ITC eligibility of brick & mortar components forming part of a plant & machinery

 

Adv. Nirav S. Karia, Partner & Adv. Vatsal Bhansali, Senior Associate, Lakshmikumaran & Sridharan

 

Introduction

The term 'Manufacturing Plant' in a general parlance means a factory or building where goods are manufactured. However, under the taxing statues the meaning of 'Plant' has always been read with 'machinery', with a specific exclusion to any brick-and-mortar structure which forms part of the 'plant and machinery'.

 

Law under the GST Regime

Under the GST regime the definition of 'Plant and machinery' has been provided as an explanation to Section 17 of the Central Good and Service tax Act 2017 (hereinafter referred to as 'CGST Act').

 

Clause (c) & (d) of the Section 17(5) of the CGST Act provide that credit of tax paid for goods and services used in construction of an immovable property would not be available as input tax credit under GST. However, a specific exclusion has been carved out of the provision for 'plant and machinery'. Consequently, for a 'plant and machinery' even where the same constitutes as an immovable property, the credit of tax paid on goods and services used in constructing/setting up of the same would be available as input tax credit.

 

The term 'plant and machinery' for the purpose of GST has been defined to mean 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 exclude any land, building or any other civil structures, telecommunication towers and pipeline outside the factory.

 

The aforesaid definition now raises a question, as to whether an ''apparatus'' such as tank, flow channel, etc. which is made of brick and cement as opposed to metal, plastic, etc. to accommodate the huge quantum of raw materials, semi-finished goods and finished goods, would qualify as ''plant and machinery'' defined under GST law.

 

Illustration for ease of understanding

Let us take the example of an ''Effluent treatment plant'' which is now growing to be a necessity for any industrial unit, on account of the increasing focus on the environment impact resulting from the industrial effluents generated as part of the manufacturing activity. ETP in many scenarios is nothing but a scaled-up version of a water purifier installed in a household. However, when the same water purifier with necessary changes is built into an ETP, it would require some changes in terms of the materials used in making the various parts such as the gestation tank where the effluent is moved between processes and the pit which holds the various layers of material for carbon-based filtration. The said components which are an integral part of ETP would be required to be built from cement, bricks and steel to ensure that the same can take the weight of the huge quantum of material and effluents which would be required to be processed. However, when one looks at the said components in a standalone capacity, they would give an impression of an "immovable property" ONLY.

 

Foreign jurisprudence

Reference at this point is invited to the foreign jurisprudence in case of Barclay, Curie and Co.'s [1969 (1) WLR 675] decided by the House of Lords which pertains to a dry dock yard which itself was functioning as a plant, that is to say structure for the plant was constructed so that dry dock can operate. It operated as an essential part in the operations which took place in getting a ship into the dock, holding it securely and then returning it to the river. The dock as a complete unit contained a large amount of equipment without which the dry dock could not perform its function. Hence, it was held that the entire dry dock together with the ancillary structures constituted plant.

 

In England, Courts have repeatedly held that the meaning to the word 'plant' given in various decisions is artificial and imprecise in application, that is to use the words of Lord Buckley, "it is now beyond doubt that the word 'plant' is used in the relevant section in an artificial and largely Judge-made sense."

 

Hence, the term 'plant' under foreign jurisprudence has been given a more unbiased meaning to include any part irrespective of the material used for construction, providing emphasis to the role played by the structure in the manufacturing process.

 

Conclusion

This brings us to the important question, as to how you interpret the expression 'plant and machinery' for the purposes of GST law.

 

In context of the aforementioned question, it becomes imperative for all registered persons to analyse the credit availed on different components which makeup the 'plant and machinery' and the possible implications under GST.

 

[Date: 20/09/2022]

 

(The views expressed in this article are strictly personal.)