2019 (1) TMI 488 - AAR - GST

Input tax credit - lease rent paid 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 capitalised and treated as capital expenditure - Held that - The prohibition from availing input tax credit, as provided 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 (other than plant and machinery), which includes the supplies received for retaining the right to use and develop the land. Such supplies are essential for construction of the civil structure on the piece of land - The Applicant will admittedly capitalize the lease premium. The property is, therefore, admittedly being constructed on the Applicant s own account and treated as fixed asset, including the lease rental paid. Whether the lease rental paid for the pre-operative period is capitalized under the head Leasehold Land or Building Block is of little significance in this context. The lease rental paid during the pre-operative period should be treated as part of the cost of goods and services received for the purpose of constructing an immovable property (other than plant and machinery) on the Applicant s own account - Input tax credit is, therefore, not admissible on such lease rental in terms of section 17(5)(d) of the GST Act. Ruling - Input Tax Credit is not available to the Applicant 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 being capitalised and treated as capital expenditure.

Summary

Issues:
1. Availability of Input Tax Credit for lease rent paid during pre-operative period for leasehold land being constructed for business purposes.

Analysis:
The Applicant, engaged in hospitality and real estate, sought an Advance Ruling on the eligibility of Input Tax Credit for lease rent paid during the pre-operative period for a leasehold land where a resort is being constructed. The officer contended that credit is allowed only for immovable property in the nature of plant and machinery, as per the GST Act. The Applicant argued that the lease rent is not directly related to construction and should not be considered part of construction cost.

The Applicant, a subsidiary of a larger entity, entered into a lease agreement for a land parcel in New Town Area for a resort project. The lease agreement specified escalating annual lease rent, to be capitalized during the pre-operative period. The officer's stance was that input tax credit is not admissible for lease rent paid during pre-operative period for construction of immovable property other than plant and machinery.

The Applicant cited relevant sections of the GST Act, emphasizing that the lease rent was not for construction purposes but for the right to use the land. They argued that the lease rent was capitalized under 'Leasehold Land,' not 'Building Block,' indicating it was not used for construction. The Applicant contended that the lease rent did not have a direct or indirect nexus with the construction of the resort.

The ruling authority analyzed the situation, considering AS10 guidelines on self-constructed assets and the nexus between lease rental and construction. It was determined that the lease rental paid during the pre-operative period should be treated as part of the construction cost for immovable property. The ruling clarified that input tax credit is not available for such lease rental, as per section 17(5)(d) of the GST Act.

In conclusion, the ruling stated that Input Tax Credit is not available for lease rent paid during the pre-operative period for construction of a resort on leasehold land, when capitalized and treated as capital expenditure. The ruling's validity is subject to provisions under Section 103 unless declared void under Section 104(1) of the GST Act.