GACL-NALCO Alkalies & Chemicals Private Limited ., In re

FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING, GUJARAT

At the outset we would like to make it clear that the provisions of the Central Goods and Services Tax Act, 2017 and Gujarat Goods and Services Tax Act, 2017 (hereinafter referred to as the ‘CGS”‘ Act, 2017’ and the ‘GGST Act, 2017’) arc pari materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act, 2017 would also mean reference to the correspondin9, similar provisions in the GGST Act, 2017.

2. The present appeal has been filed under Section 100 of the CGST Act, 2017 and the GGS’Is Act, 2017 by M/s. GACL-NALCO Alkalies & Chemicals Private Limited, (hereinafter referred to as ‘appellant’) against the Advance Ruling No. GUJ/GAAR/R/53/2021 dated 18.10.2021.

3. Briefly, the facts are enumerated below for ease of reference:

• the appellant is a joint venture between GAO, & NALCO;
• the appellant during the course of proceedings before the GAAR I Gujarat Authority for Advance Ruling] stated that they intend to set a caustic soda plant and captive power plant.
• GII)C had leased a plot of land to GACL;
• GA CI, requested for sub-division of the said plot; it surrendered 39000 sq mtrs to appellant/GNAI, on loin), term lease for the above green field project;
• the t the deed of rectification was signed on 8.1.2018;
• that the consideration was Rs. 72.79 crores of which the GST amount was Rs. 13.10 crores.

4. In view of the foregoing facts, the appellant had sought Advance Ruling on the following questions, viz:

• Whether GNAT, is entitled to claim ITC of the GST paid on the services provided by GACL in the form of agreeing to surrender/relinquish its right on leasehold property in favour of Gi` .412″

5. Consequent to hearing the applicant, the Gujarat Authority for Advance Ruling in I GAAR I, recorded the following findings viz

• GAC has transferred its lease hold right on land to GNAL,
• that Lough words used is plant or machinery in section 17(5)(d) of the ( GST Act, 2017, in term of ruling by the Karnataka Appellate Augh with for Advance Ruling, in the case of M/s. Tarun Realtors P td, tic word ‘or’ can he read as ‘and’,
• Plan: and machinery excludes land in terms of explanation to section 17(5), ibid,
• Ligature’s intent is that ITC shall not be available in respect or services pertaining to land received by taxable person for cons; auction of an immovable property;
• that had that not been the legislative intention the word ‘land’ would neve have been used;
• that further the word ‘for’ in section 17(5)(d), ibid, indicates a purpose)se, the intended goal; that the word ‘for’ is to be construed to indicate the purpose to construct building/civil structure/administrative block;
• that the argument for proportionate credit fails as it cannot be taken as b:.sis for awarding proportionate credit; that the act does not envi age mechanism to award proportionate credit for GST in such cases:
• that he GST council in its 37^th meeting mentions that the high rate of GST makes new project unviable since credit of GST on leasing is no available for construction of immovable properties.

6. The GAAR. \ ide the impugned ruling dated 18.10.2021, held as follows:

RULING

GST amount borne by GNAL on subject sere ice received is blocked credit vide Section 171510) (GST Act and thereby ineligible for availment. the reasons summarised at pant 19.

7. Aggrieved by the aforesaid advance ruling, the appellant is before us, raising the following contentions, viz

• goods manufactured by the appellant will be supplied to customers & is taxable under GST;
• appellant paid consideration to GACL for ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act’; that the tax invoice issued is under I ISN 999792;
• ITC of GST chargeable on relinquishment of rights/agreeing to surrender the rights should be eligible in terms of section 16 of’ CGST Act, 2017 as it is used in the course or furtherance of business;
• relinquishment of right does not get covered in the ineligible list of input services;
• that the service received by the appellant is not a leasing service;
• that the acquired land is to be used in the course of furtherance of business & not for the purpose of construction of immovable property;
• that it is a trite law that predominant test is to be applied; that as per the chartered engineer’s certificate, 99.85% land would be utilized for the purpose of constructing plant and machinery;
• that the plants once fully constructed, will be capitalized as plant and machinery;
• that they would like rely on the case of l3ajaj Tempo Ltd’ wherein it was held that incentive fbr promoting economic growth & development should be liberally construed;
• that in the absence of definition of land under the GS’Is Act, it should be strictly interpreted;
• that the services received by the appellant cannot be equated as land & hence the services received will not fall in the exclusion of definition of plant and machinery.

8. Personal hearin2 in the matter was held on 15.10.2024, wherein Shri Tripathi, CFO, Shri Dhruvit Shah, Jt. Manager, Shri Anmol Rathi, Manager and Shri Hemant Desai, Advocate appeared on behalf of’ the appellant. They submitted an amendment in the grounds of’ appeal and statement of facts along with the below mentioned documents viz

(i) Key plan & drawing approved by PESO

(ii) copy of approved GPCI3 plan

(iii) CCA order ofsGPC13

(iv) DISI I approved plant

(v) Project completion certificate

(vi) Chartered ,Engineers certificate

(vii) photograph of plant site premises.

Further, the appellant also relied upon the below mentioned judgements viz

• Grasim II dustiest Ltd ²
• Darshan Singh & Ors
• Kantilal Trikamlal ⁴
• A V Fernandez
• Punjab Beverages P Ltd ⁶
• Modi Sugar Mills
• Darbari lal ⁸
• N Nagamanikam ⁹
• Mohit Mehra P Ltd ¹⁰
• Safari Rereats P I ,td

8.1 The appellant in the additional submissions submitted during the course of personal  hearing, requested insertion of various facts, inter ilia

• that there is no break in the supply chain of’ the appellant and GAC ‘;
• that GAAR failed to distinguish the difference between the right on land ;’nd the right attached to land meaning ‘profit a prendre’;
• that the license to occupy land is the supply of service which covers all commercial transactions; that the license to occupy is a benefit out of land & not supply of land itself, that any lease of a Hun: c to occupy land is defined as service;
• that of allowing ITC will burden the end consumer & shall lead to clout) c taxation;
• that the leasehold right premium amount has been paid to occupying the right over land & engage in manufacturing;
• that in their view ‘on his own account’ means the immovable property is constructed for self-occupied use or non-commercial purposes; that license to occupy land must be dealt on profit of pond that the leasehold plot has been used for furtherance of business and not on its own personal account such as self-occupied or  on-commercial object;
• that after acquiring leasehold right construction or immovable property has taken place in which manufacturing plant is erected which produces taxable goods & GST is charged on the outward supply of goods;
• the leasehold right if capitalized will be under ‘leasehold right land’ & not under ‘building block’; that hence leasehold right consideration is not used for construction of the building;

8.2 Likewise, the appellant in the additional submissions, submitted during the course of personal hearing, requested insertion of the following grounds viz

• that the explanation incorporated in the section is an integral part of the statute & has no independent existence; that both arc related to the supply of goods & nothing about the supply of services;
• that in terms of section 16(1), ibid, GST paid on input supplies during the pre-operative period is available even though appellant is not providing taxable out put supply;
• that the leasehold right consideration paid to acquire the rights to the land can never be said to be used for construction of immovable property to be blocked under section 17(5)(d), ibid;
• that leasehold right is service; that they will not capitalize nor amortize the GST input in their hook & hence. section 16(3), ibid is not applicable;
• that the plant and building will be constructed on a part of lease holding premises & the unconstructed area will he used for auxiliary services; that if leasehold right is partly used for construction of an immovable property & then also GST on the leasehold right in respect of the area on which no immovable property is constructed would be eligible for ITC;
• that in terms of the ratio of Safari Retreat P 1.td, supra, ITC is held as legitimate.

FINDINGS 

9. We have carefully gone through and considered the appeal papers, written submissions filed by the appellant, submissions made at the time of personal hearing, the Advance Ruling given by the GAAR and other materials available on record.

10. The primary issue to be decided is whether the appellant is eligible to claim ITC of the GST paid on the services provided by GACL.

11. Before dwelling on to the issue, we would like to reproduce relevant sections which govern availment/blocking of ITC under the CGST Act, 2017, viz | relevant extracts|

Section 16. Eligibility and conditions for taking input tax credit (I) El’ Ty registered person shall, subject to such conditions and restrict ions as may he prescribed and in the manner specified in sect on 49, he entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intend ‘d to he used in the course or furtherance of his business and the so :1 amount shall he credited to the electronic credit ledger of such person.

Section 17. Apportionment of credit and blocked credits

(5) Notwastanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18. input lax credit shall not he available ‘a respect of the following, namely:-

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is a. input service for further supply of works contract service:

(d) goods or services or both received by a taxable person for contraction 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, addition or alterations or repairs, to the extent ol capitalisation. to he said immovable properly

Explanation.– For^– the purposes of^. this Chapter and Chapter VI. th& expression “plant and machinery” means apparatus, erumpent, 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 

12. The controversy in this appeal hinges to the aforementioned sub- sections aver, the I Hon’ble Supreme Court, in a recent judgement in the case of M/s. Safari Retreats P Ltd, reported at 12024 INSC 7561, while examining the above sub-sections has held as follows:

ANALYSIS OF CLAUSES (c) & (d) 

31. Now. we analyse clauses (c) and (d) of Section 17(5). Clause (c) applies when works contract services are supplied fin- constructing immovable property. The definition of “works contract” under Section 2(119) is extensive. It reads thus:

Definitions: –

19) “works contract” means a contract far building, construction frication, completion, erection, installation. filling out, improve, 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;

Thus, in the case of works contract services supplied for the construction of immovable property, the benefit of ITC is not available. However, there are exceptions to clause (c). First is when goods or services, or both, are received by a taxable person for the construction of “plant and machinery”, as defined in the explanation to Section 17. The second exception is where the works contract service supplied Ibr the construction qf immovable property is an input service _.for further supply of the works contract.

32. Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) seeks to exclude from the purview of sub-section (1) of Sections 16 cm(1 /8, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from 17’C provided in the first part of Clause (d). The first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”. The second exception is where goods and services or both are received by a taxable person for the construction of an immovable property made not on his own account. Construction is said to be on a taxable person’s “own account” when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructionism as a setting in which business is carried out.  However, construction cannot said to he on a taxable person’s “own account” if it is intended to be sold or given on lease or license.

33. Section 1⁷(5) incorporates an explanation which provides that the word “construction” used in clauses (c) and (d) includes reconstruction, renovation, additions, alterations or repairs, to the extent of capitalisation, to the immovable property. Thus, a very wide meaning has been assigned to the expression “construction” by the said explanation.

34. There is hardly a similarity between clauses (c) and (d) of Section 17(5) except for the_. few that both clauses apply as an exception to sub-section (1) of Section 16. Perhaps the only other similarity is that both apply to the construction of an immovable property. Clause (c) uses the expression “plant and machinery”, which is specifically defined in the explanation. Clause (d) uses an expression of “plant or machinery”, which is not specifically defined.

35. Now, what is material is the explanation to Section 17, which reads thus:

“Explanation. /”or 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.”

The explanation defines the meaning of the expression “plant and machinery”. However, as stated earlier, the expression “plant or machinery” has not been defined under the CGST Act. It is pertinent to note that clauses (C) and (d) do not  altogether exclude every class of immovable property from the applicability of^.  In the case of clause (c), if the construction is of “plant and machinery” as defined. the benefit 1^.17C will accrue. Similarly, under clause (d), ‘^. the benefit construction is of a “plant or machinery”. ITC will be available.

[emphasis supplied]

12.1 We find that the Hon’ble Supreme Court, while analyzing section 17(5)(c), ibid, .s concluded that in the case of works contract, benefit of ITC is not available in respect ol services supplied for the construction of immovable property, subject however to two exceptions la’ when the goods, services, or both, arc received for construction of ‘plant and machinery’; and ibi where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract.

12.2 Further Wet^., while analyzing section 17(5)(d), ibid, the Hon’ble Supreme Court has concluded that it seeks to exclude from the ambit of sub­sections 16(1) `: 18(1), hid, services received by a taxable person to construct an immovable property on his own account subject however, to two exceptions, where goods or services or both are received by a taxable person to

[a] contract an immovable property consisting of a “plant or machinery”; and

[b] for tile construction of an immovable property made not on his own account:

The Hon”ble Supreme Court further, explains that construction is said to be on a taxable persons “own account” when (i) it is made For his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out, further stating that construction cannot be said to be on a taxi )1e person’s “own account” i it is intended to be sold or given on lease or license.

13. The Hon’ble Supreme Court, in the case of M/s. Safari Retreats while further analyzing has held as follows viz

43………………..As the expression “plant or machinery” appears to be intentionally incorporated, it is not possible to accept the contention of the learned ASG that the word “or” in clause (d) should be read as “and”. If the said contention is accepted, there will not be any difference between the expressions “plant and machinery” and “plant or machinery”. This will defeat the legislative intent.

46. The expression “plant or machinery” has a different connotation. It can be either a plant or machinery. Section 17(5)(d) deals with the construction of an immovable property. The very fact that the expression “immovable property other than “plants or machinery” is used shows that there could be a plant that is an immovable property. As the word ‘plant’ has not been defined under the CGST Act or the rules framed thereunder, its ordinary meaning in commercial terms will have to be attached to it.

52. This Court has laid down the functionality test. This Court held that whether a building is a plant is a question of fact. This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. The word ‘plant’ used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of “plant and machinery”, which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression “plant or machinery”. We have discussed the provisions of the CGST Act earlier. To give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test.

53. One of the submissions of the learned ASG is that as the Union legislature cannot levy tax on land and buildings, the chain is broken once a building comes into existence by using goods and services. As discussed earlier, Schedule II of the CGST Act recognises the activity of renting or leasing buildings as a supply of service. Even the activity of the construction of a building intended for sale is a supply of service if the total consideration is accepted before the completion certificate is granted. Therefore, if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed thereunder are fulfilled. Therefore, the argument regarding breaking the chain cannot be accepted in its entirety. However, if the construction of a building by the recipient of service is for his own use, the chain will break, and therefore, ITC would not be available.

14. We find that the Hon’ble Supreme Court. while analyzing the expression plant or  machinery, held that there could be a plant that is an immovable property; that the word ‘plant’ not having been defined under the Act, its ordinary meaning in commercial terms will have to be attached to it. The Hon’ble Court. thereafter laid down a functionality test, further concluding that if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed thereunder are fulfilled; that however, if the construction of a building by the recipient. of service is for his own use, the chain will break, and ITC would not be available.

15. We find that the appellant has not denied the fact that construction activity has not been done on the leasehold land acquired from GACI. Though the averment is that the chartered engineers certificate states that 99.85% of the land would he utilized for construction of plant and machinery; that plant building will be constructed on a part of lease holding premises and the unconstructed area will be used for auxiliary services. The aforementioned judgement lays down the law as far as section 17(5)(d), ibid, is concerned, ITC on services received for construction of immovable property on his  account is blocked subject however, to two exceptions, as listed supra. The Hon’ble Court further explains taxable person’s “own account” to be when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. On examining the applicant’s case in light of the above, we find that the ITC of’ the leasehold land acquired from GACI, on which construction is carried out by the appellant on his own account to set up a caustic soda plant, is hit by section 17(5)(d), ibid and therefore ITC is not eligible on this count.

16. Now on examining the matter as to whether it would fall within the other exception 0f 17(5)(d), ibid, ie construction of an immovable property consisting of ; “plant or machinery”, we find that the Hon’ble Court has laid down a function, nullity test, holding that if a building qualifies to be a plant, ITC can be availed. However, even on this count, if the construction of a building by the recipient of service is for his own use, the chain will break, and therefore, ITC would not be available. We have already held that in the present dispute, the appellant has not been in a position to prove that it is not on his own account. Going by the rationale of the judgement, supra, we hold that on this ground also, the appellant would not he eligible for ITC.

17. Now, as far as his averments regarding, payment of consideration to GACI, for ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act’, falling under HSN 999792; that ITC of GST chargeable on relinquishment of rights/agreeing to surrender the rights is eligible under section 16, ibid, & is not covered in the ineligible list of input services; that the acquired land is to be used in the course of Furtherance of business & not for the purpose of construction of immovable property; that in the absence of definition of land under the GST Act, it should he strictly interpreted, is concerned, in view of the foregoing judgement, the averments, arc not legally tenable.

18. The numerous judgements relied upon by the appellant on how to read a statute, would not support his case, more so because, in paragraph 25 in the case of Safari Retreats P Ltd, supra, the Apex Court, has summarised the law regarding, interpretation of taxation statutes and thereafter, passed the aforementioned judgement, which we have relied in coming to the aforementioned findings.

19. The other averments raised by the appellant, arc not being gone into since in the judgement of Safari Retreats Pvt Ltd., the Hon’ble Apex Court has examined section 17(5)(d), ibid, in its entirety and has laid down the law, which in terms of Article 142 of Constitution of India, is the law of the land.

20. In view of the above findings, we reject the appeal filed by appellant M/s. GACL-NALCO Alkalies & Chemicals Private Limited, against the Advance Ruling No. GUJ/GAAR/R/53/2021 dated 18.10.2021, passed by the Gujarat Authority for Advance Ruling.