Entire Leased Land Treated As Industrial Construction: Gujarat AAR Blocks ITC On Lease Rentals, Repairs & Vacant Portion For Tata Subsidiary
Sangeetha Prathap
The Gujarat Authority for Advance Ruling (AAR) has held that Input Tax Credit (ITC) of Goods and Services Tax (GST) paid on lease rental is not admissible to an assessee when the leased land is used for industrial construction. The ruling blocks ITC not only for the period during which factory construction takes place, but also for the periods before and after construction, as well as for repairs, maintenance and renovation activities and even with respect to the vacant portion of land that forms part of the leased industrial plot.
The bench comprising Mr. Vishal Malani (Member–Central Tax) and Ms. Sushma Vora (Member–State Tax) delivered the ruling in an application filed by Agratas Energy Storage Solutions Pvt. Ltd., a wholly owned subsidiary of Tata Sons engaged in setting up a factory for manufacturing battery cells for motor vehicles. The applicant was granted leasehold rights by the Government of Gujarat for 50 years over an area measuring approximately 321 acres to carry out business activities including industrial construction.
The applicant sought an advance ruling on whether ITC would be available on GST charged on lease rental payments for constructing the factory building, for the periods before and after construction, as well as on GST paid towards repairs, maintenance and renovation of the factory building. It also questioned whether ITC would be admissible for lease rental paid on the vacant portion of the land on which no immovable property is constructed.
The applicant argued that the lease of land was not “for construction” of immovable property and therefore the restriction under Section 17(5)(d) of the CGST Act should apply only to goods and services used directly in construction activities, such as cement, steel, engineering or architectural services. It contended that the term “for” used in Section 17(5)(d) must be interpreted restrictively, and further argued that because land is excluded from the definition of plant and machinery in Section 17(5)(c), services relating to land should not be treated as blocked credits under Section 17(5)(d).
The AAR rejected the applicant's interpretation. Referring to the lease deed conditions requiring commencement of production activity within three years and prohibiting change of land use, the AAR held that “land has been given on lease specifically for construction of the factory… purpose of land for industrial purpose cannot be changed”, and therefore “the land being used for industrial construction… and any services specific to land is blocked.” It accordingly ruled that ITC of GST on lease rental is inadmissible both for the period prior to initiation of construction and after completion of construction, observing that the eligibility of ITC does not depend on the stage of construction.
On ITC for repairs, maintenance and renovation, the AAR relied on the statutory explanation to Section 17, noting that the expression “construction” includes reconstruction, renovation, additions or alterations or repairs to the extent of capitalization. It concluded that when ITC is already blocked on lease rental for construction of immovable property, the same restriction extends to repairs and renovation as they are treated as part of construction.
The applicant also argued that GST paid on lease rental attributable to the vacant portion of land should not be blocked since no construction activity would take place on that part. Rejecting the contention, the AAR held that “any land kept vacant for meeting the mandatory environment guidelines would be a part of the industry being constructed by the applicant on the leased land” and that the entire leased land constitutes industrial land meant for construction. On this basis, the authority concluded that ITC of GST paid on lease rental relating to the vacant portion is also blocked under Section 17(5).
The ruling extensively relied on earlier decisions in Bayer Vapi Pvt. Ltd. and GACL-NALCO Alkalies and Chemicals Pvt. Ltd., both of which were affirmed by the Appellate Authority for Advance Ruling and had held that GST paid on leasehold rights for land leased for construction of immovable property constitutes blocked credit under Section 17(5). The AAR rejected all distinguishing submissions raised by the applicant, reiterating that the legislative intent and the plain wording of the statute restrict ITC in respect of services received for construction of immovable property, irrespective of the structure of lease payments or the proportion of land used for construction versus vacant area.
The Gujarat AAR held that Agratas Energy Storage Solutions Pvt. Ltd. is not eligible to avail ITC of GST paid on lease rental for the leased industrial land in all situations—before construction, during construction, after construction, for repairs or renovation, and even for the vacant portion of the leased land—treating the entire land as being used for industrial construction, thereby attracting the bar under Section 17(5)(d) of the CGST Act.
Applicant's Name: Agratas Energy Storage Solutions Private Limited
