ITC on Solar Panels

Now a days most of the companies have adopted the practice to install the solar Panels system on the roof of the company and use the electricity generated through these Panels in their production process. For this the company purchase the solar Panels and install them on the roof of the company. For purchase of solar Panels the company pays GST to the supplier of solar Panels and similarly for their installation the GST is also paid by the company to the service provider. Here the question that usually arises is that whether the company would be eligible to claim the input tax credit of GST paid in respect of purchase of the solar Panels and the GST paid on installation services received to install the solar Panels.

Before going into detailed discussion regarding the eligibility of ITC in respect of solar Panels, it is necessary to know the reason why the confusion arises among the taxpayers for eligibility of ITC. The reason behind is that under CGST Act, there is a sub section 5 of section 17 of CGST Act which blocks the ITC in respect of the goods or services mentioned therein. The clause (c) & (d) of section 17(5) states that ITC would not be available in respect of the followings;

“(c) works contract services 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;

(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 re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property”

As the clause (c) & (d) of sub section 5 of section 17 of CGST Act 2017 blocks the ITC in respect of works contract services and goods or services used for construction of immovable property. However, there is an exception given for plant & machinery in both the clauses. Hence in respect of solar Panels there was always a doubts for the eligibility of ITC, as the solar Panels are affixed on the earth. Whether such solar Panels would be considered as the part of immovable property, this was a question of discussion among the taxpayers.

In this respect it is important to know that in respect of plant & machinery an exception is provided under clause (c) & (d) of sub section 5 of section 17 of CGST Act 2017. Meaning thereby the ITC would be eligible in respect of plant & machinery. The definition of plant & machinery is also given in the explanation to section 17(5) which is as follows;

"For the purposes of this Chapter and Chapter VI, the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises”.

As per the definition of Plant & Machinery it is clear that any equipment affixed to earth by the foundation or structural support would be considered as plant & machinery. However the plant & machinery does not include telecommunication towers, pipelines laid outside the factory premises.

The solar Panels are also affixed to the earth by the foundation, hence the solar Panels would be covered the definition of plant & machinery and accordingly the restriction of ITC as given in clause (c) & (d) of section 17(5) which is not applicable for plant & machinery, should also not be applicable on solar Panels as the solar Panels are covered in the definition of plant & machinery.

There are various advance rulings in respect of the question of eligibility of ITC of GST paid on purchase & installation of solar Panels. In case of M/s Unique Welding Products Pvt. Ltd. Gujarat authority for advance ruling [2024(01)LCX0184(AAR)] held that the applicant is eligible to avail ITC on roof top solar system with installation & commissioning under the CGST/GGST Act. Brief facts of the said case are as follows;

The applicant has installed a roof top solar system on the factory roof for power generation. The applicant further states that the generated power is solely and captively used for manufacturing welding wires within the same premises.

The advance ruling authority stated that the roof solar plant, affixed on the root of the building is not embedded to earth. Accordingly it is not an immovable property but a plant and machinery, which is utilized to generate electricity which is further solely and captively used in the manufacture of welding wires. The applicant is engaged in the business of supply of welding wires on payment of GST at the applicable rates. The applicant has further stated that they have capitalized the roof solar plant in their books of accounts. The Roof Solar Plant, as is evident is not permanently fastened to the building. Thus, it qualifies as a plant and machinery and is not an immovable property, hence, it is not covered under blocked credit as mentioned in 17(5)(d) of the CGST Act, 2017. Therefore the advance ruling authority held the applicant is eligible for input tax on roof top solar system with installation & commissioning.

Also in case of M/s. KLF Nirmal Industries Private Limited, Tamilnadu Authority for Advance Ruling [2021(06)LCX0193(AAR)] held that the applicant is eligible to take input tax credit to the extent of GST paid on acquiring the Design, Engineering, Supply, Execution (EPC) of Roof top Grid Solar Power Plant. The brief facts of the said case are as follows;

The applicant is engaged in the business of extracting/crushing/pressing edible oils of various types grades & producing coconut milk & milk powder from its plant. They are in the process of installing a captive roof top solar grid connected power plant in the edible oil extracting plant.

The advance ruling authority held that in the case at hand, the whole designing, engineering, supplying and installation have been done as works contract and as the entire set up of the solar power plant qualifies as Plant & Machinery and the credit of GST paid in the invoice of solar power plant is not blocked under this section and hence available as credit.

Thus from the above detailed analysis of the clause (c) & (d) of section 17(5) and definition of plant & machinery given in the explanation we can conclude the following;

Conclusion: The ITC would eligible on purchase & installation of solar Panels as the same would be considered as plant & machinery not the immovable property.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.