GST update No 134 on ITC eligibility on leasehold rights of land acquired for construction of plant

One of the pillars on which GST Law is founded is to allow seamless flow of input tax credit in order to eliminate cascading effect of taxes but in reality, the restrictions in availment of input tax credit provided in section 17(5) of the CGST Act, 2017 prove to the contrary. The admissibility of input tax credit of GST paid in connection with land has been a contentious issue. Recently, the dispute regarding availability of ITC on leasehold rights acquired for land that was used for construction of plant and machinery was raised before Telangana AAAR in the case of INOX AIR PRODUCTS PVT. LTD. The analysis of the decision is subject matter of our present update. The appellant is engaged in business of manufacture and supply of industrial and medical gases. The appellant had entered into an agreement wherein it procured the leasehold rights in a land for a period of 72 years from IPL for setting up Air Separation Unit (ASU) for manufacture and supply of industrial gases. The appellant sought advance ruling on availment and utilization of ITC charged by IPL in respect of the above transaction. The appellant contended that land taken on lease from IPL is not for construction of immovable property but rather for construction of plant and machinery which is not restricted under section 17(5)(d) of the CGST Act, 2017. It was also pleaded that strict interpretation of the expression “for construction” necessitates that there must be a direct nexus between goods or services procured and the activity of construction. Reliance was placed on Supreme Court’s decision of Sales Tax Commissioner V/s Modi Sugar Mills and Indian Chamber of Commerce and others v/s Commissioner of Income Tax. The appellant further stated that denial of credit under the impugned order is not proper as the ITC is related to acquiring leasehold land which is used for construction of plant and machinery which is anyways covered by the exception carved out in the provision. But the impugned order has failed to appreciate the fact that to hit by section 17(5)(d) of CGST Act, 2017,the primary condition is to be satisfied is that goods or services should be relating to “construction” of any immovable property. The restriction does not apply if there is no such construction. Moreover, even if it is assumed that the said services were used for “construction activity”, the said construction does not result in any immovable property as the ASP is a movable property. It is not permanently embedded to Earth and can be shifted to other site easily as per the requirements. Technical drawings were also submitted by appellant in this regard. Therefore, it was contended that since ASP is a plant and machinery, it shall be covered under exclusion of Section 17(5)(d). The AAAR after analyzing the provisions held that the definition of “construction” is inclusive. It covers the original work of erection, installation, commissioning etc. to the extent the expenditure is capitalized in books. Therefore, even if installation of components is made in setting up the manufacturing plant, it amounts to construction. Further, the AAAR held that as per the appellant’s contention, “for construction” means “for the purpose of construction” and services having direct nexus with construction are covered. Reliance by AAAR was placed on Apex Court’s decision in case of Oblum Electrical Industries Pvt. Ltd. wherein it was held that word “for” has much larger ambit as compared to “in”. Applying the same analogy, AAAR stated that there is no requirement to have direct nexus and therefore, services from IPL is a service received “for construction”. Further, in order to ascertain whether “plant and machinery” is a movable property or an immovable property, reliance was placed on Hon’ble Supreme Court’s decision in case of Duncans Industries Ltd. v/s State of U.P and Ors wherein it was held that in order to determine whether a machine is embedded in earth or not, primarily intention of parties is to be taken into consideration. Applying the same rationale, it was concluded by AAAR that the appellant has taken land on lease for 72 years to put up a manufacturing facility and it is not a temporary facility. Since, ASP is an immovable property which can be contended as plant and machinery but moving further, land is excluded from the definition of plant and machinery. Therefore, the AAAR upheld the view of AAR and held that ITC shall be restricted u/s 17(5)(d) of CGST Act, 2017. The above decision denies the admissibility of ITC on goods or servicesthat are specifically related to land but are indirectly related to setting up of plant and machinery. This decision depicts the adamant view of the department that any ITC having nexus with procurement of land shall not be available to the assessee irrespective of the fact that the said ITC is indirectly essential for setting up the plant and machinery. Although, plant and machinery which is embedded to Earth is eligible for ITC irrespective of its immovability but input services for procurement of land on which such machinery is established is not eligible for ITC.

Comments

GST update No 134 on ITC eligibility on leasehold rights of land acquired for construction of plant

Post a Comment

Query