CGST | 'Capital Goods' Are For Long-Term Use, 'Inputs' For Day-To-Day Operations, Not Capitalized In Books Of Accounts: Allahabad HC Clarifies

The Allahabad High Court has clarified that 'capital goods' as defined under Section 2 of the Central Goods and Service Tax Act, 2017 are for long term use whereas 'inputs' are meant for day-to-day business operations and are not capitalized in the books of accounts.

“Capital goods are intended for long-term use and are typically subject to capitalization. However, inputs, are goods used in the day-to-day operations of the business and are not subject to capitalization,” held Justice Shekhar B. Saraf.

The Court drew distinction between the definition of 'capital goods' under Section 2 of the Central Goods and Service Tax Act, 2017 and the definition of 'input'.

“Under Section 2 of the CGST Act, 2017 “capital goods” are defined as goods value of which is capitalized in the books of account of the person claiming ITC and are used in the course or furtherance of business. On the other hand, “input” is defined as any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business,” observed the Court.

Factual Background

Petitioner-Samsung India is engaged in the export of Information Technology design and software development services pertaining to mobile devices (“IT Services”) to its overseas holding company, namely, M/s Samsung Electronics Company Limited, Korea in terms of prevalent service agreement. Such export of IT services is made by the Petitioner under Letter of Undertaking without payment of IGST which constitutes zero rated supply as per Section 16 of the Integrated Goods and Services Tax Act, 2017.

Petitioner procures various inputs, input services, and capital goods and accordingly avails ITC of the CGST, SGST, and IGST paid thereon, in accordance with the applicable provisions of the GST laws. Petitioner filed a refund claim of unutilized ITC of CGST, SGST, and IGST paid on various inputs and input services for the period of April 2019 to June 2019. Refund claim of Rs.6,36,69,447/- was sanctioned by the Department barring for an amount of Rs.7,500/- on the ground of claiming refund of unutilized ITC on invoices missing in the GSTR-2A returns.

A refund claim was filed for the period of July–September, 2019 of Rs.7,46,52,231/- and October–December, 2019 of Rs.8,20,59,875/-. Against the aforesaid refund applications, deficiency memos under FORM GST-RFD-03 and later show cause notices were issued by the Department proposing to reject the refund for the aforesaid periods. Eventually a portion of refund was accepted, and some was denied on grounds that specific goods are capital goods, and not inputs. Appeals filed by the petitioner were rejected.

Counsel for petitioner argued that the goods of the petitioner were 'inputs' and not 'capital goods' as they were not capitalized, but merely used for the purpose of R & D, software development, and validation thereof, which includes, inter alia, development of project, testing and validation of the output results. In support of this argument, reliance was placed on the decision of the Supreme Court in Tata Engineering & Locomotive Company Ltd. v. State of Bihar.

High Court Verdict

The Court held that the key difference is if the goods are being capitalized in the books of accounts of the assessee who is claiming input tax credit.

The Court held that capital goods have a long term use whereas inputs are essential for day to day operations of business and are not capitalized.

The Court relied on Tata Engineering & Locomotive Company Ltd. v. State of Bihar wherein the Supreme Court has held that “goods essential for producing a final product qualify as inputs.”

Since petitioner was procuring specific goods for research and development, software development and validation which directly contributed to the IT services being exported by the petitioner to Samsung Electronics in Korea, the Court held that they were not capital goods. The Court held that they were inputs which were rendered redundant after completion and validation of software projects.

Accordingly, the writ petitions filed by Samsung India were allowed.

Case Title: M/S Samsung India Electronics Private Limited vs. State Of U.P. And Others 2024 LiveLaw (AB) 170 [Writ Tax No. 777 of 2022]

Case Citation: 2024 LiveLaw (AB) 170

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