#TaxmannPPT | Decoding Critical Input Tax Credit Issues under GST | Tattvam Advisors

Decoding critical input tax credit issues under GST with Practical case studies • ITC on Immovable Property and Telecom Towers • Gifts vis-à-vis Sales Promotion

• Employees Related Benefits

By CA Geetika Shrivastava Executive Partner : Tattvam Advisors Tattvam Advisors Copyright@

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Team of more than 40 people

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More

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across various sectors. 

Knowledge partner of PHD Chamber , Webtel Electrosoft etc

ITC on Immovable Property

Legal Provisions

Blocked Credit

Plant and Machinery

Section 17(5)(c) – Works Contract Services when supplied for construction of immovable property (excluding Plant and Machinery) except where it is an input service for further supply of works contract service



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

Section 17(5)(d) – Goods or services or both received by taxable person for construction of immovable property (excluding Plant or Machinery) on his own account



Excludesa) land, building or any other civil structures; b) telecommunication towers; and c) pipelines laid outside the factory premises

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What is Immovable Property?

 Not defined under GST  Section 3(26) of the General Clauses Act, 1897: Immovable property includes 

Land;



Benefits to arise out of land; and



Things attached to the earth, or permanently fastened to anything attached to the earth

 Section 3 of the Transfer of Property Act, 1882: Things attached to the earth



rooted in the earth, as in the case of trees and shrubs;



embedded in the earth, as in the case of walls and buildings;



attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached

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What is Immovable Property? (Contd.)

Immovable Property

[S. 3(26) of General Clauses Act, 1897]

Land

Rooted in the earth (trees and shrubs)

Benefits arising out of land

Embedded in the earth (walls and buildings)

Things attached to the earth (ATE), or permanently fastened to anything ATE [S. 3 of Transfer of Property Act, 1882]

Attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached

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Pre-GST Jurisprudence on Immovable Property Test of Permanency Municipal Corporation of Greater Bombay vs. IOCL (1991 Suppl.

(2) SCC 18; AIR 1991 SC 686)

The test was one of permanency; if the chattel was movable to another place of use in the same position, it must be a movable property. However, if the chattel has to be dismantled and re-erected at the other place of use, it would be treated as permanently attached to the earth

Triveni Engineering and Indus.

Ltd. vs. CCE [2000 (120) ELT 273 (SC)

Whether an article is permanently fastened to anything attached to the earth, require determination of both the intentions as well as the factum of fastening to anything attached to the earth and this must be ascertained from the facts and circumstances of each case

 \

CBIC Circular No. F. No. 154/26/99-CX.4 dated 15.1.2002

 Immovable Property: In case the items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and cannot be reassembled.  Movable Property: If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be moveable

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Pre-GST Jurisprudence on Immovable Property Intention of Permanent Annexation

Central Excise v. Solid and Correct Enggg Works (2010 (252) ELT 481)

In the absence of intention to annex the equipment for permanent beneficial enjoyment of the land/building, the equipment cannot be said to be in the nature of immovable property Attachment of the plant in question with the help of nuts and bolts to a foundation not more than 1.5 feet deep intended to provide stability to the working of the plant and prevent vibration/wobble free operation not qualify as attached to earth

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Principles

Degree and Extent of Attachment Movable Property: If a chattel is movable to another place of use in the same position Immovable Property: If the chattel has to be dismantled and re-erected at the other place of use with substantial damage taking place in the process to any of its components, it is to be treated as permanently attached to the earth

Intent of Attachment Movable Property: When attachment is only for the benefit of the property, Immovable Property: When a property is attached to the earth and such attachment is for the beneficial enjoyment of the land/or what it is embedded then the same will be an immovable property

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Case Study: Construction of Factory

ITC on Construction of Factory

Say, a company engaged in manufacturing of goods is constructing a new factory

The Company incurs expenses on civil works, machineries, land, etc.

Whether Company is eligible to avail ITC?

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Optimization of credit Registered Person

Civil Work

Land

Free Hold

Leasehold

Pre-Construction

Factory Sheds?

Immovable Plant & Machinery

Buildings?

Lift/ HVAC

During Construction

Project P&M

Civil Foundati on/ Support structure

Movable Plant & Machinery

Computer

Furniture

Post Construction

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Optimization of credit

01

04

Procurement strategies to minimize cost of blocked credit and/ or avoid accumulation of credit.

02

ITC on immovable plant & machinery other than telecommunication tower

03

ITC on movable plant & machinery

Other Strategies

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Case Study: ITC on Pre-fabricated buildings/structures

Pre- Fabricated Structure Pre-fabricated technology is a method construction that are made in pieces and assembled at the construction sites Can be dismantled and reconstructed at a different location saving a lot of time, effort and cost

Whether Pre-fabricated structures qualify as immovable property?

Whether credit can be allowed in respect of such structures?

01

02 03

Prefabricated building classified under HSN 94060011- Movable or immovable?

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Pre- Fabricated Structure

ITC on pre- fabricated structures which is movable in nature and accounted as “plant and machinery” and not capitalized as an immovable property ?

1 Issue

 Warehouse constructed/erected through PES intended to be used as permanent structure is an immovable property  Associated with beneficial enjoyment of land on which on which warehouse is constructed and not the PES per se  Warehouse being permanent in nature the applicant is not eligible to take the input tax credit Embassy Industrial Parks Private Limited (GST AAR Haryana) Tewari Warehousing Co. Pvt. Ltd. (GST AAR WB) Decision

Is ITC Blocked as per Section 17 (5)(d) of CGST Act,2017 ?

Test of movability  An attachment of property without necessary intent to making it permanent cannot be an immovable property. The emphasis is on the intention of the party Solid & Correct Engineering Works [2010 (252) E.L.T. 481 (S.C.)]  The item annexed can be removed without damage and effecting the further use, then such item will not be considered to be an immovable property Sirpur Paper Mills Ltd. [1998 (97) E.L.T. 3 (S.C.)]

ITC available? © Tattvam Advisors, All rights reserved

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Case Study:ITC on construction services for leasing

ITC under lease model

Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST [2019] 105 taxmann.com 324 (Orissa)

Issue Issue

Availment of input tax credit on construction services of shopping mall which is to be used for leasing

Decision



Restriction unjust & contrary to basic rationale of GST



The petitioner is not using the immovable property ‘on his own account’ but letting out property. Hence, ITC should not be restricted



Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted SC admitted SLP without any stay of order © Tattvam Advisors, All rights reserved

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ITC on construction of hotel and banquets Vardhan Holidays, [2020] 121 taxmann.com 2 (AAR- UTTARAKHAND) Issue: Availment of input tax credit on construction of banquet halls and hotel building

Decision:  Safari Retreats not followed  Restriction on ITC if using immovable property for own purpose

 Property is used by applicant for supply services and earn money  No conclusive ruling as matter pending before SC

ITC available? © Tattvam Advisors, All rights reserved

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Case Study:ITC on Telecommunication Tower

Case Study: ITC on Telecommunication Tower

01

Companies provide passive infrastructure services to telecom companies

02

Companies incur expenditure on telecommunication tower and related equipment, apparatus, etc. The said expenditure is capitalized in the books of account

03

Whether Companies are eligible to avail ITC for the tax paid on telecommunication tower and related equipment, apparatus, etc.

04

Implication of decisions in previous regime?

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Pre-GST Jurisprudence on Tower

State of Andhra Pradesh vs. Bharat Sanchar Nigam Limited reported at 2012(25) S.T.R. 321 A.P.

 The manner in which tower is fastened to the earth or top of roof would exclude it from the ambit of goods and make it an immovable property.  Also, it can be erected at another place only after it is completely dismantled at the existing site and cannot be moved to another place for use in the same position.

Hence, qualify as immovable property

GTL Infrastructure Ltd. v. Commissioner of Service Tax, Mumbai

 Towers in unassembled condition, pre-fabricated shelters and their accessories used in providing telecommunication services.  The towers are affixed to the earth and became immovable property

Essar Telecom Infrastructure Pvt. Ltd. [2012 (25) S.T.R. 16 (Kar.)] Mobile towers do not acquire the character of immovable goods, as they can be dismantled and replanted elsewhere.

Thus telecom towers should not be construed as immovable property © Tattvam Advisors, All rights reserved

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Pre-GST Jurisprudence on Tower

Bharti Airtel Ltd. v. Commissioner of Central Excise, Pune – [2014] 51 taxmann.com 254 (Bombay)

Vodafone Mobile Services Limited vs.

Commissioner of Service Tax [2018] 100 taxmann.com 245 (Delhi)[31-10-2018]

 Towers in unassembled condition, pre-fabricated shelters and their accessories used in providing telecommunication services.

 Applying the permanency test, the Court held that tower and shelter would not qualify to be ‘immovable property’ for the reason tower and shelter is merely fastened to civil foundation to make it wobble free and ensure stability, devoid of intent to annex it to earth permanently

 The towers are affixed to the earth and became immovable property

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Writ petition admitted for ITC on Towers

The

Delhi

High

Court

has

admitted

the

writ

challenging the restriction of ITC under CGST Act on

01

telecommunication towers

The petitioner submitted that the towers

Bharti Airtel

Limited vs. Union of India & Ors. [2020] 119 taxmann.com 27 (Delhi)

are based on a rudimentary “screwdriver”

02

technology

and

considered

as

hence,

cannot

“immovable

be

property”.

Accordingly, it would be decided whether ITC

should

be

allowed

on

telecommunication towers

03

The matter pending for hearing

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Possible implications of SC Decision

Immovable Property

ITC under GST not available?

Optimization of credit on incidental equipment ?

Equipment's like BTS, antenna, transmitters, receivers, etc.

Telecommunication Tower Any other ground to contend?

Movable Property

ITC Eligible

Possible strategies to avail credit in case of favorable decisions by Supreme Court – Section 16(4) of the CGST Act?

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Gift vis-à-vis- Sales promotion

Eligibility of ITC on Gifts & Free Samples

Section 17(5)(h)

Input tax credit in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gifts or free samples shall not be available

Free Samples

Free samples are small and packaged portion of merchandise distributed free, especially as an introduction to potential customers

Gifts

 Gift ordinarily means something which is given voluntarily to other person without consideration and the donor should not derive any advantage from such gift.

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What is Gift ?

 It is pertinent to mention that term ‘gift’ is not defined under the CGST Act, 2017. Hence, recourse can be taken from parallel legislations  As per Section 122 of Transfer of Property Act, 1882, “Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.  Dictionary meanings Merriam Webster Dictionary- “something voluntarily transferred by one person to another without compensation; the act, right, or power of giving.  Black Law Dictionary- Gift is “a voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously, and not upon any consideration of blood or money.”

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Types of gifts given to the dealers

Foreign trips (Voluntary)

Poster/hoardings/brochures /price list

Buy one get one

Calendar/diaries/ pens/crockery

Gifts on achievement of target:– Voluntary/ scheme

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Voluntarily offered free foreign trips

Surfa Coats India Pvt Ltd -Karnataka AAR [2019] 110 taxmann.com 204 (AAR - KARNATAKA) 

ITC on services procured for offering free trips is not available as it is similar to gift.



The taxpayer is not eligible to avail ITC on the inward supplies of goods and services given as incentives in the form of gifts of goods and services to its dealers.

Moreover, the AAR observed that free travel services provided to its dealers without consideration would not qualify as ‘supply’

Restriction under Section 17(5)(h) pertains to the goods and not services hence legally ITC should be available

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Promotional items distributed free of cost BMW India Private Limited, [2021] 124 taxmann.com 55 (AAR - HARYANA) Brief facts-

CASE STUDY  Brochures / Price List / Means of Communication  Diaries / Pen / Calendar

Availment of input tax credit on Goods Distributed as free of cost

Decision The promotional items procured by the BMW and supplied during events on FOC basis qualify as gifts

 The company is ineligible to take the input tax credit on such goods owing to restriction under Section 17(5)(h) of CGST Act,2017

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Promotional/marketing materials distributed free of cost M/s Page Industries Limited [2021] 127 taxmann.com 176 (AAAR-KARNATAKA)

Observations

The applicant in the instant case disposes of/issues the distributable goods such as carry bags, calendars, diaries, marketing material such as displays, posters etc. free of cost to franchisees and distributors

Rulings

The ITC denied on all such promotional and marketing items given to the franchisees and distributors on FOC basis as they same qualify as gift and restriction under Section 17(5)(h) of the GST Acts.

Under UK VAT laws , Sl. No. 2.12 of VAT Notice 700/7 specifies about “point of sale display material’ that : “No vat is due if you provide point of sale display material to retailers, or other business customers, for no consideration and the material provides direct promotional supports for your goods. Examples includes display stands, posters and other similar materials.

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Buy One Get One- Circular no. 92/11/2019

 It may be appear at first glance that one item is being sold free of cost without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is charged for the entire supply. It can at best be treated as supplying two goods for the price of one.  Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act  ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

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Goods on achievement of target

Sanofi India Ltd.- Maharashtra AAR [2019] 106 taxmann.com 387 (AAR MAHARASHTRA)



Shubh Labh Trade Loyalty Program: In this scheme, the distributors/whole sellers earn reward points basis the quantity of goods purchased and goods sold by them. These points can then be redeemed in the form of items, to be selected basis the availability of the product and reward points earned



Brand Reminder: As an advertisement tool, the company distributes products like pen, notepad, key chains etc. with their name engraved on it, for the purpose of their brand promotion

ITC denied as promotional items were given voluntary and not under contractual obligation, hence restriction under section 17(5)(h) applies

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Gifts on achievement of target

Moksh Agarbatti Company , [2020] 120 taxmann.com 225 (AAR - GUJARAT); Biostadt India Limited, [2019] 103 taxmann.com 127 (AAR - MAHARASHTRA)

IssuesAvailment of input tax credit on Goods given under incentive scheme Decision:

 Free goods offered on purchase of specific quantity of goods not satisfy the condition availment of ITC under section 16  Free goods offered on making payment as per defined schedule not eligible for availment of ITC under section 16  No written agreement with customers  Denial of ITC by AAR under sec. 17(5) in case where no GST is

Clarification : Ireland Department and Customs on Mixed Supplies of Goods and Services: If there is a requirement of the customer to pay a consideration in connection with the receipt of an product, even if the supplier describes part of that product as “gift” or as being “free”, it does not come within the term of gift for tax purposes.

Where there is a consideration it is always referable to all the products supplied.

Accordingly, the same will be categorized as Mixed Supply.

paid on output stage

Strategies for schemes

Input Tax Credit Vs Mixed Supply © Tattvam Advisors, All rights reserved

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Employee Related Expenses

Employee benefits

Food & beverage

Hotel and travel expenses for business travel Uniforms/gloves & helmets/safety shoes/office laptop

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Relevant provisions

Section 17(5)(b)(i)

Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance, unless the same is obligatory under any law

Section 17(5)(g)

Goods or services or both used for personal consumption

Section 17(5)(h)

Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;

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Employee benefits Case study- Uniforms/gloves & helmets/safety shoes/office laptop Whether ITC is allowed on account of business use only ?

 Not excluded under section 17 (5)(g) - exclusion on account of personal consumption is not qua the employees but is qua the taxpayer  Not excluded under section 17(5)(h)- not gift as to be used during their employment, does not have any economic value, used for official purpose

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Employee benefits Case study- Hotel and travel expenses for business travel

ITC on Business Travel

Business purpose-not personal consumption

ITC Available on • Airfare • Rail fare

ITC on Hotel Bill

Room Charges

ITC allowed subject to fulfillment of other conditions i.e.

POS

Food

No ITC on food is allowed

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Employee benefits Case study- Canteen services Canteen services provided to employee at subsidized rate •

Definition of business includes any activity or transaction in connection with or incidental or ancillary to any trade, commerce, manufacture or profession

•

The activity undertaken in the form of supply of food to the workers at the subsidized rate qualifies as supply on which GST is payable at 5% (without ITC)

•

ITC on food and beverage still not eligible because of restriction under Rate Notification

Free food and beverage •

Free supply of food and beverage to employees in the course of or in relation to his employment is not to be treated as deemed supply

•

ITC not available of such food and beverage provided to employees unless mandatory under some law.

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Indirect Tax

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