Summary: The Tamil Nadu State Appellate Authority for Advance Ruling denied Input Tax Credit (ITC) on GST paid for transfer of long-term leasehold rights over industrial land acquired for setting up an Air Separation Unit (ASP) in the case of Inox Air Products Pvt Ltd in Order in Appeal No. AAAR/04/2026 (AR) Dated 18/03/2026. The taxpayer had paid ₹15 crore for transfer of 72-year leasehold rights along with existing structures and capitalized the amount as part of the ASP cost. The AAAR held that the transaction fell within the restriction under Section 17(5)(d) of the CGST Act because the inward supply was used for construction of an immovable property on the taxpayer’s own account. The authority rejected arguments that the lease transfer was merely an enabling service, that the ASP was movable property, and that the ASP qualified as “plant and machinery.” Applying the Supreme Court’s immovability tests, the AAAR concluded that the integrated manufacturing facility was intended to be permanent and could not be treated as movable machinery. The ruling emphasized that accounting treatment, transaction structure, and ownership arrangements can significantly affect GST credit eligibility in large industrial projects.
There is a particular kind of tax dispute that does not arise from evasion or negligence but it arises from a transaction that was, at every stage, commercially legitimate, properly documented, and genuinely intended to serve a business purpose. The Inox Air Products case is precisely that kind of dispute. And that is exactly what makes it worth studying carefully.
Over nearly five years, Inox Air Products Private Limited has fought before the AAR, the AAAR, the Madras High Court, and the AAAR again to claim Input Tax Credit on ₹15 crore paid to India Pistons Limited for the transfer of leasehold rights over 5 acres of industrial land in Hosur. The transaction was real. The business purpose was legitimate. The GST was duly charged. And yet, the ITC was denied, twice by the AAR/AAAR, and after a High Court remand, denied a third time.
Understanding why requires a close reading of Section 17(5)(d) of the CGST Act, 2017 and understanding the lessons requires looking at what Inox could have done differently.
What Actually Happened
India Pistons Limited held a 99-year lease over industrial land from SIPCOT (State Industries Promotion Corporation of Tamil Nadu) at Hosur. Inox approached IPL to transfer the balance leasehold rights of 72 years over 5 acres of that land, along with the existing shed and superstructures on it.
The purpose, stated explicitly in the MOU and in SIPCOT’s approval letter, was to set up an Air Separation Unit (ASU), being one of a state-of-the-art cryogenic facility for manufacturing liquid and gaseous industrial and medical oxygen. Inox paid ₹15 crore as consideration, and critically, capitalized this amount in its books of accounts along with the cost of the ASP (Air Separation Plant) itself.
GST was charged on this transaction. Inox sought an advance ruling on whether it could claim ITC of that GST. The answer, at every level, was no.
The Legal Framework: Section 17(5)(d)
Section 17(5)(d) of the CGST Act blocks ITC on goods or services received by a taxable person for construction of an immovable property, other than plant and machinery, on his own account even where such construction is in the course or furtherance of business.
The Explanation to Section 17(5) defines “construction” broadly includes reconstruction, renovation, additions, alterations, and repairs, to the extent of capitalisation. It also defines “plant and machinery” as apparatus, equipment, and machinery fixed to earth by foundation or structural support, used for making outward supply but specifically excludes land, buildings, and other civil structures from that definition.
For this provision to block ITC, four conditions must simultaneously hold:
(a) the inward supply is used for construction;
(b) the construction results in an immovable property;
(c) the immovable property is other than plant and machinery; and
(d) the construction is on the taxpayer’s own account.
Inox argued, with considerable legal force, that none of these four conditions were satisfied. The AAAR disagreed on every single one.
The Three Arguments Inox Made — And Why They Failed
First, Inox argued that the leasehold transfer was not “for construction” at all, rather it was an enabling service that simply provided the right to access and use land for business operations. The nexus of the service, they said, was with manufacturing, not construction.
The AAAR rejected this by pointing directly at Inox’s own MOU and SIPCOT’s approval, both of which explicitly stated the land was being acquired for setting up the ASP. More damaging still was Inox’s own accounting: the ₹15 crore was capitalized as part of the ASP’s cost. When a taxpayer’s own books treat a payment as a construction expense, it becomes very difficult to argue before a court that it wasn’t for construction.
Second, Inox argued that the ASP was inherently movable, since it was comprising modular components bolted to foundations merely for stability, capable of being dismantled and relocated. They cited a CESTAT Mumbai order from April 2025 involving their own Raigad unit, where identical cryogenic ASPs were held to be movable property.
The AAAR distinguished that case sharply. The Raigad situation involved Inox setting up plants at ISPAT’s premises where ISPAT owned the land and Inox only had a right of access. The instant case involved Inox acquiring the land itself on a 72-year lease and setting up a comprehensive manufacturing facility. Applying the six-fold test from the Supreme Court’s Bharti Airtel judgment that includes –>
a) nature of annexation
b) object of annexation
c) intendment of parties
d) functionality
e) permanency
f) marketability
Thus, the AAAR concluded the ASP was immovable. The 72-year lease period, the scale of investment, and the fact that components like cooling towers and cryogenic storage tanks are tailor-made for one specific facility and cannot be marketed as standalone products in the open market, which all pointed firmly toward permanence.
Third, and this was the limb the Madras High Court had specifically sent back for reconsideration, Inox argued that even if the ASP were immovable, it qualified as “plant and machinery” which is expressly excluded from the ITC block under Section 17(5)(d). The ASP, they said, fits perfectly: apparatus and equipment fixed to earth by foundation, used directly for outward supply of industrial gases.
The AAAR gave this argument its most detailed treatment but ultimately rejected it. The expression “plant and machinery” under the Explanation, the authority held, must be read strictly and in toto but not in the general commercial sense of the word “plant.” An Air Separation Unit involving cooling towers, compressors, adsorption beds, cryogenic storage tanks, MCC panels, and an entire supporting infrastructure cannot be characterised as an “apparatus,” “equipment,” or “machinery” as those terms are understood are instruments or assemblies designed to carry out a specific, defined function. The ASP as a whole is a comprehensive manufacturing facility. And as such, it does not fit the statutory definition of plant and machinery under the Explanation, even though individual components within it might.
The ruling, accordingly, blocked ITC in its entirety.
The Lessons we should learn and why they are Significant
1. Your Own Books Can Be Your Biggest Adversary
This point cannot be overstated. Inox’s decision to capitalize the ₹15 crore leasehold payment as part of the ASP’s cost was commercially sensible and arguably the correct accounting treatment under the applicable standards. But in the context of Section 17(5)(d), it was the single most damaging piece of evidence against them. It confirmed, in their own handwriting, that the payment was integral to constructing the manufacturing facility.
The lesson: Before signing off on the accounting treatment for any capital expenditure in a complex transaction, the GST implications of that treatment need to be examined separately. How you book something tells the tax authority what you believe it is for.
2. The Payment Structure Matters More Than the Contract Label
Had Inox structured the arrangement as periodic annual lease rentals rather than a lump-sum upfront payment, the character of the transaction would have looked fundamentally different. A recurring period cost looks like a business operating expense which is an input for ongoing operations. A lump-sum capitalized payment looks like a construction cost. The economic substance in both cases may be identical, but the legal and tax characterisation can diverge significantly.
In transactions involving land access for industrial setup, the mechanism of payment is often as important as sometimes more important than the contractual label applied to the arrangement.
3. The “On His Own Account” Condition Is a Structural Lever
Section 17(5)(d) only blocks ITC where construction is undertaken on the taxpayer’s own account. This is not incidental language but it is a deliberate statutory condition. Had the arrangement been structured so that IPL retained ownership of the land and infrastructure, and Inox operated under a tolling or contract manufacturing arrangement, this condition would have failed entirely and ITC would have been available.
Many capital-intensive industries overlook this structuring opportunity. The difference between owning the land and leasing it, and between leasing the land and operating under a license or tolling agreement, can be the difference between blocked credit and available credit.
4. Judicial Precedents Are Not Interchangeable Across Tax Regimes
Inox placed significant reliance on CESTAT decisions under the erstwhile Finance Act, 1994 particularly findings that indicate towards that ASPs are movable property. The AAAR was unimpressed, and rightly so. Those decisions were rendered in the context of “Renting of Immovable Property” service under the Finance Act back then, where “immovable property” had a restricted, exhaustive statutory definition. The GST framework operates differently. Precedents across tax regimes are not automatically portable, and their applicability must always be examined in the specific statutory context in which they are sought to be used.
5. The Plant and Machinery Exception Demands Precision
The exception for “plant and machinery” under Section 17(5)(d) is real and available but it requires precision in how the asset is characterised and deployed. Individual, identifiable pieces of equipment used directly for outward supply are far better placed to claim this exception than a comprehensive, integrated manufacturing installation characterised as a whole. Where possible, disaggregating the asset into identifiable components each fixed to earth, each used for making outward supply will give a stronger foundation to claim the exception than arguing for the entire installation as a unit.
6. Tax Structuring Must Precede the Contract & Not Follow the Dispute
Perhaps the most fundamental lesson from five years of litigation is that the transaction was largely locked in by the time the advance ruling was sought. The MOU was signed, the consideration was agreed, the accounting treatment was chosen and all of it pointed in one direction. An advance ruling application is not a structuring tool. It is a confirmation exercise. By the time you are asking the AAR whether you can claim ITC, the real opportunities have already passed.
The structuring conversation about payment mechanics, about legal character of the arrangement, about accounting treatment, about whose account the construction is on belongs at the table where the MOU is being drafted, not at the table where the dispute is being argued.
Closing Thought
The Inox Air Products ruling is not a story of a taxpayer doing something wrong. It is a story of a transaction that was commercially sensible, legally structured, and genuinely purposive, but where certain choices made at inception, in accounting, and in documentation all compounded against the taxpayer when examined through the specific lens of Section 17(5)(d).
The GST law does not always align with commercial intuition. A payment that feels like a business operating expense can look like a construction cost. An installation that an engineer would call movable can be immovable in law. And a plant that any factory owner would call machinery may not be “plant and machinery” as the statute defines it.
That gap between commercial intuition and statutory language is where tax disputes live. Closing it, before the deal is done, is the only reliable way to stay out of them.
Disclaimer: This article is based on Order-in-Appeal No. AAAR/04/2026 (AR) passed by the Tamil Nadu State Appellate Authority for Advance Ruling dated 18.03.2026 in the matter of M/s. Inox Air Products Private Limited.
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