ITC on Solar Power Plant Blocked: Rajasthan AAAR Holds Electricity Fed into DISCOM Grid Constitutes a Supply Under GST

Background and Context

A significant ruling has emerged from the Appellate Authority for Advance Ruling (AAAR), Rajasthan, in the matter of In re SBF Ispat Private Limited, concerning the admissibility of Input Tax Credit (ITC) on costs incurred for establishing and operating a captive solar power plant. The appellate authority, after a detailed examination, upheld the denial of ITC, holding that the transfer of electricity from the solar plant into the RVPN/DISCOM grid qualifies as a "supply" under GST law and that electricity continues to be an exempt supply attracting a nil rate of tax.

The ruling carries considerable practical significance for manufacturers across India who are installing solar power projects under renewable energy policies and expecting to claim ITC on such capital investments.

Who Is the Appellant and What Was the Setup?

M/s SBF Ispat Private Limited is a manufacturer engaged in producing TMT Bars (HSN 72142090) and MS Billets (HSN 72071920) — both taxable goods attracting GST at 18%. The company proposed to set up a 20.5 MW (AC) capacity Solar Power Project in Village Kitasar Bhatiyan, Tehsil Sri Dungargarh, District Bikaner, Rajasthan — under the framework of the Rajasthan Integrated Clean Energy Policy, 2024 (RICEP).

The solar plant site was declared as an additional place of business under the company's single GST registration bearing GSTIN 08AAOCS6177P1Z9. The manufacturing unit, however, is located in Karoli, Bhiwadi — a geographically different district.

The proposed operating mechanism was as follows:

  • Electricity generated by the solar power plant would be fed into the RVPN/DISCOM grid
  • RVPN/DISCOM would provide energy credits corresponding to the units injected
  • These credits would then be set off against electricity consumed at the steel manufacturing unit
  • The net electricity bill from DISCOM would reflect the consumption after deducting the credit for solar energy transferred

The company emphasised that no electricity would be sold to any third party and that the entire energy produced would effectively be consumed within its own manufacturing operations.

Questions Raised Before the Rajasthan AAR

The company approached the Rajasthan Authority for Advance Ruling (AAR) seeking clarity on three questions:

  1. Whether ITC of GST paid on inputs, capital goods, and input services used in the design, engineering, and installation of the 20.5 MW solar power plant is eligible under the RICEP framework, where electricity is used for captive consumption.

  2. Whether ITC on the specific items listed in Annexure-B of the application is available under Section 16 and Section 17 of the CGST/RGST/IGST Act.

  3. Whether the capital goods and inputs used in setting up, erecting, commissioning, and installing the solar power plant constitute "plant and machinery" under Section 17(5) of the CGST/RGST Act, 2017, and whether ITC is blocked thereunder.

Ruling of the Rajasthan AAR — Order No. RAJ/AAR/2025-26/19 dated 23rd January, 2026

The Rajasthan AAR answered all three questions against the applicant:

  • On Question 1: The applicant is not eligible to avail ITC of GST paid on inputs, capital goods, or input services used in design, engineering, erection, installation, commissioning, and operation of the solar power plant, as the solar power plant generates electricity — an exempt supply under GST — and the inward supplies are attributable to such exempt supply.

  • On Question 2: ITC on items listed in Annexure-B is not available whether treated as inputs, capital goods, or input services, since their use is traceable to the output of electricity, which is an exempt supply, and credit is accordingly restricted under Section 17(2) read with Section 17(5) of the CGST/RGST Act, 2017.

  • On Question 3: Capital goods and inputs used in setting up the solar power plant do not qualify as "plant and machinery" used for making taxable outward supplies. ITC is blocked under Section 17(5)(c) and Section 17(5)(d) of the CGST/RGST Act, 2017.

Grounds of Appeal Before the AAAR

Aggrieved by the above ruling, SBF Ispat Private Limited filed an appeal before the Appellate Authority for Advance Ruling, Rajasthan, on 23rd February, 2026. The appeal was filed within the prescribed 30-day period.

A. ITC Should Be Admissible — Solar Plant Is Part of Business Operations