ITC benefit allowed on commercial property

[CA Bimal Jain]

The Hon’ble High Court of Madhya Pradesh in the case of M/S. CHIRANTAN ENTERPRISES LLP THROUGH PARTNER MR. PREM SETHIA VERSUS COMMISSIONER CGST AND CENTRAL EXCISE - 2024 (10) TMI 1242 - MADHYA PRADESH HIGH COURT dismissed the writ petition relying on the landmark case of CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS. VERSUS M/S SAFARI RETREATS PRIVATE LTD. & ORS. - 2024 (10) TMI 286 - SUPREME COURT wherein the Apex Court upheld the validity of Section 17(5)(c) and 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), rejecting the constitutional challenge. It clarified that "plant or machinery" in Section 17(5)(d) cannot be interpreted the same way as in the explanation to Section 17(5)(c) of the CGST Act. Further, construction of a mall, warehouse, or building can be classified as a "plant" depends on the registered person's business and the building's role in that business. Buildings constructed for services like renting or leasing may qualify as a plant, subject to a functionality test. Thus, the Court remanded cases where the High Court had read down the provision and called for factual analysis in other cases.

Facts:

M/s Chirtantan Enterprises LLP (“the Petitioner”) was engaged in construction of building and rental or leasing services involving own or leased non-residential property. The Petitioner had constructed a building on own land for the purpose of giving it on lease to M/s Shishukunj Knowledge Society for running a school. For the purpose of construction of building, various goods were purchased. The Petitioner availed the Input Tax Credit (“ITC”) charged on the purchase/supply of such goods consumed and used in the construction of the school building.

The Petitioner received summon dated February 11, 2022 and February 18, 2022 from the office of Directorate General of GST Intelligence (“DGGI”) for production of account statements, details of ITC availed, reconciliation sheet for outward supply, ITC availed and ITC utilized.

In compliance of the aforesaid summon, GM Accounts appeared and recorded his statement and the Petitioner was made to reverse the ITC availed on civil work through FORM DRC-03 on the same day under protest to the tune of Rs.6,68,44,378/- of the financial year 2019-20, 2020-21 and 2021-22. Thereafter, the Petitioner was served with the letter dated February 21, 2023 (“the Impugned SCN”) for payment of penalty and interest at the rate applicable on Rs.6,68,44,378/- by Commissioner CGST and Central Excise (“the Respondent”). The Petitioner submitted a detailed reply to the Impugned SCN objecting the recovery of GST.

Hence, in apprehension of the adverse order being passed by the Respondent, the Petitioner filed the present writ petition stating that the Petitioner is entitled to avail the ITC under Section 17(5)(c) & (d) of the CGST Act.

Issue:

Whether ITC can be availed on construction of commercial property?

Held:

The Hon’ble High Court of Madhya Pradesh in M/S. CHIRANTAN ENTERPRISES LLP THROUGH PARTNER MR. PREM SETHIA VERSUS COMMISSIONER CGST AND CENTRAL EXCISE - 2024 (10) TMI 1242 - MADHYA PRADESH HIGH COURT held as under:

• Relied on, M/s Safari Retreats Private Ltd (supra). wherein the Hon’ble Supreme Court held that each mall is different, therefore, in each case fact finding enquiry is contemplated. The matter was remanded back to decide, whether, on facts, the mall in question satisfied the functionality test so that it can be termed as ‘a plant’ in Section 17(5)(d) of the CGST Act. The same applies to warehouses or other buildings except hotels and cinema theatres. The Apex Court has held that if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant.
• Held that, the Petitioner was required to satisfy, whether the building in question qualifies for the definition of ‘plant’ in order to avail the ITC, but the Petitioner instead of submitting all these necessary documents chosen not to appear before the authority and directly approached the present Court. Now the final order has been passed, which has not been challenged in this petition. The Petitioner had a remedy to file an appeal against the said order. The Petitioner is free to file an appeal before the Appellate Authority, wherein the Petitioner may file all the necessary documents. Hence, the writ petition was dismissed.

Our Comments:

Section 17 of the CGST Act governs “Apportionment of credit and blocked credits”. Section 17(5) of the CGST Act provides a list of transactions where credit is not allowed. Section 17(5)(c) of the CGST states that works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service and Section 17(5)(c) of the CGST Act states that 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.

For the same purpose, explanation is also provided where “construction” is defined for the purpose of Section 17(5)(c) and (d) of the CGST Act. It states that the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Furthermore, Section 17(5)(c) of the CGST Act provides explanation for Chapter V an VI, where the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

The constitutional validity of Section 17(5)(c) and 17(5)(d) read with Section 16(4) of the CGST Act is in favor of the Revenue Department.

The ITC is not a fundamental or constitutional right, it is a statutory right. It is also a vested right, if it qualifies certain conditions.

Eligibility and conditions are specified under Section 16 of the CGST Act, which are as follows:

• Every registered person shall, subject to such conditions and restrictions as may be prescribed and, in the manner, specified in section 49, be entitled to take ITC on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
• Notwithstanding anything contained in this section, no registered person shall be entitled to the ITC in respect of any supply of goods or services or both to him unless,––

1. he is in possession of a tax invoice or debit note issued by a supplier registered under CGST Act, or such other tax paying documents as may be prescribed;
2. the details of the invoice or debit note have been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37 of the CGST Act;
3. he has received the goods or services or both.

Explanation. -For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

1. Where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
2. Where the services are provided by the supplier to any person on the direction of and on account of such registered person. The details of ITC in respect of the said supply communicated to such registered person under section 38 of the CGST Act has not been restricted;
3. As per Section 41 of the CGST Act, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
4. He has furnished the FORM GSTR-01.

However, where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take ITC upon receipt of the last lot or instalment:

However, where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of 108 from the date of issue of invoice by the supplier, an amount equal to the ITC availed by the recipient shall be paid by him along with interest payable under section 50 of the CGST Act, in such manner as may be prescribed:

Further, the recipient shall be entitled to avail ITC on payment made by him to the supplier of the amount towards the value of supply of goods or services or both along with tax payable thereon.

Meaning of “Plant and Machinery” is defined in Explanation to Section 17(5)(C) of the CGST Act. However, the meaning of “Plant or Machinery” is not defined under the GST Act.

Construction of immovable property, if it is qualified as a ‘Plant’ then credit is allowed.

In pari materia case of ALD AUTOMOTIVE PVT. LTD. VERSUS THE COMMERCIAL TAX OFFICER NOW UPGRADED AS THE ASSISTANT COMMISSIONER (CT) & ORS. - 2018 (10) TMI 814 - SUPREME COURT  wherein the Hon’ble Supreme Court held that denial of ITC was justified on the ground that it is not a fundamental or constitutional right, rather, ITC is a statutory right and in absence of the right under the statute, the Court cannot issue a mandamus to grant ITC.

(Author can be reached at [email protected])