One of the enduring complexities under GST law lies in the treatment of Input Tax Credit (ITC) on construction-related expenses. While ITC is intended to remove the cascading effect of taxes, Section 17(5) of the CGST Act, 2017 carves out clear exceptions—particularly when it comes to immovable property and construction undertaken on one’s own account.
In its recent ruling dated 21st March 2025, the Authority for Advance Rulings, Gujarat, in the case of M/s. KEI Industries Ltd. [GUJ/GAAR/R/2025/06], addresses a critical question:
“Can a concrete structure—built solely to support a key piece of manufacturing machinery—be treated as a ‘plant’ for ITC purposes?”
The AAR’s nuanced interpretation clarifies that functionality is relevant, but statutory exclusions prevail.
When Machines Need a Home
KEI Industries is engaged in the manufacture and supply of EHV, MV, and LV power cables. A vital component of this process is the Vertical Continuous Vulcanization (VCV) Line—a large, vertically structured piece of manufacturing equipment that requires a dedicated concrete foundation and external square structure for physical and operational support.
The applicant procured input goods and services to build this concrete structure—not for general business infrastructure, but specifically to house and support the VCV line.
KEI argued:
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The VCV line is plant and machinery, and the supporting structure is integral to it.
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Hence, ITC on inputs and input services used in construction should be allowed under Sections 16 and 17 of the CGST Act.
Sections 16 & 17 of the CGST Act
✅ Section 16(1) – Allows ITC on inputs and input services used in the course or furtherance of business.
However, this is subject to the restrictions under:
🚫 Section 17(5)(c) & (d) – Blocks ITC on:
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Works contract services for construction of immovable property (except when used for further supply of works contract service), and
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Goods or services received for construction of immovable property on one’s own account, even when used in the course of business.
A key exception lies in the Explanation to Section 17, which states:
“Plant and machinery” excludes land, buildings, civil structures… but includes foundation and structural supports **specifically for plant and machinery.”
This is the doorway KEI sought to enter through.
The Ruling: The “Functionality Test” and Its Limits
The AAR, while referring to the Supreme Court judgment in Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019), acknowledged the principle of “functionality test”—i.e., if a structure is functionally integral to a manufacturing process, it could be regarded as part of the plant.
The AAR observed:
"Where a structure is so integrally connected with the manufacturing or business output that it becomes a functional part of the process, it may be treated as plant."
However, the ruling draws a crucial legal distinction:
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✅ Yes, the concrete structure may qualify as part of “plant” under the functional test.
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❌ But, ITC is still not available if the construction is done “on own account” and not for further supply.
In KEI’s case, the structure is:
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Constructed by KEI itself, for its own business premises;
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Not intended to be supplied or sold as part of a works contract.
Hence, despite passing the functionality test, Section 17(5)(d) squarely blocks ITC.
Interpretation: Functionality Is Not a Trump Card
This ruling makes an important point:
Just because a structure is functionally necessary for plant/machinery does not override the legal bar in Section 17(5).
The “plant and machinery” exception under the Explanation only allows ITC on foundation and structural supports when not disallowed by other parts of Section 17(5). If the construction is immovable property constructed on own account, the restriction applies even if it is used exclusively for manufacturing.
Practical Illustration
Let’s say:
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A company installs a crane bolted into a reinforced concrete pedestal.
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The pedestal was cast specifically for this crane and has no independent use.
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The company uses works contractors and buys cement and steel for the foundation.
Under the functionality test, the pedestal may be considered part of the crane (i.e., plant).
But, if the company builds it on its own account and not as part of a works contract supply, ITC would be disallowed under Section 17(5)(d).
Takeaways for Businesses
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Passing the “functionality test” is not sufficient — ITC must also pass through Section 17(5)’s disallowance filters.
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Structures built on own account, even if serving a plant/machinery, may fall foul of Section 17(5)(c)/(d).
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The only safe harbour is when foundation/supports are not immovable property or the supply is part of an outward works contract service.
Closing Thoughts
The KEI Industries ruling reiterates a core principle of GST law: Legal language trumps business logic when it comes to ITC. Even if a structure is essential to manufacturing, unless it escapes the bar under Section 17(5), ITC remains blocked.
For businesses engaged in capital expansion or setting up new plants, this is a timely reminder to evaluate construction contracts and asset classification upfront. Structuring it right could mean the difference between optimizing tax or absorbing cost.
