ITC on inward supplies of goods and services used for supplying the works contract service for construction of an immovable property is no where prohibited under section 17(5) of CGST Act: Rules AAR

Facts and Submissions of the Applicant:

The applicant is stated to be supplying works contract service to Kolkata Municipal Corporation to construct buildings for various projects. He wants to know whether he is eligible to claim the input tax credit on the inward supplies of the goods and services procured for supplying the works contract service. 

The applicant submits that the question has roots in the provisions of section 17(5) (c) & (d) of the GST Act. It states that the input tax credit shall not be available on (i) works contract service 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)(c)] or on (ii) the 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 [section 17(5)(d)].

The applicant submits that the prohibition under section 17(5)(c) of the GST Act applies to the input tax credit on the inward supply of works contract service for the construction of immovable property other than plant and machinery. However, the input tax credit on the inward supply of works contract service shall be available if the outward supply is also works contract service.

The applicant argues that the credit of input tax on the inputs, including input services, for the outward supply of works contract is not blocked by the above provisions of section 17(5)(c) of the GST Act. Such outward supply of works contract service to a municipal corporation is neither an exempted supply under Entry No. 3 of Notification No. 12/2017 – CT (Rate) dated 28/06/2017 and, therefore, the input tax credit cannot be denied under section 17(2) of the GST Act either.

Submissions of the Revenue

The concerned officer from revenue argues that the prohibition under section 17(5)(c) of the GST Act applies to all supply of works contract service except when it is provided for further supply of works contract service. Therefore, a supplier of works contract service can claim input tax credit only on input service of works contract. Section 17(5)(d) of the GST Act extends it further to prohibit the input tax credit on inward supplies of the goods and service when the recipient uses such inputs and input services for the construction of immovable property on his own account.

The concerned officer, therefore, submits that input tax credit is not available on works contracts in relation to the construction of the immovable property or if such service is capitalized in the business. The input tax credit is not available on other goods and services used to construct an immovable property. The input tax credit is available when works contract service is supplied for plant and machinery or further supply of works contract service.

As the applicant is a supplier of works contract service, and the recipient is not a works contractor, the input tax credit, according to the concerned officer, is not available to the applicant.

Held by AAR

The concerned officer from the revenue has interpreted the applicability of the prohibition differently for clause (c) from clause (d) of section 17(5) of the GST Act. He argues that clause (c) refers to the supply of works contract service to construct an immovable property. Therefore, the prohibition from claiming input tax credit applies to the inputs and input services used for the outward supply of works contract service for the aforesaid construction. Clause (d), however, clearly refers to the inputs and input services that a taxable person uses to construct an immovable property on his own account.

In the light of the above discussion, clause (c) of section 17(5) of the GST Act should be interpreted as a prohibition on a taxable person from claiming input tax credit on the inward supply of works contract service unless it is an input service for further supply of works contract service. The prohibition applies only if the works contract service is used for the construction of immovable property other than plant and machinery. The clause (d) of section 17(5) of the GST Act extends the prohibition to cover other inputs and input services when the recipient is constructing the immovable property on his own account.

The applicant is supplying works contract service to the Kolkata Municipal Corporation. He is, therefore, making an outward supply of works contract service and is not prohibited from claiming input tax credit either under clause (c) or clause (d) of section 17(5) of the GST Act.

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