ELIGIBILITY OF INPUT TAX CREDIT ON LEASE RENT PAID FOR CONSTRUCTION OF ECO-RESORT

[Dr. Sanjiv Agarwal]

In Re: GGL Hotel and Resort Company Ltd. 2019 (5) TMI 964 - APPELLATE AUTHORITY FOR ADVANCE RULING, WEST BENGAL;  appellant in hospital and real estate business was setting up a new resort on land taken on lease from West Bengal Housing Infrastructure Development Corporation Ltd. (WBHIDCL) on lease rent. It sought advance ruling from AAR on following issue:

Whether credit is available on input tax paid on lease rent during pre-operative period for the leasehold land on which the resort is being constructed to be used for furtherance of business, when the same is capitalized and treated as capital expenditure ?

The West Bengal Authority for Advance Ruling (WBAAR) pronounced its advance ruling by an order dated 08.01.2019, that input tax credit is not available to the Appellant 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 capitalized and treated as capital expenditure.

Being aggrieved, appellant filed an appeal before AAAR, West Bengal on the following grounds: 

1. AAR has erred in disallowing ITC on lease rentals paid during the pre-operative period u/s 16(1) of the CGST Act, 2017.
2. AAR has erroneously interpreted section 17(5)(d) CGST Act, 2017 which deals with apportionment of credit and blocked credits.
3. AAR erroneously held that the prohibition 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, and such supplies are essential for construction of the civil structure on the piece of land.
4. AAR erroneously held that the construction of an immovable property is critically dependent on the supply of the leasing service and so there is an inseparable and direct nexus between lease rent of land and construction of the building. The lease rent if capitalized, will be capitalized under “Leasehold Land” and not under the “Building Block”.
5. AAR erred on the fact that the lease rental is a service and not a capital goods as defined under the GST Act. The Appellant will neither capitalize nor amortize the GST input in its books of account and hence sub-section (3) of section 16 of the GST Act is not applicable in the instant case.
6. AAR erroneously treated the lease rental paid during the pre-operative period as an integral part of the cost of immovable property.
7. AAR erroneously disallowed the entire input tax of lease rental. The building will be constructed on a part of lease holding and the unconstructed area would be used for auxiliary services. Thus the lease rent is partly used for construction of immovable property and the GST on lease rental in respect of the area on which no immovable property is constructed would be eligible for input tax credit.

Every registered person is entitled to take credit on any supply of goods or services or both which are used or intended to be used in the course of furtherance of business in terms of sub-section (1) of section 16 of the GST Act, subject to the restrictions stipulated in Section 17 of the GST Act. 

The AAAR observed that the project in discussion is building and operating a Hotel and Banquet with all added features in totality on the entire area of land.

As per the Lease Agreement, the scope of the project is to Design, Built and Operate the Eco Resort. Now construction service is classified under SAC 9954 and the recipient of the service at the end of the construction also comes in possession of an asset in the manner of an immovable property. Lease Agreement stipulates that the Appellant “shall restore the land to its original condition before expiry of lease period” and that at the end of lease period the Appellant “shall make over peaceful vacant Khas possession of the demised land in as good a condition as the same is now” to the WBHIDCL.

The Eco resort comes not only with hotel building but also with swimming pool, cafeteria, outdoor barbeque, landscape gardens. The construction of resort is not limited to the hotel building only as a significant amount of construction is involved for creating swimming pools and landscaping. The area for auxiliary services as presented by the Appellant cannot be truncated from the area of the hotel building; the Resort and its facilities come under a single project. So the Appellant's argument of ownership of the project lies with the WBHIDCL is incorrect. Further, the Appellant at the same time cannot capitalize the constructed property and not have ownership rights.

Lease Agreement clearly stipulated that the Lessee shall use demised land exclusively for the purpose of constructing building at the cost of the Lessee. Further, the Appellant was entitled to collect inter-alia all revenue from the project. So the Appellant's argument on the absence of any nexus, direct or indirect between lease rental and construction of the Project was incorrect. The lease rent paid during pre-operative period for the lease hold land, on which the construction activity had been taken for furtherance of business, had direct nexus between the Lease Rent and construction of resort. Had the appellant not paid the Lease Rent during pre-operative period they would not be able to take any construction activity thereon. Further, the asset will be capitalized in the books of accounts of the Appellant. So it is clear that the Appellant was building the Eco Resort on its own account for furtherance of business, and credit of Tax paid on input goods/service is debarred in terms of Section 17(5) (d) of GST Act.

The premium paid by the Appellant is exempted under SI. No. 41 (SAC 9972) of Notification No. 12/2017-CT(Rate) dated 28.06.2017, as amended vide Notification No. 32/2017-CT (Rate) dated 13.10.2017 and Notification No. 23/2018-CT (Rate) dated 20.09.2018. Whereas lease rental paid by the Appellant is taxable under SI. No. 16 (iii) (SAC 9972) of Notification No. 11/2017-CT(Rate) dated 28.06.2017, as amended vide Notification No. 1/2018-CT (Rate) dated 25.01.2018. Lease premium and lease rental both are parts of the project cost, the former being one-time fixed amount and the latter being a variable cost. Both lease premium and lease rental are classified under SAC 9972 being Real Estate Services. As the lease premium paid by the Appellant is exempted under Sl. No. 41 of the Rate Notification under GST Act on satisfaction of stipulated criteria the question of availing input tax credit does not arise.

The AAAR concluded that the appellant is constructing the Eco Resort on his own account in course of furtherance of its business of providing hospitality service, for which one of the input service availed is lease rental service. The ambit of the blocked credit as per clause (d) of sub-section (5) of section 17 is broad as it includes such goods or services or both when used in the course of furtherance of business. Thus, clause (d) of sub-section (5) of section 17 restricts the Appellant availing input tax credit on lease rental paid.

The appeal was dismissed and advance ruling confirmed.

Discussions to this article

[Ganeshan Kalyani]

There should be no restriction on availing credit. If the output is taxable then the input should be creditable. What could be the reason to block the credit?

[Dr. Sanjiv Agarwal]

Ideally, this should happen.