This article has been published in the Chambers' Journal Aug '20 edition.
The credit available under GST is seemingly much wider than what was available under the earlier laws for the mere reason that under GST, credit will be available if it is used for business. However, no tax law can exist without restricting any credit and GST is no exception, which blocks certain credits even if used for business.
It is thus important to understand the extent of the credits blocked under GST for the reason that all other credits can be validly availed (if the other conditions in law are satisfied). The relevant provision in this regard is section 17(5) of the CGST Act, 2017. Of the list of credits thereunder, we would have a closer look at the restriction of credit relating to the construction of immovable property, as it is a huge chunk of expense for any person or business, when incurred. It is thus important to ensure that one understands the scope of this blocked credit.
Scope of the credit restricted:
Section 17(5) (c ) and (d) are relevant, which are extracted below:
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)……………..
(b)……..
(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)…..
……..
From the above it is understood that, in general, credit in respect of goods and/or services or both used for construction of immovable property would be available in the following scenarios:
- If the input works contract services (WCS) are used for construction of P&M even though being immovable,
- If the input WCS or other goods or services are used for further supply of works contract services,
- If the input WCS or other goods or services are used for reconstruction, renovation, repairs etc. and such expenditure is not capitalized (more in detail on this in the subsequent paragraphs)
In this regard it is important to understand the following aspects:
- What does ‘construction’ include? If any expense incurred does not fall under ‘construction’, there is no restriction of credit.
- What does plant and machinery include in its ambit? If any expense incurred falls under ‘Plant and Machinery’, there is no restriction of credit.
Construction
Explanation to section 17(5) (c) and (d) defines ‘construction’ which reads as below:
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;
From the above it can be seen that the categories of work other than those mentioned above will not be covered in its ambit, like fit-out, installation, etc. Another aspect is that capitalization is an important criteria to determine eligibility of credit. From the above explanation the following two interpretations are possible:
1st Interpretation: Construction includes re-construction, renovation, addition, etc. to the immovable property, to the extent it is capitalized in books of accounts, i.e. capitalization alone is sufficient for restricting the credit.
For example, say some modifications are done to the building and such expenses are capitalized under ‘Fixtures’ in the books of accounts. In such case the credit would be restricted due to the mere reason of capitalization in the books of accounts, or
2nd Interpretation: Construction includes re-construction, renovation, addition, etc. to the extent it is capitalized to the said immovable property, i.e. condition of capitalization of such expense to the related immovable property in the books of account is required for restriction of credit.
In the above referred example, in this kind of interpretation, the credit would not be restricted as the said expense is not capitalized to the head ‘Buildings’ in the books of accounts.
This confusion arises as there are commas in the above explanation before and after the phrase ‘to the extent of capitalisation’.
The Concise Oxford Dictionary Twelfth Edition states that ‘comma’ is a punctuation mark which indicates a pause between parts of sentence, or which is used for separating items in a list. The Major Law Lexicon defines ‘comma’ as the smallest division of a sentence in language. The comma is used as a punctuation to divide sentences and parts of sentences.
Thus, the comma used between parts of a sentence is a pause and applying the same logic in the present context, ‘addition to the said immovable property’ should be read as one phrase and ‘to extent of capitalization’ should be read as another phrase. Thereby, meaning that credit in respect of any modification, etc. of the immovable property would be restricted due to the mere fact of capitalization, and the head under which it is capitalized would not be relevant.
If the second interpretation was to be considered correct then no comma should have been placed in the explanation. However, that not being the fact, as per the discussion up to now, it can be concluded that the first interpretation maybe apt.
However, there seems to be some anomaly. If we place the meaning of ‘construction’ as defined in the explanation, into clause (c) and (d) of section 17(5), it will read as under:
“(d) goods or services or both received by a taxable person for (re-construction, renovation, additions ……., to the extent of capitalisation, to the said immovable property) of an immovable property.……..”
Thereby, if we assume that the conclusion reached above (i.e. mere capitalization of renovation, etc. expense is relevant and not capitalization to the head ‘buildings’ in the books) is correct, then the phrase ‘to the said immovable property’ in the explanation was not required as the phrase ‘of an immovable property’ exists in the clauses (c) and (d). Could this then mean that the said explanation has to be then interpreted as per the 2nd interpretation mentioned above i.e. the renovation expense has to be capitalized to the head ‘Buildings’ to be restricted? i.e. restriction is of an expense of renovation of an immovable property to the extent it is capitalized to the head ‘buildings’ in the books of accounts? Maybe yes.
This interpretation will also ensure that only those expenses would get restricted that are in the nature of immovable property for the reason that only such expenses get capitalized to the head ‘building’ in the books of account and not mere furniture and fixtures, etc. which are not in the nature of immovable property. Thereby, the credits which are not relating to immovables do not get restricted even if capitalised. Thereby, we are adopting an interpretation by neglecting the commas present in such explanation.
Though, it is a known principle that the words in the statute are to be interpreted strictly as statute does not waste words as held in the case of Satheedevi v. Prasanna[1], and in State of Haryana v. Suresh[2]. However, in some cases it has been held that if such interpretation leads to absurdity then, going by the intention and object of the Statute the interpretation can be arrived at, as was held in the case of Kanai Lal Sur v. Paramnidhi Sadhukhan [MANU/SC/0097/1957 : AIR 1957 SC 907].
Further, even though comma is the most used punctuation mark in the course of drafting of statutes, where the interpretation of the punctuation leads to absurd results the Courts may not give importance to the punctuation for construing the meaning. Similar was held by the Honorable Supreme Court in the case of Aswini Kumar Gosh and Another Vs Arabinda Bose and other[3] and Whirlpool Corporation Vs Registrar of Trademarks, Mumbai & Ors. 1998 (10) TMI 510.
Moreover, in cases where an absurd interpretation emanates, interpretation would be based on the main intention and object behind drafting of such provisions as was held by the Supreme Court in the case of Association of Management of Private Colleges Vs All India Council for Technical Education & Ors[4].
In the instant case, as concluded in the discussion above, absurd result emanates if we interpret the explanation by taking into account the commas appearing before and after the phrase ‘to the said immovable property’. Hence, going by the object and reasons of the GST law, being to avoid cascading effect of taxes, it seems to be a reasonable interpretation to state that the expenses of renovation, etc. should be restricted only when the said expense results/becomes part of the immovable property, in which case the said expense is capitalized to the same immovable property in the books of accounts i.e. to the building. This interpretation ensures that not all expenses, but only those that result in an immovable property get restricted.
However, the Karnataka Authority of Advance Ruling (hereinafter referred to as ‘AAR’) has ruled in the following cases that the credit will not be available to the applicant once such expenditure is either directly related to the construction of immovable property or related for its beneficial enjoyment. It is not relevant whether the expenditure is capitalised to the value of said immovable property or capitalised separately.
Though, it is to be noted that the advance ruling is binding only on the applicant and in respect of the matter referred to. It has no precedent value though it provides an insight into the departments’ view and as has been seen in many instances, the rulings are generally pro-revenue and not actually aimed at giving a proper interpretation of the law.
Plant & Machinery
The term plant and machinery has been defined in the explanation after section 17(6) of the CGST Act. As per this provision, 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
Apparatus, equipment, and machinery
There are various cases which have analysed and explained ‘plant and machinery’ under the earlier indirect tax laws and under the Income Tax law as well. However, those cases may not be of much use under GST as P&M is specifically defined here. So, what is relevant is to identify what the terms used in the definition mean.
Machine:
- Black’s Law dictionary- machine means a device or apparatus consisting of fixed and moving parts that work together to perform some function and can also be termed as an apparatus.
- Oxford dictionary- an apparatus using or applying mechanical power and having several parts, each with a definite function and together performing a particular task.
Equipment:
- Black’s Law dictionary: the articles or implements used for specific purpose or activity and includes goods used in or bought for a business enterprise. Further equip is defined as to furnish for service or against a need or exigency; to fit out; to supply with whatever is necessary for action.
- Chambers Family dictionary: the clothes, machines, tools or instruments, etc necessary for a particular kind of work or activity. Further equip is defined as to fit out or provide someone or something with the necessary tools, supplies, abilities etc;
Apparatus:
- Black’s Law dictionary: the machine is termed also as an apparatus.
- Oxford dictionary: apparatus means the technical equipment or machinery needed for a particular activity or purpose.
- Chambers Family dictionary: apparatus means the equipment needed for a specified purpose.
From the above, the expressions equipment, apparatus, machinery can be construed as any tool/instrument/machine/equipment which is designed & used for some specified function/task/purpose/activity.
Another aspect to note in this definition is that P&M covers only those apparatus, equipment and machinery which are fixed to earth i.e. are immovable. Thereby, there would not be any blocking of credit in respect of movable apparatus, equipment and machinery.
Further, credit would be available in respect of the civil structures, which are the foundation or structural support through which the P&M is fixed to earth. Though, other civil structures in the nature of land or building or similar structures, telecommunication towers and pipelines outside the factory, would not be eligible.
Used for making outward supply
In case of Jabalpur Hotels Pvt Ltd 2020-TIOL-196-AAR-GST it was ruled by the Advance Ruling Authority that the credit relating to lift installed in a building would be restricted on the ground that the lift when installed becomes a part of the building itself and thereby a restricted credit as a civil structure.
Without getting into the legal validity of this ruling, assuming that the assessee is able to rebut the above argument of the department which is restricting the credit, the following aspect needs to be also considered.
The existence of the phrase ‘used for making outward supply’ in the above definition of P&M. This indicates that any apparatus, equipment and machinery, which is immovable, would be a P&M for purposes of Chapter V and VI of the CGST Act, only if the same is used for making outward supply. The usage of this phrase has restricted the scope of P&M.
Thereby, in case say, a lift (which is a equipment) is installed at a corporate office of a manufacturing concern, can the credit be restricted by the department also on the ground that the said immovable equipment would not fall under the ambit of P&M for the purposes of GST as the same is not necessary for making the outward supply? Meaning that any credit in respect of the goods/services that are used in its construction would be restricted?
From the above issues discussed it can be noted that various interpretations are possible and since the amount of credit involved in these transactions is generally huge, it is important that the taxpayers make informed decisions to ensure that they are not subsequently faced by unpleasant surprises from the department.
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