By CA Surekha S Ahuja
A Legal, Functional and Judicial Compass for Businesses
In GST, ITC is not claimed by habit; it is protected by classification, documentation, and legal precision that leave no room for misinterpretation.
Many businesses outsource installation, commissioning, calibration, and technical support for machinery. These services are routine, yet the ITC on them is one of the most frequently disputed areas under GST. The cause of dispute is rarely the service itself; it is almost always the SAC classification, how the scope of work is drafted, how invoices are worded, and whether the documentation creates a perception of immovable property or works contract.
Under Sections 16 and 17(5) of the CGST Act, the ITC position depends on functional use, nature of installation, business nexus, and documentation. Courts increasingly look at whether machinery is movable and whether the service directly supports taxable business operations.
This post provides a complete, legally aligned, future-ready framework covering the correct SAC classification, ITC eligibility tests, scope-of-work drafting, documentation, and compliance strategy.
Statutory Foundation for ITC Eligibility
Section 16 – Business Nexus and Intended Use
Section 16 permits ITC if the goods or services are used in the course or furtherance of business. Courts have interpreted “use” to include operational necessity and functional contribution to taxable supplies.
The Supreme Court in 2024 reaffirmed that ITC cannot be denied where an asset plays an operational role, even if attached for stability.
Section 17(5) – Restrictions and Their Limits
ITC is blocked only where the service relates to construction of immovable property, works contract resulting in immovable property, or non-business use.
Thus, the eligibility question becomes:
Does the installation create or relate to immovable property?
If the machinery remains movable or removable without substantial damage, ITC remains allowable.
The Functional Test
Courts now prioritise functionality over physical attachment. A service qualifies as plant and machinery installation when the machinery serves a core business purpose, remains movable, or is fixed only for stability.
The Supreme Court in the Bharti Airtel towers case treated towers as plant and machinery, not immovable property. Gujarat AAAR in Wago denied ITC only when components merged into the building.
Most machinery installations do not fall into the immovable category, which favours ITC eligibility.
Correct SAC Classification
The strength of your ITC claim begins with SAC classification. SAC must convey the true nature of services—machinery installation, not construction.
Primary SAC – 998732
The most accurate SAC for installation and commissioning of machinery is:
998732 – Installation services of industrial, manufacturing and service-industry machinery and equipment (18% GST).
This classification establishes the service as machinery installation and not a works contract.
Supporting SACs
Supporting classifications may be used only when they represent the actual nature of the activity.
998717 – Maintenance and repair of machinery
Used for post-installation servicing, calibration, or rectification.
998739 – Other installation services not elsewhere classified
Used where installation is not typical but still pertains to machinery.
SACs to Avoid
Some SACs invite ITC disputes and should not be used for machinery-related services.
9954 series (construction or works contract)
998714 (repair of vehicles and automotive equipment)
9983xx (pure consultancy without installation)
Misclassification here leads to treatment as works contract and ITC blockage under Section 17(5).
SAC-Wise Scope of Work
A clearly drafted scope of work ensures that the contract and invoices establish the correct nature of services. Broad or vague descriptions allow the department to reclassify the activity.
Scope of Work under SAC 998732 (Primary Category)
-
Installation and commissioning of machinery, diagnostic equipment, industrial systems, or service-industry machines.
-
Alignment, calibration, configuration, and functional testing.
-
Integration of machine software, technical settings, and operational checks.
-
Demonstration of functionality and handover to the client team.
-
Temporary fixing, anchoring, or mounting for operational stability without creating an immovable structure.
Scope of Work under SAC 998717 (Maintenance Support)
-
Post-installation maintenance, troubleshooting, servicing, and calibration.
-
Periodic checks, replacement of minor parts, and performance tuning.
Scope of Work under SAC 998739 (Specialised Installations)
-
Installation of ancillary equipment, add-ons, extensions, software-driven modules, and non-standard interfaces.
-
Activities that support the principal installation but are not civil, structural, or construction-related.
Excluded Scope under All SACs
-
Civil foundation, fabrication, welding to building structures, trenching, or RCC works.
-
Any activity that results in creation of immovable property.
-
Repairs or services relating to motor vehicles.
-
Advisory-only services without physical installation unless separately contracted.
Embedding this in contracts protects the classification and ITC eligibility.
Documentation Required for ITC Eligibility
Functional Evidence
Installation reports, commissioning certificates, photographs of machinery mounted for stability, and technical specifications proving movability.
Nexus Evidence
Purchase orders, business use declarations, supply contracts, internal approvals demonstrating that installation supports taxable output.
Financial Evidence
Capitalisation of installation costs in fixed asset registers, reconciliation with GSTR-2B, and matching invoices with vendor compliance.
Proper documentation becomes critical in GSTR-9, GSTR-9C, and departmental audits.
Practical Compliance Strategy
Avoid Bundling of Civil and Installation Work
Bundled scopes lead to works contract classification. Maintain separate contracts and invoices.
Ensure SAC 998732 Is Consistently Used
This safeguards the service from getting treated as construction or works contract.
Capitalise Installation Costs as Plant and Machinery
Capitalisation evidences business use and supports nexus.
Draft Contracts Clearly
Include a clause specifying that machinery remains movable and that installation does not create immovable property.
Obtain Business-Use Certificates for Large Projects
This pre-empts Section 17(5)(d) challenges.
Annual ITC Review
Review 2B matching, documentation, and capitalisation entries each year before filing the annual return.
Common Departmental Challenges
Departments often raise disputes on grounds such as incorrect SAC, mixed civil work, vague descriptions like “installation work,” or mismatch between invoice, contract and capitalisation.
A structured scope of work, correct SAC, and strong documentation resolve these disputes even before they escalate.
Closing Saying
“GST works in favour of businesses that present clarity, maintain consistency and speak the language of law in every invoice, contract and document.”
