Industries worldwide with the pace of their growth, in order to squeeze the benefits of economies of scale, tends to perform the functions on their own for which they generally are dependent on the third person. In this article, among the various functions performed, I would like to throw some light on the admissibility of Input Tax Credit on transmission wires laid outside the factory premises i.e. on the areas not owned by them, by the big factory houses generated in their own thermal plants used mainly for the transmission of electricity for their captive consumption under the provisions of the GST (so brought with the moto seamless transfer of credit!).
Section 16 of the CGST Act, 2017 deals with the eligibility and conditions for taking the input tax credit. Extract of the same for the sake of brevity is reproduced hereunder:
"16. Eligibility and conditions for taking the input tax credit.—
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both 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."
In terms of section 16(1) of the CGST Act, 2017 every registered person would be eligible to take the input tax credit on the receipt of goods or services which are intended to be used in the course or for the furtherance of business.
As through the wires laid, the electricity would be transferred and which would finally be utilized by the machinery for the manufacturing of the final product.
Therefore, in terms of the aforesaid provision, the goods/services used in laying and setting up wires/towers for the transmission of electricity for captive purpose is for the furtherance of business and the input tax credit is admissible on the same in the purview of section 16.
However, attention also needs to be given to section 17(5) of the CGST Act, 2017, non- obstante clause" which specifically blocks some of the goods/services the credit for which is blocked still been used for the furtherance of business.
As per clause (d) of section 17(5), which is been reproduced below:
"(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…."
It can be interpreted that:
Input tax credit won’t be available if goods and services are used for the construction of the immovable property i.e. "An asset that is fixed to the earth and cannot be moved" in spite of been used for the furtherance of business with an exception Plant and Machinery.
Two words are important in this definition i.e. Immovable Property and Plant and Machinery.
As the immovable property is nowhere defined under the provisions of the CGST Act, the same is adopted from THE GENERAL CLAUSE ACT, 1897 wherein it has been defined as:
"(26) "immovable property" shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth;"
As in the current scenario, the poles at both the ends of the wire would be fastened to the earth for making it fit to use and further, the benefits from the same would be extracted in this form only, henceforth concluding fairly, the same would reasonably be accounted for in the immovable property.
Plant and Machinery for this provision have been defined wide an explanation at the footnote of the provision which is been reproduced below:
"Explanation.- For the purposes of this Chapter and Chapter VI, 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."
It can further be interpreted that:
Plant and Machinery include all the apparatus, equipment, and machinery which are fixed to earth (for making them ready to use) either by the foundation or structural support with an exception i.e. excluding:
a) land and building,
b) telecommunication towers and
c) pipelines laid outside the factory premises
Therefore credit of all the equipment and machinery is available even being fixed to earth except for land, building, civil structure, telecommunication towers, and pipelines laid outside the factory premises.
Definition of the pipelines has no been where defined in the provisions of the CGST Act, 2017 and therefore, retrieving its definition from www.Thesaurus.com :
"a route, channel, or process along which something passes or is provided at a steady rate; means, system, or flow of supply or supplies:"
Further definition and meaning of the word laid would also need to be referred to. As per the definition as stated in www.Thesaurus.com:
"laid: simple past tense and past participle of lay
Lay: to put or place in a horizontal position or position of rest"
Taking a perspective and holistic view from the above-mentioned definition of the pipelines and laid, it can be reasonably drawn that:
a) it is route/channel i.e. the electricity flows in the designated direction of the wires; and
b) something passes i.e. electricity itself; and
c) at a steady rate; means, system or flow of supplies i.e. flow of the electricity can be controlled by the enterprise as per the requirement; and
d) the wires attached between two and subsequent poles are as good as been laid between them in a definite position.
Therefore, agreeing to the definition and view as aforesaid it can be clearly concluded that the wires/towers laid for the transmission of the electricity fall under the purview of the pipelines.
Henceforth, the wires/towers laid for the transmission of the electricity (outside the factory premises for transmitting it to various units) falls under the purview of the "pipeline laid outside the factory premises" being an exception to plant and machinery and further being an immovable property as iterated above, the input tax credit for the same is blocked under Clause (d) of Section 17(5) CGST Act, 2017.
To summarize, all though the input tax credit for the wires/towers laid for the transmission of the electricity (outside the factory premises for transmitting it to various units) is available under section 16 of the CGST Act, 2017 but however been blocked under clause (d) of Section 17(5) of the CGST Act, 2017, input tax credit on the goods/services used for setting and laying it (outside the factory premises), is not available.
But now the question arises is that GST was brought in with the motive of one nation, one tax, and a seamless flow of credit. It cannot be denied that huge cost and therefore, a huge amount of input credit would be involved when a company brings in such a project of in-house power generation and transfer for captive use. If all the credit associated with that, in terms of the aforesaid discussion instead of being available for utilization becomes part of the cost, won’t it defy the very much purpose of GST and break the chain of seamless flow credit! Thoughts need to be given on that.