Blocked Input Tax Credit under Section 17(5) of the CGST Act,
2017 – A Practical Analysis with Recent AAR Cases
Introduction
Input Tax Credit (ITC) is
one of the most significant features of the GST regime, intended to avoid the
cascading effect of taxes and ensure seamless flow of credit throughout the
supply chain. However, the law does not permit unrestricted ITC claims. Section
17(5) of the Central Goods and Services Tax (CGST) Act, 2017 specifically lists
certain cases where ITC is blocked, even if the goods or services are used in
the course or furtherance of business. These restrictions are commonly known as
“blocked credits.”
Among the most debated
blocked credits are those related to works contract services and
construction of immovable property. Recent Advance Rulings, particularly by
the Tamil Nadu Authority for Advance Ruling (AAR) in the case of M/s.
Shibaura Machine India Pvt. Ltd. (Rulings No. 31/ARA/2025 and 32/ARA/2025
dated 18 August 2025), have further clarified the interpretation of Section
17(5)(c) and (d) in this context.
1. Legal
Framework: Section 17(5) – Blocked Credits
Section 17(5) of the CGST
Act overrides the general entitlement to ITC provided under Section 16.
Sub-clauses (c) and (d) are particularly important for understanding credit
restrictions on construction-related expenses.
Section 17(5)(c): ITC
shall not be available in respect of 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.
Section 17(5)(d): ITC
shall not be available in respect of goods or services or both received by a
taxable person for construction of an immovable property (other than plant and
machinery) on his own account, including when such goods or services or both
are used in the course or furtherance of business.
Explanation 1: For
the purposes of clauses (c) and (d), the term “construction” includes
reconstruction, renovation, additions, or repairs to the extent of
capitalization to the immovable property.
Explanation 2: Clarifies
that the term “plant or machinery” refers strictly to “plant and machinery” as
defined in the Act.
2. Meaning
of “Plant and Machinery”
As per the Explanation to
Section 17:
“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:
1. Land,
building, or other civil structures
2. Telecommunication
towers
3. Pipelines
laid outside factory premises
Thus, only machinery or
equipment directly used in the manufacturing or supply process qualifies
as plant and machinery. Infrastructure items that merely support business
operations—like electrical fittings, flooring, firefighting systems, or
lighting—are generally treated as part of the immovable property.
3. Key
Advance Rulings: Shibaura Machine India Pvt. Ltd. (Tamil Nadu AAR, August 2025)
Case 1: ITC on Electrical
Installation Work for Factory Expansion (Advance Ruling No.: 32/ARA/2025 |
Date: 18 August 2025)
The Tamil Nadu Authority
for Advance Ruling, after examining the facts and legal provisions, observed
that the key issue was whether the electrical installation work qualified as
“plant and machinery” or constituted an immovable property excluded under Section
17(5)(d). The Authority noted that while the installation of cables, panels,
and transformers is essential for operating the manufacturing plant, such
installations are permanently embedded to earth and form part of the immovable
structure of the factory. It was held that though the components used (like
cables and switchgear) are movable at the time of supply, once installed, they
lose their movable nature and become part of the immovable property. Hence, the
expenditure incurred on such works is treated as part of the building or civil
structure rather than “plant and machinery.” Accordingly, the Authority
concluded that Input Tax Credit on goods and services used for the said
electrical installation work for factory expansion is not admissible
under Section 17(5)(d) of the CGST Act, 2017, as it falls under the restriction
relating to construction of immovable property.
Case 2: ITC on
Fire-Fighting System and Public Health Equipment (Advance Ruling No.:
31/ARA/2025 | Date: 18 August 2025)
The Tamil Nadu Authority
for Advance Ruling, after careful consideration of the submissions and legal
provisions, held that although the fire-fighting system and public health
installations are statutory requirements, they are permanently attached to the
building structure and become part of the immovable property. The Authority
observed that these systems, comprising pipelines, tanks, pumps, hydrants, and
sanitary fittings, are fixed to the earth or walls in a manner that they cannot
be moved without substantial dismantling or damage to the building.
Consequently, they do not qualify as “plant and machinery” as per the
Explanation to Section 17 of the CGST Act. The AAR further clarified that even
if such systems are essential for factory operations, their immovable nature
brings them within the purview of Section 17(5)(d), which blocks ITC on works
involving construction or installation of immovable property. Therefore, it was
ruled that the applicant is not eligible to claim Input Tax Credit on
GST paid for procurement and installation of the fire-fighting system and
public health equipment used during factory expansion.
4. Key
Takeaways for Businesses
1. Capitalization
Test: If the expense is capitalized under “building” or
“civil work” in books, ITC is likely to be disallowed.
2. Functional
Test: Only those items directly used in manufacturing or
provision of outward supply qualify as “plant and machinery.”
3. Nature
of Property: If the installation is permanent or
requires civil foundation, it will likely be treated as immovable.
4. Documentation: Proper
classification and capitalization are crucial to defend ITC claims during
audits.
5. Advance
Contracts: Even if the supplier raises invoices for advances,
ITC cannot be claimed where the underlying supply itself is blocked.
5.
Conclusion
The interpretation of Section
17(5) by tax authorities and advance ruling bodies has made it clear that Input
Tax Credit is not a blanket right. Any goods or services used in the construction
of immovable property—whether for business use or not—will attract the
restriction under Section 17(5)(c) and (d).
In the Shibaura
Machine India Pvt. Ltd. rulings, the Tamil Nadu AAR reaffirmed this
principle by holding that electrical works, fire-fighting systems, and
public health installations—even though necessary for factory operation—are
part of immovable property and do not qualify as “plant and machinery.”
Businesses must therefore
exercise caution while claiming ITC on such expenses, ensuring a detailed
review of contract scope, capitalization policy, and the nature of the
installation before availing credit.
Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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