No ITC can be availed on construction of pipelines outside a factory
Introduction
Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Section 17(5) pertains to blocked credit under CGST Act which states the situations where input tax credit shall not be available.
Certain situations when ITC cannot be claimed:-
1.A person cannot avail ITC wherein the given motor vehicle is used to transport people and has a seating capacity of less than or equal to 12 +1 (driver)
2. A person cannot claim ITC for the tax paid for the following:-
i. Food and beverages
ii. Outdoor catering
iii. Beauty treatment
iv. Health services
v. Cosmetic and plastic surgery
3. Services of general insurance, servicing, repair and maintenance
4. Sale of membership in a club, health, fitness centre
5. Rent-a-cab services, life insurance, health insurance
6. Travel, benefits extended to employees on vacation such as leave or home travel concession.
7. Works contract services for construction of immovable property
8. Construction of immovable property on own account
9. Composition scheme
10. Non residents
11. Supply for personal use
12. Free samples and goods destroyed
13. Restaurant services
Now, an important point mentioned above for which ITC will not be available will be the Works contract services for construction of immovable property. To elaborate on this point further, ITC is not available on 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. That means that ITC will be available on works contract service when supplied for construction of other than an immovable property or plant and machinery.
Will construction of a gas pipeline be considered as an immovable property (where ITC is not available) or movable property or Plant & machinery (where ITC is available)?
Let us refer to the advance ruling in the case of Western Concessions Private Limited (Maharashtra AAAR) where a similar issue was raised.
Facts of the Case
- M/s. Western Concessions Private Limited is engaged in regasification of Liquified Natural Gas and delivering the same to customers.
- The appellant is setting up a Liquified Natural Gas (LNG) re-gasification project in Maharashtra (LNG Terminal).
- The LNG Terminal consists of a Floating Storage Re-gasification Unit (FSRU) and has associated facilities like gas unloading arm, gas pipeline for delivering natural gas from the FSRU to the National Grid.
- The re-gasified LNG is required to be inducted into the cross-country pipeline/national Grid in order to be supplied to the ultimate customer.
- Therefore, the appellant is constructing a gas pipeline for delivering the high pressure natural gas from the FSRU to the National Grid.
Application for Advance Ruling
The appellant filed an application for Advance Ruling before the Authority for Advance Ruling, Maharashtra (AAR) for obtaining an Advance Ruling on the issue as to whether the appellant would be eligible to avail the ITC of GST paid on goods and services used for construction of Tie-in pipelines, from the FSRU to the National grid.
Advance Ruling passed by AAR
AAR denied the ITC of GST paid on goods and services used for construction of the tie-in pipeline on the following grounds:-
- As per the AAR, the FSRU is covered under the definition of ‘factory’ under Section of 2(m) of the Factories Act, 1948.
- According to the AAR, the existence of land or building is not necessary for anything to qualify as ‘factory’, but it is the manufacturing or production of something that makes a ‘factory’.
- The AAR has relied on the decision of Porritts and Spencer (Asia) Ltd. Vs. State of Haryana [1979 AIR 300] to state that the meaning of ‘factory’ should not be restricted only to a building on land, but would also include the FSRU vessel where the activity of re-gasification of LNG takes place in the present case.
- The various equipment fitted to tie-in pipeline constructed by appellant would not make it an ‘apparatus’, ‘equipment’ or ‘machinery’, as every pipeline would be fitted with such equipment.
- Hence, it would not qualify as ‘plant and machinery’ under Explanation to Section 17(5) of the CGST Act and thus the ITC in respect of goods and services used for construction of pipeline would not be available to the appellants.
- Aggrieved by the above ruling passed by the AAR, the appellant filed an appeal to the Appellate Authority of Advance Ruling (AAAR)
Proceedings of AAAR
The issues before the AAAR were as under:-
- Whether the FSRU, where the re-gasification of the LNG is carried out for delivery to the National grid, will be construed as factory or otherwise?
- In case the same is held as factory, whether the tie-in pipeline which is to be laid can be construed to be the pipeline laid outside the factory premises or otherwise?
What do you mean by ‘factory’?
1.The term factory has not been defined anywhere in the CGST Act.
2. The AAAR first visited the dictionary meaning of the term ‘factory’ as provided under the various dictionaries as provided below:-
i. Oxford Encyclopedic Dictionary (The new Oxford Illustrated Dictionary) – Building or range of buildings with plant for manufacture of goods.
ii. Collins internet-linked dictionary of Business – Third edition – A business premise used by a firm in the production of goods.
iii. The New International Webster’s Comprehensive Dictionary of the English Language – An establishment devoted to the manufacture of something, including the building or buildings and machinery necessary to such manufacture; a manufactory.
iv. Cambridge International Dictionary of English – A building or set of building where large amounts of goods are made using machines.
3. On perusal of the above meaning of the factory provided under the abovementioned dictionaries, it was revealed that for any structure to be considered as factory, the following two parameters are to be met with:-
i. First, it should be building, a set or range of buildings, a business premises, or an establishment;
ii. There should be some manufacturing activities being carried out at these places.
4. To decide “what constitutes building, a set or range of buildings, a business premises, or an establishment, AAAR again resorted to the dictionary meaning of the terms building, business premises, and establishment, as the same are also not defined under the CGST Act.
What comprises of a “building”?
1.Dictionary meaning of the term ‘Building’:
i. As per the Cambridge Dictionary: A structure with walls and a roof, such as a house or factory.
ii. As per Merriam Webster Dictionary: a usually roofed and walled structure built for permanent use (as for a dwelling)
2. On perusal of the above dictionary meaning of the term ‘Building’, it was clear that any structure with the walls and roofs would be considered as Building.
3. Further, in the above definition, there is no such constraint that such structure should be situated on the land only.
4. Thus, by looking at the photographs of FSRU, submitted by the Appellant, the AAAR considered the same as building as there are enough structures with walls and roofs, which had been built on this processing unit, which clearly indicated that the FSRU encompasses many buildings, where the regasification of the LNG is carried out for delivery of the same to the National grid with the aid of the tie-in pipelines under question.
What do you mean by establishment?
1.Dictionary meaning of the term ‘establishment’:
i. As per the Cambridge Dictionary: a business or other organization, or the place where an organization operates:
ii. As per Merriam Webster Dictionary: a place of business or residence with its furnishings and staff;
2. Thus, on perusal of the above dictionary meaning of the term ‘establishment’, it was clear that the establishment is a place from where any organization operates. There is no such restriction that such place should be located on the land only. It may be anywhere including the water bodies, such as sea, oceans etc.
3. In view of the above discussions, it was established that the FSRU, can be considered as building, or establishment.
4. Further, there is no dispute, by the Appellant, over the activities, carried out at the FSRU, where the re-gasification of the LNG is taking place, being in the nature of the manufacturing activity.
5. Thus, the impugned FSRU satisfied both the aforementioned essential conditions of the Factory, and accordingly will be construed as factory.
What do you mean by ‘premises’?
Dictionary meaning of terms ‘premises’ –
1.Illustrated Oxford Dictionary – a House, building, with grounds and appurtenances.
2. The New International Webster’s Comprehensive Dictionary of the English Language – A distinct portion of real estate; land or lands; land with its appurtenances, as buildings:
3. The Chambers Dictionary – the aforesaid (property; law); hence, a building and its adjuncts, esp. a public house or place of business;
4. Black’s Law Dictionary, V Edition – In estate and property. Land and tenements; an estate, including land and buildings thereon; the subject-matter of the conveyance. F.F. Proctor Troy Properties Co. v. Dugan Store, 191 App.Div.685, 181 NYS 786. The area of land surrounding a house, and actually or by legal construction forming one enclosure with it. A distinct and definite locality and may mean a room, especially building or other definite area, or a distinct portion of real estate. Land and its appurtenances.
5. Cambridge International Dictionary of English – the land and building owned by someone, esp. by a company or organization.
6. The American Heritage Dictionary of English Language, III Edition –
a. Land and the building on it.
b. A building or a part of building on it.
7. Wharton’s Law Lexicon. 1976 Reprint Ed – ‘premises’ is often used as meaning ‘land or houses’.
8. Cochran’s Law Lexicon, IV Edition – ‘Premises’ means ‘houses or lands’.
Observations by AAAR
1.The Appellant, vide their submissions in the form of compilation of the dictionary meaning of the term ‘premises’, has laid stress upon the argument that FSRU, a structure not being located on the land, will not be considered as building, and hence will not come under the meaning of factory as provided under various dictionaries.
2. They had also underlined the meaning of the premises as provided under various dictionaries, highlighting that premises will cover the portion of land only, which are in nature of appurtenances to building, real estate etc.
3. Now, before setting out to interpret the term ‘premises’, AAAR first looked into the context into which the term ‘premises’ had been used.
4. It is pertinent to mention that this impugned advance ruling revolved around the single core issue of interpretation of the exclusion clause i.e. “pipelines laid outside the factory premises”pertaining to the explanation to the Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.
5. According to Section 17(5)(c), ITC will not be available for 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.
6. According to Section 17(5)(d), ITC will not be available 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.
7. 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:-
a. land, building or any other civil structures;
b. telecommunication towers
c. pipelines laid outside the factory premises
8. It is a well settled principle in law that any legislation must be read in its entirety, and that texts used in the legislation should be construed in terms of context, in which these are used.
9. Coming to the issue of the interpretation of the meaning ‘premises’, it is seen that the term ‘premises’ has been used adjacent to the term ‘factory’.
10. Thus, in a way the term ‘factory’ is acting as a qualifier to the term ‘premises’, and hence it is inferred that premises need not be restricted to the land, rather it can be construed even beyond the land and may transcend to the establishment like FSRU.
11. Thus, under the present exclusion clause, the contextual meaning of the premises will prevail over the literal meaning, as advocated by the Appellant.
12. Thus, the FSRU, where the re-gasification of LNG is carried out for delivery to the National Grid through the tie-in pipeline proposed to be connecting the FSRU to the National Grid, can be rightly considered as factory.
13. Once it was established that the premises of the FSRU can be justly considered as factory premises, then there was no doubt that the tie-in pipeline, will be considered as pipeline laid outside the factory premises, and accordingly attract the exclusion clause of section 17(5)(c) and section 17(5)(d) of the CGST Act, 2017.
As a result of this, the tie-in pipeline under question will not be construed as plant and machinery, and hence the Appellant will not be entitled to avail the ITC of GST paid on goods and services used for construction of Tie-in pipelines, from the FSRU to the National grid as per the provision laid out in section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.
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