2021 (6) TMI 1101 - AAAR - GST

Input Tax Credit - blocked credit or not - Input services - construction or works contract procured for the development of an Industrial area or the special maintenance expenses of the area - mechanism for apportionment of ITC between exempt and taxable supplies as in an industrial area - whether leasing of industrial plot of land is exempt under N.No. 12/2017-Central Tax (Rate) but leasing of non-industrial plot of land/commercial plot of land is a taxable supply? - HELD THAT - Section 16 (1) of the CGST Act provides for entitlement of registered person to take credit of the input tax charged on any supply of goods or services or both made to him which are used or intended to be used in the course or furtherance of his business subject to fulfillment of certain conditions such as possession of invoice receipt of goods/service payment of tax to Government etc. as provided under Section 16 (2) of the GST Act 2017. However certain inward supply of goods or services as enumerated under Section 17 (5) of CGST Act 2017 has been specifically barred from taking Input tax credit. These supplies may also be termed as blocked credit. Sub-section 17 (5) carves out certain exceptions to Section 16 (1) by way of the non-obstante clause - notwithstanding making it clear that the restriction imposed herein is absolute in nature as it seeks to override Section 16 (1) which entitles a registered taxpayer to avail credit on works contract services/goods or services used or intended to be used in the course or furtherance of business. Though the appellant was directed to submit copies of works contracts also but they have not supplied the same; and it would appear from the facts of the case that they are not providing output service of works contract - it is found that input tax credit in general is not available for construction of an immovable property in view of the above said provisions. The only exception to this provision is plant and machinery . In other words the input tax credit is available to the taxpayer in respect of works contract services/goods or services used for construction of plant and machinery in spite of their being an immovable property. It is found that Input Tax Credit is not only restricted to the goods and services used for construction of immovable property (whether capitalized or not) but also restricted for those goods and services which are used for re-construction renovation additions or alterations or repairs to the extent of capitalization to the said immovable property. It is not the other way round that the Input Tax Credit is available to all the goods and services used for construction of immovable property which is not capitalized in the books of accounts. It is not the case of the appellant that said works contract is related to repair reconstruction renovation etc. The appellant s undertaking of development work of the land to be leased out to various industrial/ non-industrial users is construction of an immovable property and any goods and services or both / works contract used for construction of an immovable property shall attract the provisions of clauses (c) and (d) under sub-section (5) of Section 17 of the CGST Act 2017 which specifically deny such input tax credit. The appeal filed by the appellant is liable to be rejected for want of any merit and hence rejected.

Summary

Issues Involved:
1. Eligibility of Input Tax Credit (ITC) on input services of construction or works contract for the development of an industrial area or special maintenance expenses.
2. Mechanism for apportionment of ITC between exempt and taxable supplies.

Detailed Analysis:

Issue 1: Eligibility of ITC on Construction or Works Contract Services
The appellant sought clarity on whether ITC can be claimed on input services of construction or works contract procured for the development of an industrial area or special maintenance expenses. The Rajasthan Authority for Advance Ruling (AAR) held that the term 'extent to which capitalized' suggests that such expenses are expected to be capitalized to the immovable property. Since the work done by the appellant enhances the value of the property permanently, these expenses are capital in nature and must be capitalized. As per Section 17(5)(c) & (d) of the CGST/RGST Act, 2017, no ITC is available for such capitalized expenses.

The appellant argued that the expenses on development are debited to the profit and loss account and not capitalized as fixed assets. They contended that GST paid on inward supply of works contract service or goods/services received for construction is eligible for ITC if the expenses are not capitalized in the balance sheet. They cited the case of M/s DWARIKESH SUGAR INDUSTRIES LIMITED, where ITC was allowed to the extent of non-capitalization.

The appellant also referred to the judgment of the Hon'ble High Court of Orissa in the case of SAFARI RETREATS PRIVATE LIMITED, which held that ITC is allowable and not blocked under Section 17(5)(d) when the mall was constructed for leasing purposes.

Issue 2: Mechanism for Apportionment of ITC
The appellant sought guidance on the apportionment of ITC between exempt and taxable supplies. They argued that the scope of supply under Section 7(1) of the GST Act includes all forms of supply of goods and services, including leasing. They contended that for providing such outward supply of leasing of plots, it is essential to incur development and special maintenance expenses, and hence, ITC related to these expenses should be eligible and not blocked by Section 17(5).

Discussion and Findings:
The Appellate Authority examined the arguments and submissions made by the appellant. It was noted that the appellant is involved in the development and leasing of industrial and non-industrial plots. The appellant debits the entire expenses incurred on development and maintenance, including GST, in the profit and loss account as revenue expenditure.

The Authority reiterated that Section 17(5)(c) & (d) of the CGST Act restricts ITC on works contract services and goods/services used for the construction of immovable property unless it is for further supply of works contract services or for construction of plant and machinery. The explanation to Section 17(5) expands the scope of 'construction' to include re-construction, renovation, additions, or repairs to the extent of capitalization.

The Authority concluded that the appellant's development work constitutes the construction of immovable property. Therefore, any goods/services or works contract used for construction attract the provisions of Section 17(5)(c) & (d), which specifically deny such ITC. The cited cases of M/s DWARIKESH SUGAR INDUSTRIES LIMITED and SAFARI RETREATS PRIVATE LIMITED were found to be either contextually different or not having precedence value.

Order:
The appeal filed by the appellant was rejected for lack of merit. The Authority upheld the decision of the AAR, denying the ITC on the grounds that the development expenses are capital in nature and must be capitalized, thus falling under the blocked credit provisions of Section 17(5) of the CGST/RGST Act, 2017.