M/s Wework India Management Private Limited (AAR) 2020 ITL (GST) 383

Input Tax Credit can be availed on the detachable sliding and stackable glass partitions which is movable in nature

Facts of the case:

• The Appellant is a private limited company engaged in providing shared workspace/Office Space to the freelancers, start-ups, small businesses and large enterprises. The Appellant business model offers their members, 24/7 access to their locations, beautifully designed workspaces, flexible workspace configurations as needed, a common set of amenities, on-site community teams, a growing number of value- added products and services and a member experience powered by technology.

• The Appellant procures goods and services from various contractors for fitting-out of the workspaces and provides the said workspace on rent, to various companies and individuals as sharing work-spaces. The Appellant has paid applicable GST on such procurements. The two major components which are in the nature of furniture and fixtures, that are used in the Appellant's buildings are-
  (a) Detachable 14mm Engineered wood with Oak top wooden flooring; and
  (b) Detachable sliding and stacking glass partitions;

• The Appellant sought an advance ruling in respect of the following question:

  a) Whether input GST credit can be availed by the applicant on the detachable 14mm Engineered Wood with Oak top Wooden Flooring which is movable in nature and capitalized as “furniture and fixture”, and is not capitalized as “immovable property”?

  b) Whether input GST credit can be availed by the applicant on the detachable sliding and stacking glass partition which is movable in nature and capitalized as “furniture and fixture”, and is not capitalizes as an immovable property?

• The Karnataka Authority for Advance Ruling vide ruling No. KAR ADRG No. 106/2019 dated 30-09-2019 = 2019 (10) TMI 1018- AAR, karnataka, held as follows:-

  1. The input tax credit of GST can be availed by the applicant on the detachable 14 mm Engineered wood with Oak top wooden flooring which is movable in nature and capitalized as “furniture” and

  2. The input tax credit of GST is not available on the detachable sliding and stacking glass partitions.

• Being aggrieved by the portion of the impugned order relating to the denial of input tax credit on detachable sliding and stacking glass partitiions, the Appellant filed the further appeal in this matter.

Submission by the Appellant:-

• The Appellant submits that as per Section 16 of the CGST Act, they are eligible to avail credit on the Detachable sliding and stacking glass partitions as the same are being fitted in the building for the co-working space being let out to its members and thus qualifies to be used in the course or furtherance of Applicant's business. They submitted that Section 16 details the criteria of availment of ITC on tax paid on input and input services; that Section 16 of the CGST Act entitles every registered person to take input tax credit of tax charged on supply of goods or services or both which are used or intended to be used in course or furtherance of business;. Given that the Appellant procures detachable sliding and stacking glass partitions, which are installed in office spaces rented out by the Appellant, the condition as provided under Section 16 for availment of ITC stands satisfied.

• The Appellant submitted that the restriction provided under Section17(5)(d) does not apply to Detachable sliding and stacking glass partitions; that the credit restriction under Section 17(5) is only in so far as inputs/ input services are used “for construction of an immovable property”; that that the term “for” used in Section 17(5)(d) is more specific than “in relation to”; that the word “for” generally means “for the purpose of'. The Appellant placed reliance on the case of the Hon'ble Supreme Court in Mansukhlal Dhanraj. Jain & Ors. Etc. v. Eknath Vithal Ogale = 1995 (2) TMI 439 - SUPREME COURT wherein the Apex Court compared the words “for” and “relating to” and concluded that the latter has wider connotations than the former; that based on the above ruling, it can be concluded that in order to be covered by the restrictions provided under Section 17(5)(d), the goods or services must be used directly for construction of immovable property. The Appellant also submitted that the direct or immediate use in construction or the remote use in construct ion determines the coverage of in-eligibility. The Appellant relied on the decisions in the case of CCE vs Tata Engineering and Locomotives Co. Ltd. 2003 [158) ELT 130 (S.C.) = 2003 (11) TMI 68 - SUPREME COURT and Indian Chamber of Commerce v. Commissioner of Income Tax, West Bengal II, Calcutta reported in (1976) 1 SCR 830 = 1975 (9) TMI 4 - SUPREME COURT.

• The Appellant further submitted that the credit eligibility of goods or services or both is restricted only when the same is “for construction of an immovable property”; that the detachable sliding and stacking glass partitions are not inextricably linked to the construction itself, which is explicitly clear from the business model of the Appellant, as detailed in the para below, the Appellant provides its members with the following three options:
  HOT DESK - A Hot desk is an On-demand workspace. A hot desk is the ultimate flexible office space. The member can wherever they want in any of Appellant's co-working common areas get access to that location's amenities. In such cases, no glass partition is created for hot desk member. Various Hot desk members can use any desk across the common area together.
  DEDICATED DESK - A dedicated desk is one that is always reserved for the member. Dedicated desks come equipped with a chair, trashcan, and and lockable filing cabinet - akin to a permanent desk provided by the Appellant. In these cases, there will be no glass partition to separate offices for different dedicated desk members. There will be are served area where members will use their specific dedicated desk.
  PRIVATE OFFICES - An office with enclosed spaces for teams of one to 100 or more, with access to all amenities. In such cases, glass partitions can be removed or placed as required by the members. If a certain member requires a small private space, a glass partition can be placed swiftly. On the other hand, if a member requires a bigger private space, glass partitions can be removed.

• The Appellant therefore submitted that it is clear from the above business model, that fixture of glass partitions can be made very quickly. Any and all alterations can be made in case of Private offices, with great flexibility, since the same are not permanent and solely made for the members' requirements and needs.

• The Appellant submits that anything embedded to the earth and which cannot be dismantled and moved, strictly are covered under the ambit of “immovable property “thus restricting the same from availment of ITC as per Section 17 (5)(c) & (d) of the CGST Act; that the detachable sliding and stacking glass partitions are not covered under “embedded to the earth” or “cannot be dismantled and moved”, since such glass partitions, are detachable. The Appellant submits that the term immovable property has not been defined under GST Act, therefore reference needs to be taken from Section 3(26) of the General Clauses Act, 1897, which reads as follows:

       “Immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”

• The Appellant also submitted that though the terms “attached to the earth” is not defined in the GST law, reference can be drawn to Section 3 of the Transfer of Property Act, 1882 which defines it as anything
  (a) Rooted to the earth, as in case of trees and shrubs
  (b) Embedded in the earth, as in the case of walls and buildings
  (c) Attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached

• In view of the above, the detachable sliding and stacking glass partitions are fixed with the help of nuts and bolts to a foundation intended to provide stability to the working of the same; that they are neither rooted to the earth not embedded in the earth nor attached for the permanent beneficial enjoyment as the same can be detached and re-used. Therefore, detachable sliding and stacking glass partitions are not immovable property.

• The Appellant placed reliance on the Advance ruling issued by the Authority of the advance ruling in the case of Nipro India Corporation Private Limited = 2018 (10) TMI 745 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA where the question was whether the input tax credit of tax paid on cost proposed to be incurred in relation to civil works, mechanical works and electrical works can be admissible under the CGST Act, 2017 and it was held that the goods in question, are used or intended to be used in course of furtherance is business. And hence, credit respect to various plant and machinery is admissible as per Section 16 of the CGST Act. They also submitted that the Hon'ble Orissa High Court in the case of Safari Retreats Pvt. Ltd. and Anr. V. Chief Commissioner of Central Goods and Service Tax and Others = 2019 (5) TMI 1278 - ORISSA HIGH COURT allowed the ITC of goods/services used for construction of shopping mall meant for letting out. Since the facts of the decision as held by the Hon'ble Orissa High are similar to the facts of the present case, the Appellant is rightly entitled for credits with respect to the impugned goods.

• Further, the Appellant also submits that the provision of Section 17(5)(d) restricts credit with respect of construction, only when capitalized as immovable property, since the expression 'construction' has been defined to include re-construction, renovation, additions or alterations or repairs, to the extent of capitalization of the said immovable property. They submitted that, so far the business activity of the Appellant is concerned, such fixtures of partitions are not capitalised as immovable property but are in fact recorded as 'furniture and fixtures', since the glass partitions can be detached and re-used and are not considered to be the permanent civil assets. It is for this very reason that the said glass partitions cannot be capitalized as immovable property; that the classification of glass partition in their books of accounts as 'furniture and fixture' is in accordance with appropriate legal accounting standards and compliant with the requirements under the Companies Act; that a chartered accountant certificate, certifying the Detachable sliding and stacking glass partitions fittings as furniture and fixture was submitted to the lower Authority and therefore, the said glass partitions must be classified as movable property, since the same can be dismantled and re-used.

• They further submitted that there is no provision under the GST law which mandates for an earmarked closed physical space, as an office space to carry out business operations; that when a member chooses any of its models, Hot Desk and Dedicated Desk the same does not give a member, a earmarked closed physical space. However, in case of private office, the Appellant provides flexibility to its members for placing or removing glass partitions. The Appellant also places reliance on the cases of the High Court in Sri Sundha Metals v. Commissioner of Commercial Taxes, Ezhilagam, Chepauk, Chennai and Another 2012 (7) TMI 865 - Madras High Court and Jaya Granits v. Assistant Commissioner (CT) 2016 (7) TMI 479 - Madras High Court, which support the Appellant's contention that, the requirement of an earmarked closed physical space or a specific size of such physical space for conducting business, is unlawfully created only by the impugned order, and is not mandated by law. In light of the above submissions, the Appellant submits that input GST credit on the detachable sliding and stacking glass partition which is movable in nature and capitalized as “furniture and fixture”, and is not capitalized as an immovable property, must be allowed and eligible to the Appellant.

Observations of Authority:-

•  Section 16(1) of the CGST Act, 2017 provides as follows:
  “16.(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person”.
  The generalized interpretation of the aforesaid Section implies that the appellant is entitled to credit of input tax charged on any supply of goods and/or services made to the appellant and used by the appellant in furtherance of his business. However, this is subject to the conditions and restrictions as specified in Section 16(2) and Section 17 (5) of the CGST Act, 2017. Section 17(5) of the CGST Act, 2017 stipulates the situations wherein input tax credit shall not be available notwithstanding anything contained in Section 16(1) of the said Act. We are concerned with the provisions of clause (d) of Section 17(5) of the said Act.

• Section 17(5)(d) reads as follows: 
  "(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely: -
  (d) Goods or Services or both received by a taxable person for construction of an immovable property (other than Plant or Machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
  Explanation: For the purposes of clauses (c) and (d), the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

• When we read the text of Section 17(5)(d) together with its explanation, we find that for triggering the restriction under this clause, certain criteria have to be satisfied viz:
  a) The goods or services should be used for construction of immovable property.
  b) The construction can be in the form of re-construction, renovation, additions or alterations or repairs to the immovable property.
  c) The construction should be on his own account.
  d) The goods or services received are capitalised in the books of account.
  Only when all the above criteria are satisfied can it be said that the credit is restricted and the goods and services are ineligible for input tax credit.

• In the instant case, the foremost test to be applied for triggering the restriction under Section 17(5)(d) is whether an activity of fixing the detachable sliding and stackable glass partitions qualifies as 'construction of an immovable property' or not. The normal understanding of the term 'construction' is to 'make or build' something. For the purpose of Section 17(5)(d), the term 'construction' has been defined to include 're-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.' In the Appellant's case, as per the above said explanation, the addition of glass partitions qualifies as 'construction'. This construction is done by the Appellant on his own account. What remains to be determined is whether the fixing of glass partitions amounts to construction of 'immovable property'?

• The term 'immovable property' has not been defined in the GST law but rather it is defined in Section 3(26) of the General Clause Act, 1897 as including land, benefits arising out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.” “Attached to earth” is defined in section 3 of the Transfer of Property Act as meaning
  (a) rooted in the earth, as in the case of trees and shrubs
  (b) imbedded in the earth, as in the case of walls or buildings or
  (c) attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. In case of fixtures like the glass partitions, the rule is permanent attachment, that is, such attachment, whereby, removing the item in question will require demolition. To ascertain whether the item is permanently attached to earth, many courts have consistently used two-fold tests -
  (i) the extent of annexation and
  (ii) the object of annexation.
  The extent of annexation means annexing the fixture or object by which it ceases to be detachable. It would need to be demolished if one were to remove it. The object of annexation test lays down that where a movable property gets annexed with an immovable property, if the intent of annexation is of permanent beneficial enjoyment of the immovable property, then the fixture becomes an immovable property. If the intent of annexation is the beneficial enjoyment of the movable property, then the property still remains movable. Applying the above tests to this case, we find that the glass partitions are not permanent and are not embedded to the earth. They can be dismantled and moved according to the requirements of the clients of the Appellant. Although they are fixed to the earth with nuts and bolts, they can be dismantled without demolishing the civil structure. Therefore, the detachable sliding and stackable glass partitions do not qualify as immovable property.

• Further, we find that the detachable sliding and stackable glass partitions are accounted in the Appellant's books of account as fixed assets under the head “furniture and fixtures”. They are not capitalised as immovable property but rather as movable assets. The lower Authority has observed that declaring the fixtures under the head “Furniture and Fixtures” does not make the items movable and they continue to be immovable property. However, as opined by us, we have held that the glass partitions are movable property by applying the tests of extent and object of annexation. Therefore, we do not agree with the lower Authority's finding on this aspect. The lower Authority has also observed that since there is a certain degree of permanence in the office space provided, it is to be considered as immovable property. We disagree on this aspect also. The intent of fixing the glass partitions is only to provide the clients a certain sense of privacy and for the purpose of demarcation of work space area. There is no permanency in affixing such partitions as the same can be dismantled and re-fixed to signify a change in the dimensions of the work space. The fixing of the partitions to the ground using nuts and bolts only serves to give a false sense of permanency while in reality it is not so. The detachable sliding and stackable glass partitions are movable property and addition /fixing of glass partitions does not amount to construction of immovable property. Therefore, the procurement of detachable sliding and stackable glass partitions will be eligible for input tax credit and will not be hit by the provisions of Section 17(5)(d) of the CGST Act.

Ruling of the Authority:-

We set aside the portion of the Advance Ruling order No KAR ADRG 106/2019 dated 30th September 2019 = 2019 (10) TMI 1018 - AUTHORITY FOR ADVANCE RULING, KARNATAKA which deals with the eligibility of input tax credit on detachable sliding and stackable glass partitions. We answer the question in appeal as follows:

“Input tax credit can be availed by the Appellant on the detachable sliding and stackable glass partitions which is movable in nature.”