Input Tax Credit of GST paid on construction of Immovable facility which is to be leased out by the taxpayer

In this article, we will discuss the ruling given by Advance Ruling Authority, Rajasthan in the matter of M/s Indag Rubber Limited. This advance ruling answers the question as to availability of input tax credit in relation to inputs and input services procured on civil works related to immovable facility which is intended to be leased further by the taxpayer.

Background

• The applicant (M/s Indag Rubber Limited) is registered under GST and is a manufacturer of precured tread rubber, un-vulcanized rubber strip gum, universal spray cement and tyre envelopes for the tyre retreading industry. 
• M/s Elcom Systems Pvt. Ltd. is a private company engaged in the business of repair, maintenance, overhaul, upgrade and modernization of Unmanned Aerial Vehicles (UAV).Elcom approached the applicant for taking on lease a Maintenance Repair and Overhaul facility (MRO). 
• According to the agreement, the applicant will construct MRO facility as per specifications given by Elcom. The said MRO facility will thereafter be given on lease to Elcom by the applicant. Elcom will install its equipments in the MRO facility and will render MRO services to Israel Aerospace Industries.
• For set up of MRO facility, the applicant would do the following:-

(a) Civil Work (Earth work, Concrete & brick work, wood work, water proofing, flooring etc.)
(b) External Development Works (Area Grading, Site Levelling and roads)
(c) Fire fighting system
(d) Internal and External Plumbing and sanitary works
(e) Heating, ventilation and Air conditioning in HangerBuilding, warehouse building and paint shop
(f) Electrical installations (HT Panel, transformers, HT cable, bus duct, diesel generator, UPS, Battery charger cum DCDB, earthing, lighting protection, LT cables, cable trays, wirings, distribution boards, poles, fixtures and fans, civil and miscellaneous works, fire alarm, CCTV, voice, video & data networking, LT panels)

Question before AAR:

The applicant procures inputs and input services for undertaking various works to construct MRO facility. On procurement of such inputs and input services, the applicant will pay GST. Further, when the applicant will lease out the MRO facility to Elcom, it will be paying GST at applicable rates on the amount of lease rent received for leasing out of MRO facility. The issue before AAR is whether theapplicant is eligible to take input tax credit for carrying out the following activities for setting up of MRO facility which will be rented out: Civil Work & External Development Work.

Findings & Conclusion of AAR:

• Immovable property is defined in Section-3(26) of the General Clauses Act, 1897 as under:-

"Immovable Property shall include land, benefits to arise out of land and things attached to earth, or permanently fastened to anything attached to the earth"

• In view of the facts as mentioned above and provisions under GST Act, we find that the activity of MRO involving supply of goods and services is leading to creation of an immovable property.
• Section-16(1) of GST Act specifically provide that every registered person shall be entitled to take credit of the input tax charged on any supply of goods or services or both made to him, which are used or intended to be used in the course or furtherance of business. Such entitlement is subject to fulfillment of certain conditions such as possession of invoice, receipt of goods/service, payment of tax to Government etc. as provided under section 16(2) of the Act. However, the availability of credit is subject to the restrictions as prescribed under Section 17(5)(d) of the GST Act, 2017.
• The relevant portion of Section- 17(5) in this regard is reporduced below:-

"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:-

(c) Works contract services when supplied for construction of an immovable property (other than plant & machinery) except where it is an input service for further supply of works contract service;

(d) Goods or services or both received by a taxable person for construction of an immovable property (other than plant & 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 clause (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property."

• In view of the provisions as mentioned under section 17(5)(d) of GST Act, we find that ITC is not available for construction of an immovable property even when such goods or services or both are used in the course or furtherance of business.
• The applicant's claim that Section 17(5)(d) deals with unavailability of credit of inputs/input services where the output is not taxable is only one dimension of the law. This is an implicit interpretation which is not the intentional outcome of the said section. The purposive dimension of the said section is blocking of credit for construction of immovable property.
• It is clear while going through the facts that, the activity has two phases viz. construction of immovable property and leasing of the same for MRO purposes. The question raised by the applicant regarding ITC is restricted with first phase of construction itself.Therefore, contention of the applicant that output supply which will take place post construction is taxabe or not is immaterial in determining eligibility of ITC.
• The provisions of Section 17(5)(d) of the GST Act, 2017 is clear that if the goods or services are used for the construction of an immovable property, the ITC shall not be available irrespective of the use of the said property.

Ruling:

The applicant is not eligible to claim credit of GST charged by vendor for supply of goods and services to it, which are used for carrying out the activities (Civil work and External Development works) for setting up of MRO facility.

You may refer the ruling at:- http://gstcouncil.gov.in/sites/default/files/ruling-new/RAJ_AAR_23_2019-20_21.10.2019_IRL_0.pdf