Whether ITC is available for lease Rent paid during pre-operative period for leasehold land on which resort is being constructed?

PJ/Case Law/2018-2019/3498

Case:GGL HOTEL AND RESORT COMPANY LTD
Citation:30/WBAAR/2018-19 dated 08/01/2019; ARN: AD191018000365D dated 11/10/2018
Issue:Whether ITC is available for lease Rent paid during pre-operative period for leasehold land on which resort is being constructed?
Brief facts:The applicant company GGL HOTEL AND RESORT COMPANY LTD,stated to be a subsidiary of Ambuja Neotia Holdings Private Limited, 86C Topsia Road (S), Kolkata-700046 is registered with GSTN 19AABCG6133G1ZQ , states that it is engaged in the hospitality and Real Estate Business since 1997. It further communicates that it is contemplating a new project on a Leasehold Land. It therefore has acquired a land on Lease. Bengal Housing Infrastructure Development (hereinafter referred to as 'WBHIDCL'/Lessor) has leased a piece of land measuring 20,039.75 sq meters in New Town Area for a period of 32 years to the Applicant (also referred to, at times, as the Lessee) for a lease premium of Rupees Seventeen Crores Twenty Lakh only. As per the Indenture of Lease dated 21.08.2013, the Applicant is liable to pay annual lease rent at the rate of 10% of the aforesaid premium for the first and second year, and the same would be escalated at the rate of 5% per annum, in the subsequent years from the start of the third year over the last annual lease rent per annum. The project is proposed to be completed within a period of two years from the foundation of the project and the lease rent paid during the Pre-operative period shall be capitalized in the books of account by the Applicant.

Appellant’s contention:The Appellant has the view that the GST Act does not define the exact nature of the goods and services received that are deemed to relate to construction of immovable property. As a result, the meaning of construction cost is to be construed as is taken in the modern parlance. The Applicant is required to pay the lease rent to the Lessor whether or not the construction has been carried out and shall be paying the lease amount even after the completion of the construction of the immovable property for the balance period of the lease period. The lease rent for the pre-operative period is capitalized under the head 'Leasehold Land' and not under the head 'Building Block'. It can, therefore, be inferred that the lease rent is not used for construction of the resort. Hence, the renting services cannot be said to be received for the construction of immovable property as there is no nexus, direct or indirect, between the construction of the hotel and banquet and the rental service availed. Further, mere capitalization of the lease rental cannot make such services as received for the construction of immovable property.

Respondent’s Contention and Reasoning of Judgement: The Applicant's argument about absence of any nexus-direct or indirect-between the lease rental and construction of the buildings for hotel etc. is incorrect. Construction of the hotel etc. is impossible unless the Applicant enjoys uninterrupted right to use the land. It is clear from the agreement that the applicant cannot enjoy that right if he fails to pay the lease rental. Construction of the immovable property is, therefore, critically dependent on the supply of the leasing service. The nexus between them is, therefore, direct and the two are inseparable. The leasing service for right to use the land is, therefore, a supply for construction of the immovable property. The prohibition from availing input tax credit, as provided under section 17(5)(d) of the GST Act, is not limited to the civil structure being constructed. It extends to the immovable property in general (other than plant and machinery), which includes the supplies received for retaining the right to use and develop the land. Such supplies are essential for construction of the civil structure on the piece of land. The property is, therefore, admittedly being constructed on the Applicant's own account and treated as fixed asset, including the lease rental paid. Whether the lease rental paid for the pre-operative period is capitalized under the head 'Leasehold Land' or 'Building Block' is of little significance in this context. On the basis of the discussions made, it has been concluded that the lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the Applicant's own account. Input tax credit is, therefore, not admissible on such lease rental in terms of section 17(5)(d) of the GST Act.

Decision: Input Tax Credit is not available to the Applicant for lease rent paid during pre-operative period for the leasehold land on which the resort is being constructed on his own account to be used for furtherance of business, when the same is being capitalized and treated as Capital Expenditure.
Comment: In the Instant Case the Applicant, GGL Hotel and Resort Company Ltd has taken an asset on lease. The Applicant; as the lessee does; pays Lease Rentals for the land taken on lease. The gist of the case is that Input Tax Credit will not be available against the lease rentals that were paid during the pre-operative period for the leasehold land on which the resort is being constructed when the same is capitalised and treated as capital expenditure. Further reference has been given to AS-10, Property Plant and Equipment. The Cost of a Self Constructed Asset should be determined using the same principles as for an acquired asset and it usually is same as the cost of constructing an asset for sale. Accordingly, the cost of constructing the immovable asset includes the lease rental paid for right to use the land on which the asset is built. Being an integral part of the cost of the immovable property, the lease rental paid for the service of right to use the land is a supply for construction of the said property. Therefore it would be covered under the section 17 of the GST Act which disallows the Credit for the goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Prepared by: Adit Gupta

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PJ/Case Law/2018-2019/3498

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