GST Vidhi | GST Advance Ruling

Whether the GST paid on works contract for carrying out repair of building shall be available for ITC to the extent to which the said expense is not capitalized to the said immovable property.

Authority For Advance Ruling - Tamilnadu

Advance Ruling No. : 08/AAR/2023                                               Dated: 06.06.2023

Name of Applicant: J.K. Fenner (India) Limited

A.    Relevant Sections/Rules & Notification/Circulars on the Subject:

·        Section 2(119) of the CGST Act

·        Section 17 of the CGST Act

·        Section 18 of the CGST Act

B.    Facts and contentions submitted by applicant:

·        The Applicant is engaged in manufacturing of Transmission Rubber Belts, Oil Seals,Hoses, Geared Motors, Pulleys, FEAD Systems, Belt Tensioners, and Moulded Rubber Products, EV Products for Automotive & Industrial Applications.

·        The Applicant has stated that, they have to constantly incur expenditure on repairs and maintenance of factory buildings. Up-keep and maintenance of factory building is crucial for continuity of its seamless production. It is the work undertaken to restore or improve every facility in every part of a factory building, its services and surroundings to currently accepted standards and to sustain utility values of the facility. Repair works in the factory building are in the nature of painting, renovation, debris removal, roof changing etc., Repairs and maintenance expense is the cost incurred to ensure that an asset continues to operate. The Applicant has preferred this application as they have doubt on the issue of Input tax Credit (ITC) under GST.

·        Section 17 of CGST/TNGST Act, 2017, debars certain activities/supplies/work from the eligibility to claim ITC. The relevant portion of sub-section 5 of Section 17 of CGST/TNGST Act, 2017 in this regard is reproduced below:

Notwithstanding anything contained in sub-section (1 ) of section 16 and subsection (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.

Explanation.-For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

·        In view of above facts, input tax credit (ITC) in general is not available for construction, reconstruction, renovation, addition, alteration or repair of an immovable property even when such goods or services or both are used in the course or furtherance of business. However, the limitation in such a scenario is to the extent of capitalization.

C.     Question Raised before AAR:

·        Whether the GST paid on works contract for carrying out repair of building shall be available for ITC to the extent to which the said expense is not capitalized to the said immovable property.

D.    Discussion and Findings of the Authority:

·        As per section 16(1) of CGST & SGST Act 2017, every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person."

·        Going by the explanation, the Applicant has contended that, with Section 17(5) seeking to deny ITC of GST on goods and/or services used for repair of immovable property, to the extent of capitalization, there is no bar on ITC availment in respect of factory building repair expenses to the extent of not capitalized. Thus, ITC on Works Contract (factory building repairs) charged to profit and loss account is very much available.

·        the Applicant has contended that Initial Cost of Recognition as Fixed Asset as per Ind AS 16 PPE (Property, Plant & Equipment). This includes PPE besides all Civil Works which are considered as Project Cost. An Asset can be capitalized if probable further economic benefit associated with the asset will flow to entity. The economic benefit can flow either directly / indirectly. Once project is commissioned through which the economic benefit is arrived, subsequent to project, replacement of any spare parts, Maintenance & Repair whether it is periodically or annually, Civil or Mechanical would be considered as "Revenue Expenses". This will not be form part of project cost as it won't be capitalized as per the Accounting Standard Procedures. d) Since the expenses if it is relating to project, it would be taken for Capitalization and if it is relating to "Repair & Maintenance" it would be treated as "Revenue" since there will not be any future economic benefit arises after the establishment of project.

·        In this connection, we observe that, Section 17 of the GST Acts blocks certain credits as ineligible/unavailable to the taxpayer. More specifically Section 17(5)(c) and 17(5)(d) block ITC on works contract services which is reproduced as below;

Section 17(5): Notwithstanding anything contained in subsection (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a)                                                                                                 -

(b)                                                                                                 

(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 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.

·        In support of their contention they have furnished copies of purchase orders, work orders, sample document for accounting capital nature of civil expenses and sample document for revenue nature of civil expenses. Perusal of purchase order/work order revealed that the Applicant has procured certain goods and services towards renovation of factory buildings. But, there is no mention about the actual factory building or deteriorated portion of factory building to be renovated or repaired, so as to ascertain whether repair work has been carried out only for the purpose of preserving or maintaining an already existing factory building, which does not bring a new asset into existence. Moreover, asset category wise expenditure/cost incurred towards repair and maintenance could not be deciphered from the documents produced as to whether the maintenance and repair work has been carried out in the factory building or in the buildings meant for some other non-business utility.

·        Further, the Applicant has contended that the said expenses were recorded as revenue expenses in their books of accounts. During the personal hearing also the AR reiterated that these expenditures cannot be capitalized as per accounting standards. In support of their contention they have submitted certain data entries made in the system related to the financial year 2022-23. But, the actual treatment given to the expenditure could be deduced only after finalization of their accounts.

·        Therefore, we are of the view that the Applicant is entitled to ITC on the goods and services received towards repair of existing factory buildings (which were already capitalized) to the extent of non-capitalization of expenses in their accounts

E.     Ruling By AAR:

·        The GST paid on works contract for carrying out repair of factory building shall be available for ITC to the extent to which the said expense is not capitalized to the said immovable property as per section 16(1) but subject to the provision under Section 17(5).

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