{"id":1087,"date":"2020-01-07T18:49:00","date_gmt":"2020-01-07T18:49:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1087"},"modified":"2020-01-07T18:49:00","modified_gmt":"2020-01-07T18:49:00","slug":"gst-issues-denial-of-itc-related-to-construction-of-enabling-works-peb-storage-sheds-by-treating-these-as-immovable-property","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1087","title":{"rendered":"GST Issues: Denial of ITC related to construction of Enabling works\/PEB storage sheds by treating these as Immovable property"},"content":{"rendered":"
\n<\/p>\n
\n(This
\nis the first article on GST in this Blog and it may not be that relevant for a non
\nGST professional. So I have divided the article in two parts- first part is
\ngeneral discussion about taxes which I think is relevant for everybody and
\nsecond part is specific to the GST issue but even in this part the views about
\nimmovable property are relevant even for a non GST professional)<\/span><\/div>\n
\n
<\/span><\/div>\n
\nPART-1-General
\ndiscussion about Taxation<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nTax laws should
\nbe simple <\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nIf we keep ourselves aside then objectively,
\non its own, life does not seem to have any higher purpose\u2026.except reproduction.
\nEverything around us- whether a flower, an animal or an insect\u2026everybody is
\njust seemed to have one motive and that is to reproduce before death. Life- if
\none can see appears to support and favors reproduction only not anything else.
\nIt does not care if a poor baby is being killed or an innocent girl is being
\nraped\u2026no law of life intervenes\u2026nothing. We may be having larger than life
\naspirations from our short term life here but life does not seem to expect much
\nfrom us. But still, all this massive universe and gigantic phenomenon couldn\u2019t
\nhave been planned just for creating this worthless cycle of birth and death.
\nThere must be some higher purpose behind so much pain and plan in creation. But
\nby looking at the relentless focus of life and support system mainly upon
\nreproduction- it seems that the life system still has deficiencies and its
\ndesign (like short life) is not fully supporting the basic purpose behind the
\ncreation. Or we are living in a Tier 3 world with a chance to upgrade into
\nhigher dimension world.<\/div>\n
\n<\/div>\n
\nTaxation is a nightmare for most
\nof the humanity. The language used to draft the tax laws is a nightmare even
\nfor the highly educated fellows. we see extremely talented professionals
\ndebating in courts over tax disputes where we see that the cases involving tax
\ndisputes of hundreds of crores are settled by courts over the interpretation of
\nphrases like \u201cin respect of\u201d, \u201cin relation to\u201d , \u201cmeans\u201d or \u201dincludes\u201d. And when
\nwe see that the small useless phrase \u201cin respect of\u201d can be of so much
\nimportance we just tremble in awe. This extremely complex web of taxation seems
\nto suggest that this is something very superior\u2026that something extremely
\nimportant, worthy is being planned and done\u2026that these things are meant only
\nfor some chosen ones and this realm will remain out of the reach of normal
\nbeings like us. But for all the charisma around it, taxation system has only
\none purpose- to collect money and in most cases from normal ordinary human
\nbeings.<\/div>\n
\n<\/div>\n
\nSo one day, in the process of evolution,
\nit is possible that an ape from a zoo would ask if the objective is so trivial
\n(just collection of money, no contribution to the life and its objective) then
\nwhy so much complexity in taxation system? Why to waste so much time and energy
\nin creating such a complex system at first and then fighting for ages in courts
\nfor proving what is the \u201creal\u201d meaning\/interpretation\/coverage of a particular
\nsection of law? A beggar also collects money from other people without giving
\nany service to them directly. Similarly taxation system also collects money
\nfrom other people without giving any service to them \u201cdirectly\u201d. I am saying
\n\u201cdirect service\u201d because the use of the money collected from taxes for the
\nwelfare of the people may return something of value to them indirectly. But
\nthat is related to the use of money collected from taxes which if we can see
\nsuffers from even worse problems- the use of public money for productive uses
\nis very scarce and most of the money is wasted in useless subsidies and
\nfreebies<\/b> just to attract votes. <\/div>\n
\n<\/div>\n
\nBut we can see that the \u201cusage\u201d
\nof money collected from taxes can be revolutionary for society and humanity-
\ntake for example that money can be used for doing revolutionary research in the
\nfield of medicine which can prolong the use full life of the human beings (not just
\nold age where they just can breathe). But \u201ccollection\u201d and \u201cusage\u201d of the tax
\nmoney are altogether different and there is no doubt that \u201cusage\u201d definitely is
\nmore worthy and valuable. So both \u201ccollection\u201d and \u201cusage\u201d need some systems to
\ncarry out the desired objectives of their creation but \u201ccollection\u201d is a
\nsubordinate to \u201cusage\u201d and the efficiency of \u201ccollection\u201d system is crucial to
\nthe ultimate objectives of \u201cusage\u201d system.<\/div>\n
\n<\/div>\n
\nAnd the efficiency of taxation
\nsystem is not in the complexity but in the simplicity. Complex system does not
\nresult in more tax revenues but more disputes and so much of the productive
\nresources of an economy are consumed in this process of litigation. People
\nconfirm the efficiency of taxation structure on the basis of cost incurred for
\ntax collection. The same is around 1% for most of the taxes but this is the
\ndirect cost. If we can count the indirect costs due to years of litigation,
\nlack of clarity and doubt, money spent on court and lawyer fees, social costs
\nand most importantly lack of investment due to fear of complex taxation. If one
\ncan count these then the same will outweigh any incremental tax revenue
\ncollected by creating a complex and arbitrary taxation system. That\u2019s why I
\nalways say that tax system should be simple. It can\u2019t be allowed to be so
\ncomplex to create havoc to the society and economy. Its construction and
\ncomposition should not burden businessmen so as to discourage investment and
\ninnovation but encouraging corruption and anarchy. Taxation system should not
\nburden people with time wasting and costly compliances. Unnecessary and large
\nnumbers of compliances like monthly and annual tax returns etc. just increase
\nthe cost of doing business and hinder the economic growth because so much of
\nthe economic resources like manpower and money are spent on ensuring these tax compliances
\nand disputes which adds nothing\/little to the GDP. These
\nforces act more like rentier forces or toll booths on economy collecting money\u2026a charge on economy. <\/span>Without any second thought, taxation system
\nshould be simple just like 2 plus 2 is four. <\/div>\n
\n<\/div>\n
\nIf there is anything in our
\nsociety which indeed deserves complexity is the easy entry of anybody in public
\nservices, administration and politics. Any fool can enter these very important
\nsocial structures without any testing. Just by passing an exam anybody can
\nbecome a public servant and can play with gigantic economic and social resources.
\nWe attempt to test and measure their intelligence by taking exams\/tests etc.
\nbut no tests for judging the integrity, ethical buildup, compassion and thirst
\nfor social welfare in the candidates which are more important for public
\nservices than intelligence because in the absence of these attributes
\nintelligence will lead to corruption in almost all the cases. If you ask me, compassion
\nis also a major part of IQ not intelligence alone. No doubt that any attempt to
\njudge these abstract attributes of human character will make the selection
\nprocess very complex but this is what and how it should be- the selection
\nprocess of public servants should be very complex to discourage easy entry.
\nOnly a compassionate, honest and ethical policeman can do his job meaningfully
\nmaking valuable contribution to the society and where general public can have
\nfaith and confidence not fear and disgust. <\/div>\n
\n<\/div>\n
\nThings are very strange in our
\nsociety. Governments distribute much of the resources collected through taxes
\nto poor through many social schemes. As this distribution is targeted and
\ninvolved scarce money\/economic resources hence there should be extreme caution
\nand focus to not to waste or misuse this money. So this indeed requires
\ndevising a very high tech, complex, transparent system so that money does reach
\nthe needy and corruption free. But situation is just the opposite- Huge
\nquantity of food in the form of wheat\/rice is wasted in the shabby warehouses
\nby government meant for public distribution not to forget the widespread
\ncorruption. Highly subsidized Urea is used wastefully in excess because it is cheap-
\nin some cases around 10-20 times the required input. So this inefficiency is
\neverywhere wherever public money is involved instead of being highly efficient.\n<\/div>\n
\n<\/div>\n
\nBut on the contrary, taxpayers
\n(Income tax) work day and night and then from their hard earned money they part
\naway very significant portion as taxes. So government should be thankful to
\nthem but instead these taxpayers are burdened with unnecessary large number of
\ncompliances and in some cases making their life miserable. Instead of giving
\nsome exclusive benefits (like lower toll charges etc.) taxpayers are burdened
\nwith huge obligations although they give money (as tax) for free but the receiver
\nof this (both direct and indirect taxes) money (including Government) who are receiving
\nthis for free have virtually no obligation towards proper and authentic
\nutilization. <\/div>\n
\n<\/div>\n
\nSimilar is the case for indirect
\ntaxes. It is true that the collectors (businessmen\/firms\/companies etc.) of
\nthese taxes are dealing with public money so it must be ensured that they are
\ndoing this in good faith and there is no misappropriation and avoidance but
\nstill the prime responsibility for ensuring this lies with the tax department
\nnot on the assesse. So tax departments should devise systems to ensure most of the
\ncompliances indirectly rather than assessees spending big time and money on
\nensuring the same. <\/div>\n
\n<\/div>\n
\nPART-2 GST<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nGST is one such attempt to bring
\nsimplicity to the taxation and to create an environment of flexibility, freedom,
\nfearlessness, clarity, perspective and lower compliances. It is indeed a step
\nin the right direction but as of now it still needs fine tuning. <\/div>\n
\n<\/div>\n
\nLow compliances is one area where
\nsimpler rules\/formats can ensure easy life for businesses. But seamless Input tax
\ncredit (ITC) is another area of equal importance and in no case a law should arbitrarily
\ndeny input tax credit to a business. In my view, for a business which is
\ndischarging output tax (GST) liability the right to avail ITC is a fundamental
\nconstitutional right. No law should attempt to disallow ITC just for the sake
\nof revenue.<\/div>\n
\n<\/div>\n
\nDisallowance
\nof ITC of certain supplies in GST<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nGST act has disallowed the ITC of
\nmany input goods and services under section 17(5) of CGST act. One such
\ndisallowance (Clause (c &d) of section 17(5)) is against works contract
\nservices and goods\/services used for the purpose of construction of immovable
\nproperty<\/b> other than plant and machinery even when these are used for the
\npurpose of furtherance of business. Apart from exception in the form of plant
\nand machinery the other exception is where works contract service is the input
\nservice for further supply of works contract service. Below is the reading of
\nthe Clause (c &d) of section 17(5): <\/div>\n
\n<\/div>\n
\ninput tax credit shall not be
\navailable in respect of the following, namely:<\/i><\/div>\n
\n(c) works contract services
\nwhen supplied for construction of an immovable property (other than plant and
\nmachinery) except where it is an input service for further supply of works
\ncontract service;<\/i><\/div>\n
\n(d) goods or services or both
\nreceived by a taxable person for construction of an immovable property (other
\nthan plant or machinery) on his own account including when such goods or
\nservices or both are used in the course or furtherance of business.<\/i><\/div>\n
\n
<\/i><\/div>\n
\nTo explain the impact of this let\u2019s
\ntake the example of Mahindra logistics Ltd which is a logistics player.
\nMahindra has built a warehouse for storing the goods of his customers and earns
\nincome from storage charges. Mahindra has incurred huge costs\/investments in
\nconstructing this warehouse and must have paid GST on the procurement of all
\nthe goods and services which is Input tax for Mahindra. But as this warehouse
\nis an Immovable property so due to the restrictions imposed by this section
\n(immovable property and services offered not being of works contract but
\nstorage charges) Mahindra can not claim the ITC of the GST paid on its input goods
\nand services used for the construction of warehouse. These logistics firms do
\nnot have large variable costs and their biggest cost is the cost of construction
\nof warehouses etc. Their employee cost is lower than depreciation charge. Even
\nif Mahindra take the warehouses on lease there will not be any difference
\nbecause the firm who is leasing the warehouse to Mahindra must have forgone its
\nITC and thus the same has become its cost of construction which will increase
\nthe lease charges for Mahindra.<\/div>\n
\n<\/div>\n
\nFor a warehouse costing 50 cr the
\nloss of ITC of GST will be around 9 cr which is substantial. One can easily see
\nthat this does not look very logical because Mahindra is paying the output GST
\non storage charges earned from its customers so it should get the ITC of input
\ngoods and services. The right to avail input credit is related to the payment
\nof output tax and it can\u2019t be restricted on any \u201cparticular\u201d class of goods and
\nservices per se. same is the case with hotel industry where assets created are
\nimmovable but services offered are not works contract.<\/div>\n
\n<\/div>\n
\nViolation of
\nconstitutional Right to Equality<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nThere is no doubt that it is
\nagainst the right to equality accorded by Article 14 of Indian constitution
\nwhich is one of the six fundamental rights in the Indian constitution. Right to
\nequality ensures that there shall not be any arbitrary discrimination between
\none citizen and the other. It applies to all persons like corporates which are
\nlegal persons. For more clarity, take the case of some steel pipe maker like
\nJindal. Jindal is buying steel and other goods and services for manufacturing
\nsteel pipes and is paying GST on all these input goods and services. Jindal is
\nalso paying output GST on its sale of steel pipes and as per GST law it can
\navail the ITC of GST paid on input goods and services. If we can see there is
\nnot any difference in the business model- both are paying output GST on their
\nproducts but Jindal is entitled to claim the ITC of its major input goods and
\nservices while on the other hand Mahindra can\u2019t claim the ITC of its major
\ninput goods and services. So one can clearly see that both are not treated as \u201cequal\u201d
\nby the law and hence the same is unconstitutional and there are high chances
\nthat the Apex court may declare it so on one fine day. But I am leaving this
\nconstitutional part here due to length of this article but will explain the
\nsame in detail in some other post.<\/div>\n
\n<\/div>\n
\nITC of enabling
\nworks by Infrastructure firms<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nThe issue I am going to discuss
\nin this post is related to availment of ITC of enabling works by Infrastructure
\nfirms. Generally Infrastructure firms like L&T takes the orders from customers
\nfor construction of things like Power plants, Dams, road, Railway lines etc. <\/span>Take the example of an order received by
\nL&T from NTPC for construction of a power plant of 800 MW. Here, L&T
\nwill be constructing the power plant on land belonging to NTPC. In most cases,
\nNTPC buys the equipments related to power plants like Boiler, Turbine from
\nother firms like BHEL and the same it hands over to L&T for erection and
\nconstruction of power plant.<\/div>\n
\n<\/div>\n
\nThese construction firms need to
\nconstruct sheds\/stores for the storage of various materials it receives from
\nNTPC and its own, development of open yard, fencing, electrification work of
\nthe open yard and Sheds for security and traceability, building approach roads
\netc. All this basic infrastructure is collectively called enabling works. The
\nland for constructing store etc. is given by NTPC and as per contract terms
\nL&T is required to demolish the same after the project is completed and no
\ncharges are charged by NTPC for the usage of the land.<\/div>\n
\n<\/div>\n
\nThese days infrastructure firms
\nare using Pre-fabricated\/pre-engineered materials (PEB) for the construction of
\nenabling works (Closed and semi closed sheds) at their project sites. PEB
\nbuilding consists of a structural steel framing system, supporting a metal
\nroofing system and the wall panels of varying materials. In PEB buildings, the
\nbuilding structure is built of steel frames instead of concrete and in most cases
\nthese steel frames are fabricated elsewhere in a factory and then brought to
\nthe site and then the same are installed using screws and welding etc. Also,
\nthe side walls and roof of the storage shed is also made of steel panels and
\nroofing sheets. Apart from reduced construction time and lower cost, the main advantage
\nof PEB structure is that the material is re-usable. The steel structure can be
\nremoved from site office without damaging the same and same can be reused at
\nother project sites and after transporting the same to other sites it retains
\nits original functionality. So this is a true green material.<\/div>\n
\n<\/div>\n
\nNow the question here is- whether
\nPEB building\/enabling works is an immovable or movable property as the
\navailment of ITC of GST paid on construction of the enabling works is dictated
\nby this factor and if PEB building is immovable then no ITC will be available
\nand cost implications are huge. <\/span>General
\nindustry view is that the same is immovable. Further doubts have been raised
\nover this in the wake of recent ruling given by Advance ruling Authority West
\nBengal in case of Tewari Warehousing Co Pvt Ltd that ITC is not admissible on
\nconstruction of a warehouse with prefabricated building blocks. <\/div>\n
\n<\/div>\n
\nSo in the next paragraphs I\u2019ll
\ntry to explain the same. Whether some structure is immovable or movable is
\nrelevant not only from the perspective of ITC of GST but also in cases where a building
\nis sold for significant amount and costly machinery is also installed\/fabricated
\nin the same building. So now the question may arise whether this transaction is
\none of sale of immovable property and will attract registration and stamp duty
\ncharges on registration\/transfer of the building on the entire transaction
\nvalue or else the transfer of machine is not sale of immovable property but one
\nof sale of goods and thus GST is required to be paid on the same. One can see
\nthe involvement of huge sums in the form of registration & stamp duty
\ncharges and GST.<\/p>\n

As per the Act, the ITC is
\nrestricted on the basis of Immovability not on the basis of capitalization. In
\nfact, the ITC is allowed even for immovable property if the same is not
\ncapitalized hence we need to test whether the construction of enabling work falls
\nunder movable or immovable property.<\/p>\n

\n<\/div>\n

<\/div>\n

\n(A)
\nConstruction of PEB enabling Structure <\/span>is movable or immovable?<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nFirst of all we need to find out
\nwhat actually is immovable property. The same is defined in General clauses
\nact 1897, Registration act 1908 and Transfer of property act 1882<\/b> which say
\nthat Immovable property includes land, benefits to arise out of land and things
\nattached to earth. General clauses act and Registration act do not define the
\nmeaning of \u201cattached to earth\u201d but the same is done by Transfer of property
\nact. It defines it as:<\/div>\n
\n(a) rooted in the earth, as in
\nthe case of trees and shrubs;<\/div>\n
\n(b) imbedded in the earth, as in
\nthe case of walls or buildings; or<\/div>\n
\n(c) attached to what is so
\nimbedded for the permanent beneficial enjoyment<\/b> of that to which it
\nis attached<\/b>;<\/div>\n
\n<\/div>\n
\nAs per above, there is no doubt
\nthat land and a concrete building is an immovable property. But matter becomes
\ncomplex when it is about movable things becoming immovable after being attached
\nto these immovable civil structures like a machine or PEB material. To settle
\nthe same guidance is provided by the clause (c) above which provides for the permanent<\/u>
\nbeneficial enjoyment of that to which it is attached<\/u><\/b>. <\/div>\n
\n<\/div>\n
\nThis clause provides that a thing
\nbecomes immovable if the same is attached to an immovable structure and such
\nattachment is for the permanent beneficial enjoyment of the immovable property
\n(not of the thing) to which it is attached. These things are not immoveable
\nproperties per se<\/i> but they become immovable as they are permanently
\nattached\/fixed to a foundation embedded in earth. So the pressing issues and
\ntests here are 1) permanent attachment<\/u> <\/b>and 2) thing to be
\nenjoyed<\/u><\/b>. Major issue involved in deciding permanent attachment is the intent
\n<\/u><\/b>which further involves Object and<\/u><\/b> Mode\/extent\/degree
\nof annexation to the earth<\/b>. <\/u>Let\u2019s have a look at these issues:<\/div>\n
\n<\/div>\n
\n1)Thing to be enjoyed:<\/u><\/b>
\nAs per this clause, if a thing is attached to an immovable structure embedded
\nin land like wall or civil structure then that thing becomes part of immovable
\nproperty if by attachment the intention is to enjoy the benefits of wall\/civil
\nstructure not of the thing which is attached to that structure. So if a chattel
\nis attached to a wall for beneficial enjoyment of wall then the chattel becomes
\npart of immovable structure. However If the attachment is made for the
\nbeneficial enjoyment of the chattel itself, then it remains a chattel not
\nimmovable property, even though fixed for the time being so that it may be
\nenjoyed.<\/div>\n
\n<\/div>\n
\nThis explains why door\/windows
\nare considered immovable structure because when we attach a door to a wall,
\nthen we are not enjoying the door but through door we are enjoying the benefits
\nof room because door on its own is incapable of providing any enjoyment. The
\nsame thing is also true for windows as they are just allowing us to enjoy the
\nbeneficial enjoyment of our house. But the same thing is not true for AC
\nbecause when we attach an AC to the wall then the intent is not to enjoy the
\nbenefits of wall but of AC as a separate fixture and further we can remove the
\nsame without any damage to wall and AC and the same can be reused. So AC
\nfulfills the twin tests of destructibility and beneficial enjoyment of the
\nchattel itself.<\/div>\n
\n<\/div>\n
\n1(a) Applying the above test
\non Construction of PEB Enabling shed at project sites: <\/u><\/b>When we apply
\nsame analogy to construction of PEB structure at project sites, one can see
\nthat when we attach PEB material to the civil structure or foundation then the
\nintention is not to enjoy the civil structure\/foundation (means land) but PEB
\nmaterial itself (of space not land). So by constructing PEB shed the intention
\nis to enjoy the PEB shed itself hence PEB shed is a movable property. Similarly
\nwhen we make civil foundations, we are getting beneficial enjoyment of land so
\ncivil foundations are immovable structure.<\/div>\n
\n<\/div>\n
\nFurther, even without
\nconstructing walls and roof from PEB material we can still enjoy the benefits
\nassociated with land as we can place all the materials on land (civil structure\/floor)
\nwithout walls and roof. So the purpose of walls and roof is not to enjoy the
\nbenefits associated with land but to ensure security and safety from
\nenvironment damage. But if the purpose of walls and roof (if made of concrete)
\nis not to enjoy the benefits associated with land then why they are regarded as
\nimmovable property. Actually walls\/roofs are regarded as immovable property not
\nbecause they get beneficial enjoyment of land but because walls and roofs are
\nembedded into the earth (as per clause (b) above of Transfer of Property act)
\nwhich fulfills the condition attached to earth and so the same is immovable
\nproperty. But it has no relation with beneficial use of land.<\/div>\n
\n<\/div>\n
\nSame view has been taken by
\nvarious courts in a number of cases:<\/b><\/div>\n
\n
<\/b><\/div>\n
\nIn case of SRI VELAYUTHASWAMY
\nSPINNING MILLS (P) LTD vs THE INSPECTOR GENERAL OF REGISTRATION Madras High
\ncourt settled<\/b>: \u201cIn the case before us, the attachment of the oil engine to
\nearth, though it is undoubtedly a fixture, it for the beneficial enjoyment of
\nthe engine itself and in order to use the engine, it has to be attached to the
\nearth and the attachment lasts only as long as the engine is used. When it is
\nnot used, it can be detached and shifted to some other place. The attachment,
\nin such a case, does not make the engine part of the land and as immovable
\nproperty\u201d.<\/div>\n
\n<\/div>\n
\nCalcutta High Court in
\nJanchand v.Kishore<\/u><\/b> (AIR 1960 Calcutta 301) has held that the test is
\nwhether the annexation is with the object of the permanent beneficial enjoyment
\nof the land or building. The Court held that the machinery was not attached for
\nthe mere beneficial enjoyment of either the soil or the concrete; it was
\nactually a case of the structure being built around the machinery to protect
\nit.<\/div>\n
\n<\/div>\n
\n2) Tests of Permanent
\nattachment:<\/u> <\/b>Technically nothing can be attached, annexed or embedded
\ninto earth permanently. So \u201cattached forever\u201d can\u2019t be the test for judging the
\nannexation to earth. Here, the intent\/purpose behind the attachment confirms
\nthe annexation to earth because the things under consideration are itself
\nmovable but they are considered immovable due to attachment to the immovable
\nstructure so intent behind such annexation is the primary factor. <\/b>The
\nintent is guided by the \u201cmode\u201d of annexation and \u201cobject\u201d of annexation. The mode\/nature
\nof annexation involves the test of destructibility<\/u><\/b> while object
\nof annexation further (apart from thing to be enjoyed) involves the intended duration
\n(long term vs short term) of the annexation i.e. whether attachment is
\nintended to be permanent<\/u><\/b>. <\/div>\n
\n<\/div>\n
\nVarious Indian courts have
\nconsidered these tests as most relevant while deciding the immovability. The
\nobject of annexation is determined by facts and the circumstances of each case.
\nHowever, most important thing to be kept in mind is
\nthat the permanent attachment test is relevant only when the thing is not
\nembedded into earth like wall or building because when it is so then that wall
\nor building is an immovable property courtesy clause (b) of the definition of
\n\u201cattached to earth\u201d of Transfer of Property act. If a thing is not embedded
\ninto earth like wall or building then the relevant factor is whether the intent
\nis to attach the thing permanently into earth. That\u2019s why for our PEB structure
\nthis test is more relevant as PEB structure is not embedded into earth like
\nwall or building. So the intent behind attachment (permanent or temporary) of
\nthis structure into earth is to be checked.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe English law has also evolved
\nthe twin tests of degree\/nature or mode of annexation and the object of
\nannexation. In Wake v. Halt (1883) 8 App Cas 195 where, speaking for the Court of
\nAppeal, Lord Blackburn stated: \u201cThe degree and nature of annexation is an
\nimportant element for consideration; for where a chattel is so annexed that it
\ncannot be removed without great damage to the land<\/b>, it affords a strong
\nground for thinking that it was intended to be annexed in perpetuity to the
\nland.<\/b>\u201d<\/i><\/div>\n
\n
<\/i><\/div>\n
\nSupreme Court in CCE v. Solid
\n& Correct Engineering Works and Ors 2010 (252) ELT 481 (SC)<\/b> has opined
\nthat an attachment without necessary intent of making the same permanent<\/u>
\ncannot constitute permanent fixing, embedding or attachment in the sense that
\nwould make the machine a part and parcel of the earth permanently. Hence, the
\nSupreme Court held that the plants in question were not immovable property.<\/div>\n
\n<\/div>\n
\nHere, SC observes that attachment
\nof the plant to the foundation is not comparable or synonymous to walls and
\nbuildings embedded in the earth, because a building embedded in the earth is
\npermanent and cannot be detached without demolition<\/b>.<\/div>\n
\n<\/div>\n
\nApart from destructibility test,
\nanother important aspect is the whether the intention is of temporary or
\npermanent (duration) attachment<\/b> of the structure. There are cases where
\nmachinery installed by monthly tenant was held to be a moveable property as in
\ncases where the lease itself contemplated the removal of the machinery by the
\ntenant at the end of the tenancy. The same point was also considered by SC in
\nCCE v. Solid & Correct Engineering Works.<\/div>\n
\n<\/div>\n
\nAlso, in the above case of Tewari
\nWarehousing Co Pvt Ltd, AAR West Bengal, while giving the ruling, has taken
\ninto consideration the fact that the Applicant has taken the land to build
\nwarehouse on 30 years lease and the same is further extendable after this
\nperiod so the intention is to use the warehouse as permanent structure as they
\nare not going to (have no plans) to remove the same in the near future.<\/div>\n
\n<\/div>\n
\nIn Subramaniam Chettiar v.
\nChidambaram Servai (’40) 27 A.I.R. 1940 Mad. 527 <\/u><\/b>it has been pointed
\nout that when the owner of a building installs machinery therein he may well
\nhave intended to make a permanent improvement to the premises which he owned in
\norder to facilitate the user of those premises but that a tenant in
\ntemporary occupation of leased premises is not likely to have had any such
\nintention in making the improvement<\/b> and he accordingly held that the oil
\nengine did not become and was not therefore immovable property.<\/div>\n
\n<\/div>\n
\nMadras High Court in
\nMohammed Ibrahim v. Northern Circars Fibre Trading Co<\/u> <\/b>has opined that
\n‘when the owner purchases the land and the machinery, he cannot be said to have
\nthe same intention which his vendor had.<\/div>\n
\n<\/div>\n
\nCalcutta High Court in Jnan
\nChand Chugh vs Jugal Kishore Agarwal And Ors.<\/u><\/b> on 21 September, 1959 has
\nobserved that \u201cthe important test is what was the intention of the owner when
\nbringing the machinery on the land and setting the same up. The owner only
\nhad a monthly tenancy.<\/b> The nature of the structure in which the machinery
\nwas housed shows that the object was somehow to keep off wind and water. The
\nreason is obvious; the land was held on the basis of a monthly tenancy and but
\nfor the legislation now in force the tenant could be asked to quit on a few
\nmonths’ notice at the most. The whole building seems to me to have been put
\nup in such a way that it could be dismantled and removed elsewhere at a short notice
\nand without much expense.<\/b> In my view, it is clear that the owner did not
\nwant to make the machinery a part of the land at all.<\/div>\n
\n<\/div>\n
\n2(A) Applying the above 2 tests
\non Construction of PEB shed at project sites: <\/u><\/b>In order to decide
\nwhether the construction of enabling sheds by PEB material in our project sites
\nis resulting in immovable property we need to apply above two tests of Mode
\n& object of annexation and permanent annexation.<\/div>\n
\n<\/div>\n
\n(1) Testing intention for
\npermanent annexation: <\/b>As explained above, for PEB structure this test is
\nmore relevant as PEB structure is not embedded into earth like wall or
\nbuilding. So the intent behind attachment (permanent or temporary) of this
\nstructure into earth is to be checked. in our case from the very beginning the
\nintention behind construction of PEB enabling work is to dismantle and
\ntransport the same to other sites at the end of the project so the intention is
\nnot for permanent attachment but only for the temporary attachment of the
\nstructure and hence the same is a movable property. The same can be assessed
\nfrom the fact that in the past also for similar work done in many sites; we
\nhave transported\/moved the PEB material to other sites for reusing the same.<\/div>\n
\n<\/div>\n
\n <\/span>Further, as per the customer contract the infrastructure
\ndeveloper (L&T in our case) is required to dismantle all the temporary
\nstructures before leaving the project site after work completion so it is
\nsettled well before the start of construction that the time span of the
\nstructure is limited (generally for 4-5 years) and to be used temporarily. So
\nas is evident the intention is only for short period that\u2019s why to better
\nmanage the capital costs pre-fabricated material is preferred so that the same
\ncan be reused at other sites.<\/div>\n
\n<\/div>\n
\n2. Test of destructibility: <\/b>the
\nPEB material can be removed from site office without damaging the same and the
\nafter transporting the same to other sites it retains its original
\nfunctionality. <\/div>\n
\n<\/div>\n
\n3. No interest or ownership of
\nland<\/b>: further the land on which enabling structure is built neither belongs
\nto L&T nor there is any long term lease with customer. Hence it is evident
\nfrom the very beginning that the PEB structure to be built is only for short
\nduration of time and intention is never for the permanent attachment of the PEB
\nstructure into the earth.<\/div>\n
\n<\/div>\n
\nFrom above discussions, it is clear
\nthat construction of shed from PEB material at project sites does not become
\npart of immovable property after attachment to the civil structure\/foundation. construction
\nof enabling work (Closed and semi-closed Sheds) is construction of movable property
\nhence we can take the ITC of construction work (supply as well as erection
\nwork) as the blockage under section 17(5) (c&d) comes into force only when
\nthe structure is immovable so we can take the ITC of all the material and
\nservices (supply of PEB material and cost of construction also) which are used
\nfor constructing the \u201cmovable structure\u201d.<\/b><\/div>\n
\n
<\/b><\/div>\n
\nApart
\nfrom main PEB structure of Closed and semi-closed sheds, I have tried to test
\nthe above ratios on other components of an enabling structure:<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\n(B)<\/b> ITC of Civil
\nFoundation, boundary work, sanitary works, flooring, Shuttering etc.:<\/u><\/b> In
\nall these items, the structure\/things are permanently attached to the land\/foundation
\n(immovable structures) so it is not possible to remove the same without
\ndamaging the structure and its reusability. In fact, the material used in these
\nworks is sold as scrap and the same is never transported to other sites. Hence
\nthe ITC related to these works should not be taken. In the act, the ITC of
\ncivil foundation is allowed only in case of Plant and machinery like when we
\nbuild the same for placing genset. Here the intention is not to use the
\nbenefits related to land but of machine (genset).<\/div>\n
\n<\/div>\n
\n <\/span>(C)<\/b> ITC of electrical work of open
\nyard:<\/u><\/b> The purpose behind development of open yard is the beneficial
\nenjoyment of the land. However, the electrification work of the open yard in
\nthe form of poles\/lights etc. does not enable\/facilitate the beneficial use of
\nland. In fact, the main function of electrification work at open yard is to
\nprovide security and traceability at night. Further, these poles can be removed
\nvery easily and we also shift these electrical poles to other sites for reuse. So
\nthis passes the tests enumerated above i.e. Thing to be enjoyed, permanent
\nattachment and mode & objective of annexation. Hence keeping this in view,
\nthe ITC related to electrical work at open yard shall be taken.<\/div>\n
\n<\/div>\n
\n(D)<\/b> ITC of Fencing
\nand Gates:<\/u><\/b> Purpose of fencing is to safeguard\/security of material not
\nof beneficial enjoyment of land and it is not permanently attached\/affixed or
\nfastened to earth as these can be removed fairly easily and can be reused at
\nother sites. So we shall take the ITC of the fencing and gates. <\/div>\n
\n<\/div>\n
\nHence as per above points, we
\nshall take the ITC of PEB material supply and construction work, open yard
\nelectrical work and Fencing and gates. Except the items I have explained above I
\nhave left other items related to construction of enabling works at project
\nsites but I do not think that apart from the above 3 cases the chances of other
\nitems passing the movable test are very less and will be disputable.<\/div>\n
\nI have done a rough calculation
\nfor development of open yard and construction of 6 nos. closed sheds costing
\naround 8 cr and as per the calculation ITC of Rs. 60 lacs can be taken against
\ntotal GST impact of some 1.40 cr which is around 8% of the total cost of
\nconstruciton.<\/div>\n
\n<\/div>\n
\nBut why
\ndisallowance of ITC related to Immovable property at first and possible
\nsolution<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nIt appears that the main
\nintention behind the blocking of ITC as per this section is to safeguard the state
\nrevenue because when a permanent structure is sold the same is treated as sale
\nof immovable property and hence not taxable under GST as only movable goods are
\nliable for GST. So as there is no GST on sale so any ITC allowed earlier will
\nresult in loss of revenue to the state. Although here,
\nin case if enabling work, neither infrastructure developer (L&T) is the
\nowner of the land nor there is any long term lease so there is no chance that
\nL&T can sell the structure as immovable property. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut if we can see the basic premise
\nof value added tax of ensuring seamless input tax credit then this should not
\nbe an excuse to deny the ITC of legitimate inputs used for providing taxable output
\nservice or sale of goods. Surprisingly the GST act
\nhas made sure that for real estate transactions which are also immovable ITC is
\nallowed. Clause 5(b) of Schedule II of the CGST act provides that construction
\nof building etc. is a service (except where the entire consideration has been
\nreceived after issuance of completion certificate). So by declaring the same as
\nservice the act has paved the way for the builders to avail the ITC related to
\nconstruction of building etc.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSimilarly,
\nin case of construction of immovable property the focus should not be on denial
\nof ITC at first but on eliminating the subsequent loss of revenue in the form
\nof ITC availed of immovable business property which later on sold without
\npaying any GST. For ensuring the same In GST act, a special provision can be
\ninserted which provides for the reversal of proportionate ITC availed of
\nImmovable property which later is sold off. By this way, revenue loss will be
\nstopped but this will ensure the same level playing field for companies using
\nimmovable properties for providing output supplies like Hotel, Logistics and retail
\nfirms. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nIn fact, a similar clause is
\nalready provided in the CGST act. Section 18(6) of CGST act provides that in the
\ncase of sale of capital goods or plant and machinery, on which input tax credit
\nhas been taken, the registered person shall pay an amount equal to the input
\ntax credit taken<\/b> on the said capital goods or plant and machinery
\nproportionate to the depreciated value of said machinery or the sale price
\nwhichever is higher. Similar provision can be created for the payment of GST
\nliability on sale of immovable property used for the purpose of providing
\noutput supply. And since enabling work is also used by infrastructure firms for
\nthe purpose of furtherance of business so full ITC should also be allowed.<\/p>\n
\nWhether
\nenabling work is deferred revenue
\nexpenditure not capital asset?<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nFurther,
\ni also think that in the above case of construction of enabling work we can
\neven claim the ITC of entire amount incurred for the development of enabling
\nwork. I am still working on this but let me share the basic premise for this.
\nActually as per the GST act, the ITC is disallowed if the immovable property is
\ncapitalized. Here, the main test is capitalization. But in case of enabling
\nwork, in my view these are treated as assets not because they are capitalized
\nbut because they are \u201cdeferred revenue expenditure\u201d. Deferred revenue
\nexpenditure is where we have made the full payment but those are not consumed immediately
\nor consumption extends beyond next 12 months. In other words, the benefit of
\nexpenditure incurred extends beyond one accounting period like for example expenditure
\non issuance of bonds, advertising and marketing spend on launching a new
\nproduct. These deferred expenditures are held as non-current assets on the
\nbalance sheet.<\/span><\/b><\/div>\n
\n
<\/span><\/b><\/div>\n
\nSo
\nnormal capitalized assets are charged off via depreciation but deferred revenue
\nexpenditure is written off in the following 3 to 5 years as per the period of
\nbenefit. I think the expenditure on enabling work is in the nature of deferred
\nrevenue expenditure and so we should get the ITC of the entire amount spent on
\nthe construction\/development. I\u2019ll share more on this after doing much detailed
\nhomework.<\/span><\/b><\/div>\n
\n<\/div>\n<\/div>\n
\n(Views are personal)<\/div>\n
\n<\/div>\n
\n<\/div>\n
\n<\/div>\n
\n<\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

(This is the first article on GST in this Blog and it may not be that relevant for a non GST professional. So I have divided the article in two parts- first part is general discussion about taxes which I think is relevant for everybody and second part is specific to the GST issue but even in this part the views about immovable property are relevant even for a non GST professional) PART-1-General discussion about Taxation Tax laws should be simple If we keep ourselves aside then objectively, on its own, life does not seem to have any higher purpose\u2026.except…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1087","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1087","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1087"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1087\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1087"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1087"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1087"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}