ITC reversal not required when electricity is generated for captive consumption: AAR

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Synopsis: In the matter of M/s Shri Keshav Cement and Infra Limited, the Hon’ble AAR, Karnataka has held that the Applicant is not required to reverse ITC on electricity generated and consumed captively for cement manufacture.

However, the Applicant is required to reverse ITC on the surplus electric energy generated by it at its plant and banked with KPTCL, GESCOM & HESCOM for which consideration is received in terms of the Wheeling and Banking Agreement.

Facts:

M/s Shri Keshav Cement and Infra Limited (“the Applicant”) is engaged in the business of manufacturing of cement and has two manufacturing units – one each at Kaladgi and Lokhapur. The Applicant has recently installed a captive solar electricity power plant which has been commissioned and operative w.e.f. April 1, 2018 at Bisarahalli, Koppal.

The Applicant, for the purpose of setting up the power plant, has purchased inputs/ capital goods such as solar power panels, transformers, electrical meters, wiring & installations etc.

Further, the Applicant has entered into a Wheeling and Banking agreement with Karnataka Power Transmission Corporation Limited (“KPTCL”) along with Gulbarga Electricity Supply Company Limited (“GESCOM”) and Hubli Electricity Supply Company Limited (“HESCOM”) for production of power from solar power plant.

Issues involved:

  • Whether the Applicant is eligible to take ITC as ‘inputs/ capital goods’ or ‘input services’ of the items purchased for setting up the power plant in terms of Section 16 and 17 of the CGST Act, 2017 (“CGST Act”)/ Karnataka GST Act, 2017 (“KGST Act”)/ IGST Act, 2017 (“IGST Act”)?
  • Whether the Applicant is permitted to avail entire ITC on items being used towards the electric energy generated from the captive power plant and transmitted to the manufacturing plant and subsequently utilize the same for payment of output tax on cement sold by the Applicant?
  • Whether the Applicant is required to reverse ITC on electric energy generated by it at its plant and banked with KPTCL, GESCOM and HESCOM and which is unutilized at the end of six months from the date of banking and is deemed to be consumed by KPTCL, GESCOM and HESCOM at the end of six months?

Held:

The Hon’ble AAR, Karnataka in Advance Ruling No. KAR ADRG 26/ 2019 decided on September 12, 2019 held as under:

Answer to Q1:

  • The court observed that the Applicant is engaged in the manufacturing of ‘goods’ as electric energy is classified under Tariff Heading 27160000 as specified in First Schedule to Customs Tariff Act, 1975 (“Customs Tariff Act”). Therefore, electric energy is considered as ‘goods’.
  • Accordingly, electric power is one of the ‘inputs’ required for carrying out the process of manufacturing. Furthermore, in terms of Serial No. 104 of Notification 2/2017- Central Tax (Rate) dated June 28, 2017, electric energy is exempted from tax under CGST Act.
  • The definition of the input under Section 2(59) of the CGST Act does not cover capital goods. Therefore, the goods, value of which has been capitalized in the books of accounts would not be considered as inputs and the Applicant will not be entitled to ITC in relation to such goods. Therefore, the Applicant will be entitled to ITC in respect of goods other than capital goods.
  • Section 17(5)(c) of the CGST Act provides that ITC shall be available in respect of work contract services related to construction of plant and machinery. The definition of plant and machinery as contained in the Explanation to Section 17 of the CGST Act implies that only those apparatus, equipments, and machinery which are fixed to earth by foundation or structural support alone are entitled to qualify as plant and machinery. Therefore, the goods which come under this definition are to be treated as Plant and Machinery. In respect of other goods provisions of Section 17(5)(c) of the CGST Act shall apply and ITC shall not be available.

Answer to Q2:

  • The Applicant generates electric energy from the captive power plant which is transmitted to the cement manufacturing plants physically located at distinct locations within the State of Karnataka, thus applicant is engaged in manufacture of cement (taxable supply) and production of electric energy (exempted supply).
  • The activity of production of electric energy is a supply to self as the electricity produced is captively used. It is in fact, a intermediate process in the manufacture of cement akin to the use of generators sets within the factory premises to produce electricity for consumption in the manufacturing process.
  • Thus, to that the extent of captive consumption, operation of solar power plant shall not constitute a separate supply warranting the application of Section 17(1) and/or 17(2).
  • Thus, the Applicant shall be entitled to the eligible ITC in entirety provided the entire production is captively consumed.

Answer to Q3:

  • The Applicant is engaged in supply of exempted goods in respect of supply of surplus electric energy which accrues to KTPL, GESCOM and HESCOM.
  • Accordingly, the Applicant is required to reverse ITC on such surplus electric energy generated by it at its plant and banked with KPTCL, GESCOM & HESCOM for which consideration is received in terms of the Wheeling and Banking Agreement.