Denial of ITC on construction of warehouse capitalised in books of accounts

[CA Bimal Jain]

The AAR, West Bengal, in the case of IN RE: M/S. MINDRILL SYSTEMS AND SOLUTIONS PRIVATE LIMITED - 2023 (7) TMI 351 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL ruled that, Input Tax Credit (“ITC”) cannot be claimed on construction of immovable property which is capitalised in the books of account.

Facts:

M/S Mindrill Systems and Solutions Pvt. Ltd. (“the Applicant”) built a warehouse for which it has received inward supplies of goods and services, including work contract services.

Additionally, the Applicant has been paying tax on renting services because renting out the warehouse counts as a supply of service under GST.

The Applicant approached the AAR, to seek whether the ITC pertaining to construction of warehouse will be available to the Applicant.

On the ground that, the Applicant has let out the warehouse to another person for rent, thus it cannot be said that the Applicant has received the inward supplies for construction on his own account and secondly, the warehouse constructed by the Applicant cannot be regarded as immovable property since the warehouse is constructed by use of pre-engineered steel structures which can be detached and dismantled without any damage.

Issue:

Whether the Applicant is eligible to claim ITC of the inward supplies used in the construction of the warehouse?

Held:

The AAR, West Bengal in of IN RE: M/S. MINDRILL SYSTEMS AND SOLUTIONS PRIVATE LIMITED - 2023 (7) TMI 351 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL held as under:

• Observed that, the Applicant has constructed the warehouse and capitalised the same in books of accounts and retains the ownership/ title of the said warehouse, thus it is clear that the warehouse has been constructed in the Applicant’s own account and the contention of the Applicant in this regard is not acceptable.
•  Further observed that, the warehouse cannot be exempted from the definition of immovable property, this view is supported by the fact that the warehouse, despite being constructed of removable parts, is not meant to be relocated and has not really been moved after construction.
• Held that, the Applicant is not eligible for ITC charged on inward supply of goods and services related to construction of warehouse which is capitalised in the books of account.

Our comments:

In our opinion, credit should be allowed on works contract services and any goods or services used in the construction of immovable property as factory, office building, complex or mall etc. which are used for further supply of taxable supply in the course or furtherance of business.

It needs to be appreciated that construction of factory, offices, mall, hotels, etc., are foundation of any business for making outward supply of goods or services and necessarily required in the course or furtherance of business without ITC, setting up infrastructure for doing business is turning out to be very expensive, which is contrary to the concept seam less flow of credit and going contrary to the concept of “Make in India” scheme. Thus, section 17(5) (c) and (d) of the CGST Act, 2017 may be omitted.

(Author can be reached at [email protected])