Impact of ‘relevant facts’

 

Impact of ‘relevant facts’ is often disregarded in interpretation of statute and when it happens, we are left with nothing but spiral jargon of words, with little or no certainty. This phenomenon has become a trivial truth and examples of it can be found across legislations, jurisdictions or even time frames.

From a taxman’s point of view, an unwavered example can be made out of ‘immovability of a structure’ that has been at the helm of high stake disputes for a

long time and continues to be disputed irrespective of the tax regime viz., value added tax, central sales tax, excise, service tax or even the most recently implemented goods &services tax (‘GST’). Although, a plain and simple term ‘immovable’ requires no explanation for a layman to infer ‘that which cannot be moved’; nonetheless, its usage in statute books seems to have never enjoyed that simpliciter interpretation. This perhaps is the reason as to why immovability has remained a frequently debated issue even in the GST regime.

Recently, the Karnataka AAAR in its ruling in the case of WeWork Management Pvt. Ltd. held that glass partitions used in shared work place were not to be treated as ‘immovable’ given these were meant to be moved on a need basis. This ruling led the applicant to avail input tax credit of applicable GST paid on these glass partitions.

In contradiction, the authority for advance ruling (Madhya Pradesh) in the case of Jabalpur Hotels Private Limited categorically noted that lifts are assembled and manufactured to suite the requirement of a particular building and are not sold out of shelf; it also observed that a lift does not have its  own identity when removed from building and therefore, cannot be said to be separate from the building and  thus “lift becomes part of the building and is not a separate thing per se”. Consequently, lift was treated as immovable and related input tax credit was denied.

The catena of these ruling is lined both ‘for’ and ‘against’ immovability. As such, over the period the concept of immovability came to be debated in numerous judicial disputes and one thing that has remained constant in all of them is that, its interpretation has changed with the facts. Notably, the debate of immovability has carried over to the GST regime with its constant companion – restricted input tax credit.

It is for this reason that a quick brush up over the past precedents would certainly provide a much-needed jump start to understand fate of these disputes in times to come and their impact on input tax credit related to immovable property.

Presently, the Indian Judiciary over the period vide its umpteen judicial precedents have developed three tests to calibrate immovability viz., (i) test of permanency, (ii)intent test, and (iii) functional utility test. The concept of immovability was expounded by the Hon’ble Supreme Court in the case of Municipal Corporation of Greater Bombay vs. Indian Oil Co. Ltd. [AIR 1991 SC 686] which laid down the principle of ‘permanency’. Accordingly, if a structure is unable to be moved in ‘as is’ form, the same is to be treated as an immovable structure.

This principle of permanency was yet again upheld by the Hon’ble Supreme Court in T. T. G. Industries Ltd. vs. Collector of Central Excise[(2004) 4 SCC 751]. In addition to being law of the land, the ratio laid down by

the Hon’ble Supreme Court has been referred and relied upon in countless cases which has further increased its binding nature qua the given subject of immovability. As a matter of fact, the CBIC (formerly CBEC) had also vide its Circular No. 58/1/2002-CX dated January 15, 2002 clarified an identical analogy, though in the context of levy of Excise duty on manufacture of excisable goods.

In another case viz., Solid and Correct Engineering Works [2010 (252) ELT 481], theHon’ble Supreme Court evaluated the nexus of ‘intent’ with the immovability of a structure. The ratio of this ruling provides that if the intent is to affix a structure permanently, then it assumes the character of immovability.

In another catena of decisions, recent being Kone Elevator India Private Limited vs. State of Tamil Nadu [2014 (304) ELT 161 (SC)], the Apex Court also analyzed immovability of a structure with its intended functionality. If a structure is necessarily required to be installed or erected or embedded to earth to attain its intended functional utility, then it is to be treated as an immovable structure.

The determination of immovability has remained intrinsically linked with restrictions on input tax credit, inasmuch as the same is restricted in GST regime, in line with the erstwhile tax regimes. But this co-relation of immovability with restricted tax credit comes with its own trickery, in that a structure may be treated as an immovable, but related input tax credit may not always be restricted under GST. The restriction applied to tax credit relating to ‘construction’of an immovable property also applies to activities such as re- construction, renovation, additions or alterations or repairs, to the extent of capitalization.A corollary of such explanation also implies that the stated activities of re-construction, renovation, additions or alterations or repairs would not be construed as ‘construction’ if the same is not capitalized in its books of accounts by the assessee,and consequently would not be restricted for availment of input tax credit (provided the basic tenets of credit eligibility as enshrined in Section 16 of the CGST Act, 2017 are being met).

 

Inclusion of these activities thus creates possibility of variant interpretation qua capitalization, which can best be understood if tabulated:

 

Subject activity	Accounting treatment accorded to by assessee in its books of accounts	Position of input tax credit
Construction of immovable property	Expenditure is capitalized or charged to the Statement of Profit & Loss; say, in any exceptional circumstances (i.e. irrespective of the accounting treatment)	Credit is restricted
Re-construction, renovation, additions or alterations or repairs	Expenditure is capitalized	Credit is restricted
	Expenditure is charged to the Statement of Profit & Loss (i.e. not capitalized)	Credit is allowed

 

Another, crucial exclusion from tax credit restriction under GST refers to ‘plant and machinery’ accordingly; anything that qualifies as ‘plant and machinery’ remains available for the taxpayer to avail credit thereon. However, this area too has its grim areas inasmuch as the definition of plant and machinery has its own exclusions by way of land, building or any other civil structures, and telecommunication towers etc. In this regard, one may refer to the decision pronounced by the authority for advance ruling (Maharashtra) in Las Palmas Cooperative Housing Society Limited[GST/ARA/31/2019-20/B-13,Mumbai, dated Jan 22, 2020] in which, lifts and elevators although an equipment or a machinery for a layman, were excluded from being treated as ‘plant and machinery’, as these also were ruled to be forming part of the building.

The above being said, a recent Writ Petition admitted by the Hon’ble Delhi High Court in the matter of Delhi International Airport Ltd. has added a new dimension to the debate in whichthe very validity of restriction on input tax credit qua immovability is being challenged. The Petitioner has argued that although immovable, if the underlying structure is being used for purposes of business and to provide taxable supplies exigible to GST, input tax credit qua works contract services as well as goods/services used in construction of such structure (other than plant and machinery) ought to form an integral part of the tax credit system.It has further been emphasized that any deviation, if resorted to, would essentially lead to cascading effect which is against the primary intent of introducing GST as well as is in teeth of the intent and spirit of Article 14 of the Constitution of India.The said order also cites that the Hon’ble High Court has already admitted the Petitions in Bamboo Hotel and Global Centre (Delhi) Pvt. Ltd. vs. UOI, and Riveria Commercial Developers Limited vs. Union of India,

on similar points and have also issued notices.

It is worthwhile to note here that recently the Hon’ble Gujarat High Court in the matter of VKC Footsteps [CA No. 2792 of 2019, Gujarat HC] has allowed the petition by upholding petitioner’s plea that disputed statutory provision [viz., Rule 89(5) of the CGST Rules, 2017] resulted in cascading effect, which was noted to be against the purpose and spirit of introducing GST. The Hon’ble High Court extensively relied upon the First discussion paper by the empowered Committee of state Finance Minister, Statement of Objects and reasons appended to the Bill introducing CGST Act, Frequently Asked Questions on GST issued by the CBIC, and International VAT/GST guidelines, among others. If the Delhi High Court were to take a leaf out of the Hon’ble Gujarat High Court’s book, a radical verdict pertaining to input tax credit qua immovable property may just pave the path for yet another lengthy legal battle across the country.

 

By far, it is not anew that the very idea of immovability itself has struggled to find any conclusive end and debates qua restriction on corresponding input tax credit have only fueled the disputes further. It is in these circumstances that the machinery of advance ruling was expected to provide clarity and certainty, but this system itself has struggled with inconsistent views across its various benches, rendering itself infructuous (to say the least). If one has to seek solace in this question, it appears that it would only be if the revenue itself analyses the subject carefully to re-align all the policies, precedents and law together to issue a comprehensive clarification to settle the underlying issues – after all a tax policy can only succeed and win the trust of relevant stake-holders if it embodies the principles and spirit of ‘Transparency – Certainty – Consistency’!