expression “plant or machinery” is to be determined based on the business of the person and the role such building plays in the business.
- If the structure is a tool for the business, which generates the revenue not just housing the machinery will be treated as a plant.
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| 4. Whether input tax credit can be availed on buildings used for administrative purposes like corporate office, staff quarters, security rooms, etc.? |
- No. The buildings which are constructed for mere administrative purposes do not qualify as a plant. They are not planned and constructed to serve any special technical requirements.
- The Hon’ble Supreme Court has clarified that the construction is said to be on a person’s own account if it used as a ‘setting in which the business is carried out.’
- The ITC is not eligible either on indigenous procurement of goods or services or on works contract services.
- The real test is if your building is for just housing the machinery or men (your revenue generators) credit not eligible. However, if the building/structure itself is revenue generator, on which you are paying the output tax Credit can be claimed. [ example- as a service provider]
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| 5. Whether input tax credit can be availed on goods and services procured for construction of a hotel or a cinema theatre? |
- Considering the fact that a hotel or a cinema theatre is not merely a setting in which the business is carried out but a means/tool by which the revenue is generating, the Hon’ble Supreme Court will have to decide eligibility of ITC on construction of theatre and hotel in light of specific clauses of Section 17(5)(d) of the GST Act, 2017.
- In our view the decision in the case of Anand Theatres may not be much relevant in the context of GST for this question for various reasons.
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| 6. Whether the input tax credit is eligible on goods and services used for construction of warehouses, cold storages, co-working spaces, dry docks, ponds, multi-level car parking systems, etc.? |
- From the analogy of the judgement, it can be said that the input tax credit is eligible on goods and services used for construction of warehouses, cold storages, co-working spaces, dry docks, ponds, multi-level car parking systems, etc.
- Functionality test can be satisfied very easily for these structures.
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7. Whether the ITC is eligible on lifts, DG Sets, Escalators Central Air-conditioning, electrical appliances Sewage and Water Treatment Plants
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- Yes
- Including civil foundations & structural supports to the above items
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We hope we have provided some clarity on the important questions surrounding the eligibility of input tax credit in light of the judgement of the Hon’ble Supreme Court. The above views may help the assessees to optimise their input tax credit availment. Those who have reversed the ITC under protest or voluntarily, they now can avail such ITC. The ITC pertaining to FY 2023-2024 can be availed on or before 30th Nov 2024.
The fundamental principle we have been advising from the days of Modvat, Cenvat, & now ITC in GST is whenever there is an ambiguity in eligibility of the Credit/ITC our suggestion is to avail the Credit and fight for the Credit.
For queries or feedback, kindly reach out to [email protected], Mobile No. 9989604111
