Breakwater-Wall For Ship-Safety Not 'Plant And Machinery', GAIL Subsidiary Not Eligible For ITC: Bombay High Court

The Bombay High Court has held that the breakwater wall or accropode that are essential certainly do not qualify as plant and machinery. The breakwater wall can hardly be called “plant or machinery." Accropodes lose their identity when a breakwater wall is constructed using accropode.

The bench of Justice K. R. Shriram and Justice Jitendra Jain has observed that Explanation to Section 17 also provides that “plant and machinery” should be used for making outward supply of goods or services. The breakwater wall is used for protecting the vessel from tides while unloading the LNG received and not for making outward supplies of goods or services. Therefore, the petitioner does not satisfy the condition provided in the Explanation to Section 17 to be eligible for ITC.

Ratnagiri Gas and Power Pvt Ltd., a joint venture of NTPC, GAIL, and Maharashtra State Government, was incorporated in July 2005 to take over the Dabhol Power Company by Enron Corporation, USA, and others. Through a scheme of demerger, duly approved by the National Company Law Appellate Tribunal, Ratnagiri Gas and Power Pvt Ltd. retained the power plant, whereas the LNG (Liquid Natural Gas) Terminal was transferred to the petitioner.

Post demerger, the petitioner or assessee engaged in the regassification of LNG at its regassification plant situated in Dabhol. The petitioner is a subsidiary company of GAIL (India) Ltd., a Government of India undertaking.

As per the petitioner, under the GST regime, the activity of regassification of LNG amounts to the supply of taxable services. Hence, the petitioner has been discharging appropriate CGST and MGST liabilities on supply. The petitioner has also been filing the stipulated returns as required under the CGST Act.

The petitioner receives LNG, which is the input for the regassification plant, by sea from various countries through LNG carriers, which contain large cryogenic tanks onboard. The LNG imported is received at the petitioner's captive jetty, which is 300 meters long and situated 1.8 km into the sea. Tugs are used to tow the LNG carriers towards the jetty, and after alignment, anchoring, and mooring, the LNG carriers are berthed at the jetty. Once the vessels are moved alongside, the LNG is transferred to cryogenic storage tanks located in the regassification plant with the help of an insulated plant pipeline. After discharging cargo, the LNG carriers sail away.

The petitioner filed an application for an advance ruling before the Maharashtra Authority for Advance Ruling. The issue raised was whether the petitioner was eligible to avail or utilize the input tax credit of the taxes paid to the supplier of goods and services on the construction of the breakwater wall, which is an important and integral part of the existing jetty.

The AAR ruled that the breakwater would not qualify for inclusion in the term “plant and machinery” under Section 17(5)(d) of the CGST Act, and, therefore, the petitioner will not be entitled to any input tax credit (ITC) on the construction or reconstruction of the breakwater.

The petitioner preferred an appeal before the Maharashtra Appellate Authority for Advance Ruling for Goods and Services Tax (AAAR). The AAAR confirmed the order of the AAR.

The petitioner contended that the breakwater was “plant and machinery” and, therefore, the petitioner should be entitled to claim ITC. The breakwater is an “immovable property,” and it can be considered plant and machinery, as all immovable structures are not disqualified from being covered in terms of “plant and machinery." Section 17(5)(d) of the CGST Act carves out an exception for plant and machinery, and, therefore, if goods, services, or both are received from a taxable person for the construction of plant and machinery, then ITC shall be available.

The department contended that “plant” would mean where industrial activity takes place or a factory where certain materials are produced or machinery is used to carry out certain processes or for production. The breakwater wall constructed on the sea to protect the ship from high waves can hardly be called machinery, apparatus, or equipment. The breakwater not only comprises piling of accropode on top of each other but also involves extensive civil work and foundation laying in order to build the breakwater wall, and the accropode is only part of it. It is therefore a “civil structure” and not “plant and machinery” by any stretch of imagination. The extensive earthwork as well as civil work that has gone into the making of the breakwater wall, and therefore, even for a moment, one calls it “plant and machinery," has to be excluded by virtue of it being a “civil structure.”.

The court noted that the dictionary meaning used by respondents for the term “plant” indicates that it would mean and include a place where industrial activity takes place and/or a factory where certain materials are produced or machinery is used to carry out certain processes or production. The breakwater or accropode cannot be called "machinery." Even if both plant and machinery are read together, it should be interpreted to mean a place where certain manufacturing activities of production are carried out with the help of inputs.

The Bombay High Court upheld the AAR and AAAR rulings, denying ITC to Konkan LNG Limited for the construction or reconstruction of a breakwater wall.

Counsel For Petitioner: Sirram Sridharan

Counsel For Respondent: Dhananjay Deshmukh

Case Title: Konkan LNG Limited Versus The Commissioner of State Tax

Case No.: Writ Petition No. 313 Of 2021

Click Here To Read The Order