2019 (5) TMI 964 - AAAR - GST

Input Tax Credit - lease rent during pre-operative period for the leasehold land on which the resort is being constructed to be used for furtherance of business - the said rent is capitalized and treated as capital expenditure - Challenge to AAR decision. HELD THAT - WBHIDCL holds the ownership title of the land only and holding no proprietary interest in the immovable property constructed or being constructed on it. The Appellant is not providing any construction service to the WBHIDCL and also will not be operating the hotel on behalf of the latter. Further 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. 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 WBAAR never held lease rental to be capital good so discussion on sub-section (3) of section 16 of the GST Act is irrelevant. The Appellant's argument on the absence of any nexus, direct or indirect between lease rental and construction of the Project is 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, has 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 is 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. So the moot question is whether input tax credit on lease rental paid is available in the pre-operative period. It transpires from the above discussion 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. So clause (d) of sub-section (5) of section 17 restricts the Appellant availing input tax credit on lease rental paid. The AAR decision upheld - appeal dismissed.

Summary

Issues Involved:
1. Eligibility of Input Tax Credit (ITC) on lease rent paid during the pre-operative period.
2. Interpretation of Section 17(5)(d) of the GST Act concerning blocked credits.
3. Nexus between lease rent and construction of immovable property.
4. Classification of lease rental as a service or capital goods.
5. Proportionate credit of lease rental on unconstructed area.

Issue-wise Detailed Analysis:

1. Eligibility of ITC on Lease Rent Paid During the Pre-operative Period:
The appellant sought an advance ruling on whether ITC is available on input tax paid on lease rent during the pre-operative period for leasehold land used for furtherance of business, when capitalized and treated as capital expenditure. The WBAAR ruled that ITC is not available for lease rent paid during the pre-operative period when capitalized as capital expenditure.

2. Interpretation of Section 17(5)(d) of the GST Act:
The appellant argued that the WBAAR erroneously interpreted Section 17(5)(d), which blocks ITC on goods or services received for the construction of immovable property, except plant and machinery. The appellant contended that lease rent is paid to acquire rights to the land and is not used for construction of immovable property. However, the WBAAR held that the prohibition under Section 17(5)(d) extends to immovable property in general, including lease rent essential for construction.

3. Nexus Between Lease Rent and Construction of Immovable Property:
The appellant argued that there is no direct nexus between lease rent and construction, emphasizing that lease rent would be capitalized under "Leasehold Land" and not "Building Block." The WBAAR, however, found that there is a direct nexus between lease rent and construction, as the lease rent enables the appellant to undertake construction activities.

4. Classification of Lease Rental as a Service or Capital Goods:
The appellant contended that lease rental is a service and not capital goods, and thus, Section 16(3) of the GST Act is not applicable. The WBAAR did not classify lease rental as capital goods but maintained that ITC on lease rental paid during the pre-operative period is blocked under Section 17(5)(d).

5. Proportionate Credit of Lease Rental on Unconstructed Area:
The appellant argued that the lease rent should be proportionately credited for the unconstructed area, which would be used for auxiliary services. The WBAAR rejected this argument, stating that the entire lease rental is part of the project cost for constructing the Eco Resort, and thus, ITC on lease rental is blocked.

Conclusion:
The Appellate Authority upheld the ruling of the WBAAR, concluding that ITC on lease rent paid during the pre-operative period is not available. The lease rent has a direct nexus with the construction of the resort, and thus, falls under the blocked credits as per Section 17(5)(d) of the GST Act. The appeal was dismissed, and the ruling of the WBAAR was affirmed.