They are obsessed with credits, they really are, when was the last time the government had put quantitative restriction on tax credit, despite knowing they were handicapped to do so. Old habits die hard, the tax credits qua construction of immovable property for self use have been cursed since 2011. This piece discuss the restrictions on tax credit under Section 17 (5) (d) of the Central Goods and Services Tax Act, 2017 (“the GST Law”) in the light of vague word “for”. Section 17 (5) (d) ibid in essence denies input tax credit (ITC) on goods or services received for construction of an immovable property on his own account. A ‘for’ always indicates some nexus, the present piece examines whether this nexus is ‘direct’ or ‘indirect’ or otherwise.
1. The genesis of blockage
Section 17 (5) of the GST Law ipso facto is a debatable existence, as why it is there at all. Clause (c) and (d) of Section 17 (5) are the wrath of legacy Gods and Evils on construction/ realty sector. What the government thinks is not precisely clear, but it appears that the construction leads to property, property leads to something not goods and services, therefore when they don’t tax the property, why give you credit. For the sake of reference, Section 17 (5) (d) ibid, is reproduced below;
(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[1] 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.
ITC on goods or services received for construction of an immovable property on his own account is not available. But then what is ‘for construction’, is it what ‘used in’ construction is or is it also what ‘drives’ construction. The property survey services, purchase of FSI/ TDRs, services of real estate consultant, government fees[2], are some of the inward supplies that are not required for creating the super-structure, but are definitely inextricable linked with planned construction of super-structure. If the expression ‘for’ is read as having direct nexus with construction, then the tax charged on such supplies should be available as ITC and not shirked by Section 17 (5) (d) ibid. But if the answer in is negative, ITC is goes out of the window too.
2. Scope and extent of ‘for’
The expression ‘for’ in isolation is of wide amplitude, the dictionary.com best defines it as “with the object or purpose of”. Anything or any act with the object or purpose of something implies ‘something is for that thing/ act’. For e.g. if using of pen is with the object of writing an article, then ‘act of using pen’ is ‘for’ ‘writing the article’. Traditional meaning aside, the judicial approach in defining the word ‘for’ is a bit more complex, though. The meaning may be understood from some of the key judicial pronouncements;
Context of Parent Section: The earliest tracing goes back to Hon’ble Supreme Court decision in State of UP vs Ramkrishan Burman[3]. The respondent disputed payment of Court Fees on obtaining decree-declaration of title to money or other property, to the exclusion of “suits for a decree for money or other property” under Section 7 (iv-A) of the Court Fees Act[4]. The Court ruled that second time use of expression ‘for’ and is narrow and limited to suit for recovery of money or other property [‘recovery’ is the pursued act in other clauses of Section 7] and not all acts concerning money (in this case suit for obtaining title of money). The test is what acts are covered when the expression “for” is used be it (1) limit acts or (2) all acts, depends upon the context of parent Section.
Context of general scheme of things: The Hon’ble Calcutta High Court in Anjali Roy vs State of West Bengal[5] interpreted the scope of ‘for’ in Article 15 (3) of the Indian Constitution. Article 15 (3) entailing for sex wise discrimination read as follows “nothing in this Article shall prevent the State from making any special provision for women and children”. The Court averting to Mahadeb Jiew vs BB Sen[6], held that although grammatically and etymologically ‘for’ may mean ‘concerning’ i.e. discriminatory provision both favourable and unfavourable discrimination against women, however theoretically it is impossible that any unfavourable discrimination be resorted under Article 15 (3) ibid, hence ‘for women’ therein can only be interpreted as “in favour of” women. The Court again emphasised the context in which words ‘for’ should be seen.
Applying the tests
The question begs then is what is the context of ‘for construction’ in Section 17 (5) (d) ibid. It could be argued from following, that construction infers ‘used in’ construction for creation of superstructure
Inter-play between clause (c) and clause (d): Clause (c) and (d) of Section 17 (5) appears to be there with a same intention i.e. to deny ITC vis-à-vis construction of immovable property, while clause (c) covers totally outsourced construction, clause (d) covers partially outsourced construction. Works contract are services that is at times rigidly understood as contracts which enables creation of super structure viz. building, fabrication, renovation. Reading clause (d) on same footings as clause (c), it can very well be argued that only those goods and services are covered therein which enables creation of super structure, rather than those goods or services that received pre facto. A real estate agent’s services in isolation has not characteristics of ‘works contract’, meaning thereby it is not covered within clause (c), and so therefore it should also not be covered by clause (d). Similar did the Supreme Court held in Ramkrishan Burman case supra.
Immovable Property: Of an immovable property is the chief qualification over the received goods and services i.e. it is not only necessary that goods and services should have inextricable link with ‘immovable property’, but should result in immovable property. Any goods or services in anticipation or for the adventure of immovable property is difficult to be construed as ‘for’ immovable property. Had the intention of the clause (d) to block, all goods or services in anticipation of immovable property, it should have specifically stated so. A buyer who buys FAR/ FSI may either use for the purpose of building the super-structure or may keep it in anticipation of sale along with land. In the latter case since no immovable property was ever constructed, hard to Section 17 (5) (d) ibid could have triggered. It does indicate that ‘immovable property’ is the nearest object of goods or services and not the end object.
On the basis of above arguments, it is quite apprehend-able that ‘for construction’ doesn’t implies ‘concerning construction’, but only covers ‘for constructing’. A thin line of defence the revenue may have is that, while clause (c) is combination of specified service with exception clause (d) on the other hand is a specified service with no exception [noteworthy that ‘own account’ appears to be qualification of specified service itself rather than exception to specified service], therefore the two are different in spirit, and hence any comparison of both is unwarranted. With all positivity, it is hard to rebut revenue on this count.
3. Narrowness or wideness of ‘for’
The expression ‘for’ may also be understood as to intended coverage thereupon. If the legislature intends to carve out something from the universe it tends to define it very specifically, those specific carve outs should then be understood as restrictive since had the legislature intended to cover those expanded meaning, it would have specifically stated so.
Restricted interpretation: The Hon’ble Madras High Court in The Municipal Corporation, Tuticorin vs T Shanmuga Moopanar[7] quotes a famous English decision of Cotton vs Vogan[8], wherein the words “grains” were interpreted as natural grown products of earth and not the flour and meal out of such products. The Court holds that “grain” refers only to grain sourced through natural process and not in comprehensive sense as to refer to all articles of commerce into which grain can be turned by some process. Rice is strictly not grain, and the separate entity of the grains by a process of disintegration disappears when they are converted into broken rice.
Noscitur a sociis: Another legal doctrine that could be utilized is ‘noscitur a sociis’ that the ambiguous words should be read along with the associated words. Interesting associated words are “of immovable property (except plant and machinery)”. Clause (d) envisage ITC blockage vis-à-vis immovable property, but excuses it when it comes to plant and machinery. Both immovable property and plant and machinery should be read analogous i.e. what is for ‘immovable property’ could also be for ‘plant and machinery’, except it is blocked only in the former case. Conversely, what cannot be for immovable property but not for plant and machinery or vice versa should not be scope of ‘for’ covered by clause (d)[9]. The services of statutory licenses that are required only for immovable property but not for plant and machinery should therefore not be covered within clause (d).
4. Theory of direct or immediate use
The goods or services received for construction, may also be examined as to how stretched the construction is process is. The direct or immediate use in construction or the remote use in construction determines the coverage of in-eligibility. In a fairly relevant judgment vis-à-vis Central Excise exemption on captively manufactured goods of CCEx vs Tata Engineering and Locomotives Co. Ltd.[10], the Hon’ble Supreme Court agreed with the ruling of CEGAT, that in interpreting the exclusion of ‘use for producing or processing’ of any goods “indicates direct or immediate use in actual production or processing of goods”. In the earlier order, the CEGAT had very emphatically distinguished the rationale of “for” used in the context of manufacturing process. The CEGAT held that measuring equipment, handling equipment ipso facto doesn’t have the capacity to bring about processing or production or change in the substance, and such assets do not fall within the coverage of “for”.
There direct and immediate use theory proceeds on the premise that the strength of the object proceeding after ‘for’, without the use of measuring equipment processing can be undertaken, and similarly without the surveyor’s services, the construction activity can surely be started. The measuring equipment and surveyor’s services in essence provides quality to the respective objects. Therefore an objective test that one can form is whether impugned goods or services is sine qua non for construction or is only for the qualitative purpose. If goods or services are sine qua non, they should be covered within ‘for’, while if they are only for the purpose of quality, then they should not be covered within the canopy of ‘for’.
5. Impact on setting up of factory
The Cenvat Credit Rules, 2004 (“the Rules”) underwent a remarkable change in 2011, the widely worded ‘input’ and ‘input service’ definition under the rules were curtailed. Before 01st April 2011, the inclusive clause of input service definition used to have an assertion of ‘setting up of factory’, which was removed. The revenue authorities have since then have framed a mind that services of setting up of factory became in-eligible from that eventful date. The assessee on the contrary have argued that merely because the services are removed from inclusive clauses doesn’t ipso facto mean that Cenvat Credit stands ousted, so long as the services continues to be used in the business and not get covered within the exclusion clause of ‘used for construction’. The Hon’ble CESTAT have been kind to assessee recently, as seen from the ruling in Piramal Glass Ltd.[11], and Nuvoco Vistas Corporation Ltd.[12]. The CESTAT rulings though hardly bothers the revenue, who would continue to push like Ken Miles.
Wonder what’s in store for ‘setting up of factory’ in the light of Section 17 (5) (d) – it appears that the resolution lies in how setting up is interpreted. Setting up means “to place on foot” or ‘to establish’ and is not contradistinction to commence i.e., before a unit is ready to commence business it is not set up, said the Hon’ble Supreme Court in Kabini Minerals (P) Ltd. v. State of Orissa[13]. The author believes the terms in the contract could be folded and moulded to oust to establish from the construction, but that’s the story for another is it?
Conclusion: The words ‘for’ appears to be wide, but are narrow for the reason they are qua exception to the general, which should be construed in its restricted sense. The government through the notifications, circulars, press release and what not is running is so fast that these hidden issues which have the potential to create chaos are being totally ignored. For the benefit of all, the trade needs to refrain seeking clarification from government in this regard, because it’s already known how that pans out. The need is to be litigation ready, the courts have over the years supported the logics within a taxation statute, regardless of how the legacy have seen it. It is though advisable that proper contract documentation should be staged for the music to be melodious.
Note
[1] Clearly ‘in respect of’ vis-à-vis clause (d) to (h) is deluded, how can ITC be in respect of any goods or services, it would always be on that goods or services.
[2] Those that are leviable to GST (believe it or not, there are many)
[3] AIR 1971 SC 87: (1970) 1 SCC 80: (1970) 2 SCR 588
[4] In suits for or involving cancellation of or adjudging void or voidable a decree for money or other property having a market value, or as instrument securing money or other property having such value.
[5] AIR 1952 Cal 825
[6] AIR 1951 Cal 563
[7] (1926) 51 MLJ 62
[8] Judgment dated 19.05.1896 by the House of Lords
[9] This interpretation also honours the avoidance of surplus-age
[10] 2003 (158) E.L.T. 130 (S.C.)
[11] 2019-TIOL-3013-CESTAT-AHM
[12] 2019-TIOL-2063-CESTAT-CHD
[13] (2006) 1 SCC 54
Author Bio
INSTANT
“Note
[1] Clearly ‘in respect of’ vis-à-vis clause (d) to (h) is deluded, HOW CAN how can ITC be IN RESPECT OF any goods or services, it would ALWAYS BE ON THAT goods or services.”
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??!?!?! >>>>>>>>>>>>>>>>>>>><<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
To jest for a while all 'FOR' the sake of …………
TAIL Note: As someone said LAWS are not made FOR or by Archangels !
To Add: Equally true- Laws are not always made (or 'construction placed) by 'MY LORD ' – QUEEN's BENCH or LORD CHANCELLOR (of GB)?!