GST Update

 GST Update admissibility of ITC on Paver Blocks 108/2020-21

Input tax credit is an essential component of GST which aims at removing cascading effect of taxes. However, availability of ITC in relation to construction services which are used in the course of furtherance of business has always been a point of dispute since erstwhile regime. The present update seeks to discuss the advance ruling pronounced in the case of M/s Sundharams Private Ltd. wherein the issue raised was regarding entitlement to avail input tax credit in respect of Paver Blocks laid on the land which were not capitalised to buildings.

The applicant contended that laying of Paver Blocks on land does not amount to construction of immovable property u/s 17(5)(c) of the CGST Act, 2017 and are to be construed as moveable items as such paver blocks are not to be permanently embedded on earth and are capable of being removed as such without causing damage to them for reuse elsewhere. It was also contended by the applicant that they have considered the expense as revenue expenditure and as they have not capitalised the said expense to the building account, the restriction contained in section 17(5) does not apply in the present case. However, the Authority for Advance ruling has held that the purpose of laying of paver blocks is to ensure efficient parking of automobiles with no wear and tear, to have longevity, durability and flexibility to re-use. The flexibility to re-use does not mean that blocks will be removed and re-erected frequently. They are meant to be permanently fixed to earth but whenever the need arises the applicant may remove them and re-erect.

The reasoning taken by the authority also included that mere capability of removal and reuse elsewhere, doesn’t mean blocks are not permanently embedded to earth. It was held that the applicant would not use the paver blocks with an intention to remove it and use the same as a movable property. In the instant case the laying of Paver Blocks would qualify as immovable property and therefore applicant cannot avail input tax credit as per Section 17(5) of the CGST Act, 2017.

The applicant had also placed reliance on the decision given by Hon’ble Orissa High Court in the case of M/s Safari Retreats allowing availment of ITC on construction of malls which are further let out. However, the AAR did not consider the decision on the grounds that the Special Leave Petition has been filed and admitted before the Hon’ble Supreme Court and the matter is sub-judice, pending for final decision.

In this context, reference can be made to ruling given in the case of M/s Sree Varalakshmi Mahaal LLP – AAR Tamil Nadu wherein it was held that the ITC is not available against any goods or services used by the applicant for construction of the marriage hall on his own account, even if said gods or services are used in course or furtherance of his business. Even in case of M/s Unity Traders -AAR MP it was held that ITC is not admissible under section 17(5) on goods purchased for purpose of construction and maintenance of warehouse used for letting out on rent.

It is observed that apart from favourable decision pronounced by the Hon’ble High Court of Orissa in the case of Safari Retreats Pvt. Ltd., wherein the principle of seamless flow of credit in the supply chain has been considered of paramount importance, the AAR do not follow the decision on the grounds that SLP is pending before the Supreme Court. We have time and again mentioned that in view of principle of judicial discipline and the verdict of Apex Court in the case of Kamalakshi Finance Corporation Ltd., mere filing of appeal before Court or higher appellate forum cannot be the basis for not following the ratio laid down by the High Court. However, there is tendency of department of not following the decision where appeal has been preferred and pending before the higher forum. Nonetheless, the aspect regarding treating the expenditure of paver blocks as revenue expenditure was not considered by the AAR which in our opinion has substantial weightage in cases where availability of input tax credit on construction related services is concerned. It is clear that construction includes renovation or repairs and if such expenditure is not capitalised in the books of accounts, the input tax credit is admissible to the assessee. It is hoped that this aspect is examined by the AAAR if the decision of AAR is appealed further by the applicant.