#TaxmannPPT | GST Input Tax Credit in relation to Construction Services | Nitya Tax Associates

ITC IN RELATION TO CONSTRUCTION SERVICES

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TABLE OF CONTENTS

LEGAL PROVISIONS

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OVERVIEW Types of construction expenses

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 Repair & maintenance  Capex Condition to claim ITC  Business test  ITC not restricted under negative list [Sec 17(5)] Sec 17(5)(c) - Works contract service for construction of immovable property Exceptions: (i) Works contract service for construction of plant & machinery (ii) Works contract service used to provide outward Works contract service Sec 17(5)(d) - Goods & services for construction of immovable property on his own account Exception: (i) Goods & services for construction of plant & machinery on his own account 4

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DISPUTED AREAS

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What is an immovable property?  Movability v. Non-movability

 Immovable property = [Civil work + Plant & Machinery] or Civil work only  Classification of work as Civil work or Plant & machinery  ITC when outward supply is leasing, renting, etc.  Meaning of ‘Capitalization’  Meaning of ‘Plant & Machinery’

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d)

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 ITC not available when following supplied / received for ‘construction’ of immovable property: o o o

Work contract services Goods Services

 Exceptions: o Used for further supply of works contract service o Plant & machinery  Construction includes: o Re-construction o Renovation o Addition o Alteration or repairs To the extend of capitalization

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d)

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(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

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(119). "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;

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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;

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d) (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

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Term ‘Immovable property’ is not defined in GST. Reference shall be made to General Clauses Act, 1897

Movable property – Section 3(36) of General Clauses Act, 1897 • Shall mean property of every description, except immovable property Immovable property – Section 3(26) of General Clauses Act, 1897 • Includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything ‘attached to the earth’ Attached to earth – Section 3 of Transfer of Property Act a) rooted in the earth, as in the case of trees and shrubs b) imbedded in the earth, as in the case of walls or buildings c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d) (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

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Permanency Test • Permanency test based on following parameters:

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 Capability of movement of goods as such  Object of annexation  Degree of annexation  Attachment for wobble-free movement •

Complex definition leading to divergent interpretation especially on plant & machinery attached to building or civil structure

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Immovable property test is irrelevant for Plant & Machinery to claim ITC.

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Authorities are reading Immovable property = [Civil work + Plant & Machinery] leading to denial of ITC on Plant & Machinery parts as well

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d) (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

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Plant & Machinery •

Plant & machinery means:

Apparatus: A compound instrument designed to carry out a specific function

 Apparatus,  Equipment,  Machinery

Equipment: One or more assemblies capable of performing a complete function

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Fixed to earth by foundation or structural support

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Excludes:  Telecommunication tower  Land, building or civil structure  Pipelines outside factory

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Machinery: Some mechanical contrivances which by themselves or in combination with one or more other mechanical contrivances by the combined movement and inter-dependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite ad specific a result.

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RESTRICTIONS UNDER SECTION 17(5)(c) AND 17(5)(d) (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.

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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;

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JUDICIAL PRONOUNCEMENTS

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JUDICIAL PRONOUNCEMENTS BUSINESS TEST

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Ruling

Nature

National Aluminium (AAR GUJ)

Repair & maintenance of residential colonies, guest house, hospitals

Decision

Not a business expense

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JUDICIAL PRONOUNCEMENTS CONSTRUCTION EXPENSES Ruling

Nature

Safari Retreats (SC) Delhi International Airport (Del HC)

Decision High Court read down Section 17(5)(d)

Challenge to Constitutional Validity of Section 17(5)(c) and 17(5)(d) Pending

Bharti Airtel (Del HC)

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JUDICIAL PRONOUNCEMENTS CONSTRUCTION EXPENSES

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Ruling

Nature

Vardhan Holidays (AAR UK)

ITC on construction of hotel building and banquet halls

Mother Earth (AAR KAR)

ITC on construction of land pits

Dhingra Trucking (AAR HAR)

ITC on construction of warehouse to be let out

Decision

Immovable property used for own account

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JUDICIAL PRONOUNCEMENTS ITC ON EXPENSES NOT DIRECTLY RELATED TO CONSTRUCTION Ruling

Nature

Deendayal Port (AAR GUJ)

ITC on construction of residential area, park and industrial park

GGL hotels (AAAR WB)

ITC on lease rent paid on land where resort was to be constructed

Decision

Immovable property

Direct nexus with construction of building Daicel Chiral (AAR TEL)

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ITC on lease charges, annual lease rent and maintenance of land

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JUDICIAL PRONOUNCEMENTS ITC ON REPAIR & MAINTENANCE OF BUILDING

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Ruling

Nature

Jabalpur Entertainment (AAR MP)

ITC on maintenance and renovation of malls and multiplexes

ITC eligibility does not depend on accounting treatment

Rambagh Palace (AAR RAJ)

ITC on repair and maintenance of:  Building  Electrical and sanitary fittings

Denied to the extent of capitalization

Decision

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JUDICIAL PRONOUNCEMENTS ITC ON MOVABLE PROPERTY Ruling

Nature

Wework India (AAAR KAR)

ITC on installation of detachable wooden flooring, sliding and stacking glass partition

VDM Hospitality (AAR HAR)

ITC on installation of temporary structure comprising of pillars and prefabricated shelter

Decision

Not immovable property

Intent of permanent beneficial enjoyment

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Embassy Industrial Park (AAR HAR)

ITC on construction of warehouse using prefabricated technology

Vindhya Telelinks (AAR UK)

ITC on goods & services for installing cables to clients of telecommunication sector

Movable property

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JUDICIAL PRONOUNCEMENTS ITC ON PLANT AND MACHINERY Ruling

Decision

ITC on lift installation, sewage system, air conditioning, utility and electrical work

Plant & Machinery

ITC on civil construction, plumbing, dismantling and fire protection work

Not Plant & Machinery

Synergy Global (AAR HAR)

ITC on installation of sewage treatment plant, fire fighting system and electrical fittings

Intent of permanent beneficial enjoyment

NDMC Limited (AAAR CHG)

ITC on construction of private railway siding

Immovable property

Nipro India (AAR MAH)

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Nature

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JUDICIAL PRONOUNCEMENTS ITC ON PLANT AND MACHINERY Ruling

Atriwal Amusement Park (AAR MP)

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Nature

Decision

ITC on water slides along with their support structure and foundation

Plant & Machinery

ITC on land preparation work, construction of machine room and swimming pool

Not Plant & Machinery

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WAY FORWARD

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WAY FORWARD FOR TAXPAYERS

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Determine criteria for capitalization in consensus with Statutory Auditor under separate heads Execute separate contracts/POs OR Mention price breakup in case of single contract/PO Separate invoicing under different tariffs in lieu of single invoicing under works contract services

Party to writs filed where tax opportunity exists

Track latest development 22

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Q&A

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Disclaimer: This session is intended solely to provide information. Information presented as part of this session is provided for general purposes and should not be construed as professional advice from any of speakers or NITYA Tax Associates.