Input Tax Credit (ITC) in respect of construction materials

[Ganeshan Kalyani]

The Authority for Advance Rulings, Tamil Nadu in response to the advance ruling sought by M/s. Sree Varalakshmi Mahaal LLP has ruled on 25.11.2019 = 2020 (1) TMI 31 - AUTHORITY FOR ADVANCE RULING, TAMILNADU that no Input Tax Credit is allowed against any goods or services procured by the applicant for construction of the Marriage Hall on his own account even if used in course or furtherance of his business of renting the place.

The applicant M/s. Sree Varalakshmi Mahaal LLP = 2020 (1) TMI 31 - AUTHORITY FOR ADVANCE RULING, TAMILNADU registered under Tamil Nadu GST Act, is engaged in leasing out the building (Marriage Hall) with all amenities for short term period. The applicant has stated that a huge quantities of materials and other inputs in the form of steel, cement, sand, aluminum, wires, cables, plywood, paints, lifts, escalators, air condition plant, electrical equipment’s, DG sets, other decorative items and also services in the form of consultancy service, architectural service, legal & professional service, engineering service and other all related services were utilized for construction purpose.

All the aforesaid goods and services which are purchased / received for such construction are taxable under the CGST, SGST & IGST Acts and as such the applicant has paid significant amount towards payment of CGST, SGST & IGST levies while purchase. It is an undisputed fact that the activity of letting out the building (i.e. marriage hall) attracts CGST & SGST levy of 18% as output tax. Thus, the appellant has a valid query as to whether input tax credit on construction material purchased can be availed to pay GST payable on letting out the hall.

The applicant has submitted that in general on a plain reading of Section 17 (5) (d) of CGST Act, it is inferred by the authorities that what is contemplated and provided for a particular situation where inputs are consumed in the construction of an immovable property which is meant and intended to be sold. The sale of immovable property post issuance of completion certificate does not attract any levy of GST. Consequently, in such a situation, there is a break in the tax chain and therefore, there is full justification of denial of input tax credit as, on the completion of the transaction, no GST would at all be payable and therefore, no set off of the Input Tax credit would be required or warranted or justified.

The applicant has further submitted that the position is totally different in his case where the immovable property is constructed for the purpose of letting out the same, because, in that event, the Tax Chain is not broken and on the contrary, the construction of the building will result in a fresh stream of GST revenue to the Exchequer on the Rental generated by the building. The denial of Input Tax credit in such a situation would be completely arbitrary, unjust and oppressive and would be directly opposed to the basic rationale of GST itself, which is to prevent the cascading effect of multi stage taxation. 

The applicant in support of his claim, cited the decision of the Hon’ble Orissa High Court in Safari Retreats Pvt. Ltd. And another’s (Vs) Chief Commissioner of Central Goods and Service Tax and others in W.P. (C) No. 20463/2018 = 2019 (5) TMI 1278 - ORISSA HIGH COURT which allowed the petitioner to take the Input Tax Credit spent on Construction of Building materials (in their case is Mall) towards output tax liability i.e. renting of immovable property and provided a copy of the verdict.

State jurisdiction officer appeared for the hearing and submitted a written submission stating that no show cause notice has been issued to them and in view of the provisions of Section 17(5)(d) and Explanations, input tax credit in general, is not available for construction, reconstruction, renovation, addition, alteration or repair of an immovable property even when such goods or services or both are used and the applicant are not eligible to avail ITC on the materials purchased for construction of various building materials and services. The Jurisdictional state GST authority have submitted a written write up that the applicant is not eligible to avail ITC on the materials purchased and services rendered. The applicant did not have anything further to add.

The Hon'ble High Court heard both the side. In order to reply to the question whether input tax credit on construction material is allowed or not, it has referred the provision of Section 17(5)(d). The same is reproduced as under:

5.1 Section 17(5)(d) reads as follows:

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(d) Goods or Services or both received by a taxable person for construction of an immovable property (Other than Plant and Machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation: For the purposes of clauses (c) and (d), the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property:

The Hon'ble High Court stated Section 17 (5) (d) provides that no ITC is available in respect of any goods or services received by a taxable person for construction of an immovable property on his own account even if such inputs and input services are used in the course and furtherance of business. In the instant case the applicant has himself built the marriage hall for which he has received various goods such as cement, steel, sand, tiles, bathroom fittings etc. as inputs and services by architect, labour contractor etc. as input services. He is using the hall to rent out to customers for occasions i.e. for furtherance of his business. Therefore, as per section 17(5) (d), no ITC is available on any goods or services received by him for such construction and the same cannot be claimed by him.

The Hon'ble High Court further stated that, "The Legislative Scheme is amply clear. The input tax paid on the goods/ services received for construction of an immovable property ‘on one’s own account’ is unavailable. The restriction is provided in the Act which is passed by the Legislature. The power to restrict flow of credit exists under Section 16(1) of the GST Act, which shows a Legislative intent that Input Tax credit may not always be allowed partially or fully. As the suitability and requirement of tax payer varies from person to person, rule/ Act, cannot be changed/ amended accordingly and it is mandatory for the tax payers to adhere the restrictions prescribed in Act and Rule."

According to the observation made by Hon'ble High Court which is stated is above para, the Hon'ble High Court ruled that, No Input Tax Credit is available against any goods or services received by the applicant for construction of the Marriage Hall on his own account even if used in course or furtherance of his business of renting the place.

Discussions to this article

[KASTURI SETHI]

Dear Sir,

An eye opener article.Conflicting case laws on this issue are available. Actually ITC is not allowed as per Section 17(5)(d) of CGST Act. The registered person should not take risk in the light of those judgements which allowed ITC on this issue.

[Ganeshan Kalyani]

I fully agree with you Sir.

[Muthukumar Muthunarasimhan]

Dear Mr. Ganeshan and SethiSeth jj

The articles based upon my client case filed before the advance ruling by me has been clearly discussed and as pointed out Sethi ji assessee should not take risk unless otherwise settled in the Act.

[Ganeshan Kalyani]

Sri Muthukumar Sir,

Thanks for your words.