Whether ITC related to HVAC System, Lift and others is eligible?

Introduction

GST law was introduced in July 2017. One of the major reasons for introducing GST was to stop cascading effect of taxes and ensure seamless flow of credit. However, the GST law comes with a lot of conditions and restriction because of which certain credits are still adding on to the cost of the taxpayer (similar to the erstwhile tax regimes). One such restriction is that credit relating to immovable property cannot be taken [Section 17(5)(c) and 17(5)(d)]. There is a lot of confusion in the industry with regard to credit eligibility of HVAC system and lift and hence the author has tried to examine the eligibility of input tax credit on such goods in this article.

Specific legal provision on ITC restriction

Section 17 of the CGST Act, 2017 (hereinafter referred to as 'The Act') provides a list of credits which are restricted from availment even if such goods/services are used in the course or furtherance of business. Relevant extract from the provision is as follows:

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in 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 an input service for further supply of works contract service;

(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.

We now examine the meaning of the following terms:

1. Construction
2. Immovable property
3. Plant or machinery

Meaning of construction

Explanation to Section 17(5)(d) of the Act defines construction to include:

1. re-construction,
2. renovation,
3. additions or
4. alterations or
5. repairs,

to the extent of capitalisation, to the said immovable property

In the case of PSL Corrosion Control Services Ltd [2008 (12) S.T.R. 504 (Tri. - Ahmd.)] which was affirmed by the Gujarat High Court [2011 (23) S.T.R. 116 (Guj.)] held that the expression defined in statute to be understood and interpreted in the light of language used in definition.

For the purpose of section 17(5)(c) and 17(5)(d) of the Act, the term construction would include re-construction, renovation, additions, alterations and also repairs provided they are capitalised to the said immovable property in the books of account.

Consequently, if the expenses related to re-construction, renovation, additions, alterations or repairs is charged off to profit and loss account, then the same would not be covered with the meaning of construction for the purpose of Section 17(5)(c) and 17(5)(d) of the Act and input tax credit in relation to such expenses would be available.

Meaning of immovable property

The term immovable property is not defined in the GST law. We refer to other laws for understanding the meaning of immovable property.

As per The General Clauses Act, 1897, 'immovable property' shall include:

1. Land,
2. Benefits to arise out of the land, and
3. Things attached to the earth, or permanently fastened to anything attached to the earth.

Land is one of the examples of immovable property. There are many other examples that would also be covered in the definition of immovable property.

Further, the dictionary meaning of immovable property is as follows:

1. Cambridge Dictionary: property such as land or buildings, not a person's possessions
2. Wikipedia: Immovable property is property that cannot be moved from one place to another. It is generally connected to the ground or land on which it sits. The term immovable property also includes the land.
3. World Law Dictionary: an object that cannot be moved or removed without destroying it, usually referring to land and things attached to it

Therefore, anything which cannot be moved and is attached to the land would be covered within the meaning of immovable property.

Meaning of plant and machinery

The expression 'plant and machinery' is defined in explanation to Section 17(5). The extract is as follows:

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.

In the case of Lucas TVS, Madras [1987 (28) E.L.T. 266 (Mad.)], it was held that when an Act defines any term used in the body of the Act one must substitute the definition in places where the term defined is used.

Since the defining of plant and machinery is defined in the GST law, the same need to be referred for interpreting the expression 'plant and machinery'.

Analysis of the definition of plant and machinery

In the definition of plant and machinery, 'comma' is used after apparatus and equipment. What does 'comma' indicate? In the course of interpretation of statutes, the sentence and the context in which comma is used would become relevant to construe the meaning of such sentence. The Concise Oxford Dictionary Twelfth Edition states that 'comma' is a punctuation mark which indicates a pause between parts of sentence or which is used for separating items in a list. The Major Law Lexicon defines 'comma' as the smallest division of a sentence in language. The comma is used as a punctuation to divide sentences and parts of sentences.

In Mohd. Shabbir vs. State of Maharashtra reported in (1979)1 SCC 568 while interpreting the provisions relating to punishment under the Drugs and Cosmetics Act, 1940 viz., whoever 'manufactures for sale, sells, stocks or exhibits for sale or distributes' a drug without a licence is liable for punishment. The Hon'ble Supreme Court pointed out the presence of comma after 'manufacturers for sale' and 'sells' and absence of any comma after 'stocks'. It was, therefore held that only stocking for sale could amount to offence and not mere stocking

In the definition of plant and machinery, 'comma' has been used after apparatus and equipment and hence, the phrase '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' equally applies to apparatus and equipment as well.

Consequently, the following is emerging from the reading of the above definition of 'plant and machinery':

Plant and machinery include:

• Apparatus
• Equipment
• Machinery
• The foundation or structural support based on which apparatus, equipment and machinery are fixed to earth

Plant and machinery exclude:

• Land, building and civil structure other than foundation or structural support
• Telecommunication Towers
• Pipelines laid outside the factory premises

We now examine the meaning of various terms used above (these are not defined in the GST law)

1. Apparatus

• As per Black Law's Dictionary 4th Edition, apparatus means a complex device or machine designed for the accomplishment of a special purpose; a complex instrument or appliance, mechanical or chemical, for a specific action or operation
• Apparatus means technical equipment or machinery needed for a particular activity or purpose.
• The word 'apparatus' would certainly mean the compound instrument or chain of series of instruments designed to carry out specific function or for a particular use. [Commissioner of Customs v. C-Net Communication (I) Pvt. Ltd., (2007) 216 ELT 337: (2007) 10 SCR 330: JT 2007 (11) SC 329].

2. Equipment

• Equipment means one or more assemblies capable of performing a complete function [I.C.B (P) Ltd. 1997 (95) E.L.T. 239 (Tribunal)].
• As per Black Law's Dictionary 4th Edition, equipment means furnishings, or outfit for the required purposes.
• As per Mc-Graw Hills Dictionary, equipment means 'one or more assemblies capable of performing a complete function' [Speedcrafts Ltd 2003 (156) E.L.T. 304 (Tri. - Kolkata)].

3. Machinery

• Machine means a mechanical device consisting of a planned and an organized arrangement of various parts, each part having definite functions, and in which energy is transmitted or modified from one point to another [I.C.B (P) Ltd. 1997 (95) E.L.T. 239 (Tribunal)].
• The word 'machinery' as defined in the New Webster's Dictionary of the means "Any collection or functioning unit of machines or mechanical apparatus; the parts of a machine, collectively; any combination or system of agencies by which action is maintained".
• As per Law Lexicon, "Machinery" means something more than a collection of ordinary tools. It means more than a solid structure built upon the ground, whose parts either do not move at all or if they do move, do not move the one with or upon the other in interdependent action with the object of producing specific and definite result.

ITC eligibility test

We now analyse whether ITC is eligible on HVAC (Heating, Ventilation and Air-conditioning) system, lift and similar equipment. These systems are ideally fixed to the building and hence the applicability of restriction as provided in section 17(5)(c) and section 17(5)(d) need to be analysed.

Section 17(5)(c) and 17(5)(d) restricts the following:

1. Works contract services and
2. Supply of goods and services

For construction of immovable property (other than plant and machinery).

Therefore, if these services are procured for construction of plant and machinery, then such credit would not be restricted under section 17(5) even though the plant and machinery is an immovable property.

Scenarios to summarize the above:

Whether HVAC system and lift are covered within the meaning of plant and machinery? Whether the restriction under section 17(5) would apply as these would be immovable property and fixed to earth?

HVAC System

HVAC stands for heating, ventilation, and air conditioning. It refers to the systems that regulate and move heated and cooled air throughout residential and commercial buildings, from homes to offices to indoor stadiums. Although there are many options when it comes to HVAC systems, they all work similarly: taking in fresh air and using a mechanical ventilation system to heat or cool it to a desired temperature.

HVAC units also can control humidity levels and improve air quality through air cleaners that capture bacteria, spores, and virus-sized particles. The HVAC technician who comes to your home for a pre-installation evaluation will help you determine which system and options are best for you and your home.

Lift/Elevator

A lift (or elevator) is a form of vertical transportation between building floors, levels or decks, commonly used in offices, public buildings and other types of multi-storey building. Its components include the elevator car, elevator doors, hoistway or shaft, elevator control system, safety systems, counterweights, guide rails, call buttons, emergency communication system, lighting, and ventilation. Additionally, a lift may have a control panel, intercom system, door locking mechanism, buffer system, power supply, maintenance and monitoring systems, accessibility features, speed governors, car operating panel, and destination control system.

HVAC system and lift/elevator are clearly covered within the meaning of plant and machinery as these are mechanical devices consisting of a planned and organized arrangement of various parts. Further, these are assemblies capable of performing a complete function i.e., heating, cooling or even movement of people and goods. Consequently, credit would be available even though these are fixed to earth.

The restriction as provided in section 17(5) restricts credit in relation to construction of immovable property. However, it provides an exception to plant and machinery. Therefore, if works contract service or goods/services are procured for construction of plant and machinery, then the restriction would not apply even though it is related to immovable property.

Whether plant and machinery cannot be immovable property?

Recently, it has been held in an advance ruling that credit cannot be taken as the work has resulted into immovable property and hence it ceases to be a plant and machinery since it is an immovable property.

In the case of The Varachha Co-Op Bank Ltd [2024 (82) G.S.T.L. 77 (App. A.A.R. - GST - Guj.)], it was held that installation and commissioning of lift via a works contract service, makes it an immovable property, it ceases to be a plant and machinery and hence credit is restricted in terms of section 17.

Advance rulings are applicable only to the assessee who has applied for and the corresponding officer. These are not applicable and binding on other assessee's. However, AAR's could be referred to understand the department's view.

In the above judgement of The Varachha Co-Op Bank Ltd, at para 15.6, the authority has directly concluded as follows without any reasons:

15.6 As the construction of central air-conditioning plant via a works contract service as pointed out above, makes it an immovable property, it ceases to be a plant and machinery.

It is a settled principle that a non-speaking order is not a valid order. There have been various cases of Supreme court and High court in this regard. Hence, the above judgement is not valid in law.

The definition of plant and machinery as defined in the GST law does not mention that a plant and machinery cannot be an immovable property. Indeed, the definition acknowledges the fact that the machine could be fixed to earth by foundation or structural support which indicates that a plant and machinery can be an immovable property as well and still get covered within the meaning of plant and machinery.

If the interpretation as held in the advance ruling of The Varachha Co-Op Bank Ltd supra is adopted, then exclusion of plant and machinery from restriction of section 17(5)(c) and 17(5)(d) would become a dead letter as the exclusion is used in the context of immovable property. Similarly held in the case of Kamrup Industrial Gases Ltd [2004 (172) E.L.T. 454 (All.)] which was maintained by the Supreme Court in 2010 (255) E.L.T. A17 (S.C.) that a construction that reduces one of the provisions to a 'useless lumber' or 'dead letter' is not a harmonious construction.

Consequently, in the view of the author, plant and machinery, which takes the character of immovable property would still be considered as plant and machinery and GST incurred towards such plant and machinery would be an eligible ITC (provided other conditions are satisfied).

In the case of Tarun Realtors Pvt Ltd [2020 (35) G.S.T.L. 438 (App. A.A.R. - GST - Kar.)], it was held that lifts, escalator and travellators although fixed to earth with structural supports, they qualify as plant and machinery.

In the case of Uvee Glass Pvt Ltd [2023 (77) G.S.T.L. 139 (A.A.R. - GST - Raj.)], it was held that Input Tax Credit of GST paid on inward supply for fixing of plant and machinery to earth by foundation or structural support which is used for making outward supply of goods/services is admissible up to this extent only.

Though advance rulings are not applicable to other assessee's, these advance rulings are confirming our understanding.

In the case of M/s. Wago Private Limited [Advance Ruling /SGST&CGST/2020/AR/54, dated 30th July 2021], it was held that input tax credit is not admissible on Air-conditioning and Cooling systems and Ventilation systems, as this is blocked credit falling under Section 17(5)(c) CGST Act. The authority has held that AC System is in nature of a system and not machine as a whole.

The above advance ruling has directly concluded that AC system is not a machine without examining the meaning of machine/ plant and machinery.

The credit pertaining to HVAC system has been allowed in the following judgements under the erstwhile regime which may have persuasive value under GST as well:

1. City Centre Mall Nashik Pvt Ltd [2017-TIOL-4322-CESTAT-MUM]
2. Khoah Solutions Pvt. Ltd [2017 (3) TMI 1598 - CESTAT, HYDERABAD]
3. Vamona Developers Pvt Ltd [2015 (12) TMI 1111 - CESTAT MUMBAI]

What is the scope of exclusion of land, building and other civil structure from the definition of plant and machinery?

Plant and machinery specifically include foundation or structural support used to fix the machinery to earth.

Foundation means:

1. Cambridge dictionary: the structures below the surface of the ground that support a building
2. Merriam Webster dictionary: a body or ground upon which something is built up or overlaid

Structural support means a structural support is a part of a building or structure that provides the necessary stiffness and strength in order to resist the internal forces (vertical forces of gravity and lateral forces due to wind and earthquakes) and guide them safely to the ground. [Source: Wikipedia]

In substance, foundation and structural support is required for wobble free functioning of the machine and hence these are integral part of the machine. In case of Solid and Correct Engineering works [2010 (252) ELT 0481 SC] it was held that the machine is fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth but because a foundation was necessary to provide a wobble free operation to the machine.

Consequently, any GST incurred towards construction of foundation and structural support for plant and machinery without which the machine would not be able to provide the desired output, would not be covered by the restriction of section 17(5) of the CGST Act, 2017 and such credit would be eligible (provided other conditions are satisfied).

ITC in relation to any other work towards land, building or civil structure would not still be restricted under section 17(5).

In the case of Jabalpur Hotels Pvt Ltd [2020 (40) G.S.T.L. 65 (A.A.R. - GST - M.P.)], it was held that lift being part of building and thus fell under exclusion from plant and machinery and hence ITC of tax paid on lifts procured and installed in hotel building shall not be available to applicant.

The authority has considered all kinds of building and civil structure as part of exclusion from the definition of plant and machinery. The authority has not given effect to the inclusion of foundation and support structure while pronouncing the above judgement. Hence, in the view of the author, the above judgement is not in line with the GST law.

Conclusion

The GST department has been disallowing credit in relation to such goods based on advance rulings which are not in line with the law because of which a lot of eligible credit is forming part of the cost of the assessee. This may not be the intention with which the GST law was introduced and the provisions were laid down. In the view of the author, all credits related to plant and machinery including the cost incurred towards foundation and structural support is available even though they may be fixed to the earth. Further, the judgement of Supreme Court in the case of Safari Retreats is also much awaited which may provide another reason for enabling the credit.

I would like to thank CA Jatin Nagpal for vetting this article and providing his inputs.

The author may be reached at camayankajain@outlook.com.