No ITC on the solar power plant's procurement costs due to the exempt nature of their output supplies i.e. supply of electrical energy

Facts of the Case:-  The Applicant is engaged in the production of electrical energy through its solar power plant in Maharashtra. The applicant incurred significant expenditure, including SGST and CGST, for setting up the solar power plant. The applicant is involved in Production of electrical energy (exempt from GST), Transmission and distribution of electricity (taxable under HSN/SAC codes 996911 and 996912). The applicant invoices only for the supply of electrical energy, not for transmission or distribution.

Issue:- Liability to pay GST on intra-state and inter-state delivery of electrical energy. Also, can the applicant claim and utilize CGST and SGST paid for the procurement of the solar power plant as input tax credit for payment of GST liability. 

Contention of Applicant:  The Applicant contended that Supply of electrical energy is exempt from GST as per Notification No. 2/2017, also, Transmission and distribution of electricity by an electricity transmission or distribution utility are taxable at a nil rate as per Notification No. 12/2017. The applicant argues that since the solar power plant is used for taxable sales (transmission and distribution), the input tax credit for the procurement of the solar power plant should be available. The applicant cited the case of KLF Nirmal Industries (P.) Ltd. In re [2021], where it was ruled that the ITC can be availed for taxable supplies.

The applicant contends that their main activity is the sale of electrical energy, which is exempt from GST. Since there is no taxable supply, the applicant believes they are not entitled to ITC for the procurement of the solar power plant.

Observations by the AAR:- The AAR observed as under:

GST on Intra-state and Inter-state Supply:  Electrical energy is exempt from GST as per Notification No. 2/2017.Therefore, the supply of electrical energy, both intra-state and inter-state, is exempt from GST.

Input Tax Credit Utilization:  As per Section 17(2) of the CGST Act and related rules, ITC is not available for exempt supplies. Since the applicant’s supply of electrical energy is exempt, they cannot claim ITC on the procurement of the solar power plant.

Rulings:- The applicant is not liable to pay GST on the intra-state and inter-state delivery of electrical energy. The applicant cannot claim and utilize CGST and SGST paid on the procurement of the solar power plant as ITC for the payment of GST liability since the supply of electrical energy is exempt from GST.