No ITC on construction expenses for immovable property, regardless of capitalization in books

Assistant Commissioner, Shibpur Division, CGST & CX Vs. Mindrill Systems and Solutions Private Limited (GST AAAR West Bengal)

The case of Assistant Commissioner, Shibpur Division, CGST & CX Vs. Mindrill Systems and Solutions Private Limited (GST AAAR West Bengal) has raised significant questions regarding the eligibility to claim and utilize the Input Tax Credit (ITC) against inward supply of inputs/input services used for the construction of a warehouse, which is then rented out. This article delves into the detailed analysis of the appellate authority’s ruling, its implications for businesses, and the broader context of GST law concerning the construction and leasing sectors.

The appeal was filed by the Assistant Commissioner against the ruling passed by the West Bengal Advance Ruling Authority (WBAAR) regarding Mindrill Systems and Solutions Private Limited’s claim of ITC on construction expenses of a warehouse leased to Zomato Hyperpure Private Limited. The core issue revolves around whether ITC on inward supplies used for construction, whether capitalized or not, can be utilized to offset tax liabilities on outward supplies of renting services.

The WBAAR’s original ruling highlighted two scenarios: ITC claims on construction expenses that are capitalized in the books and those that are not. It restricted ITC for capitalized construction expenses while allowing it for non-capitalized expenses, drawing on the stipulations of section 17(5)(d) of the GST Act, which bars ITC on goods or services used for construction of immovable property on one’s own account.

Mindrill Systems and Solutions contended that the restriction should not apply as the constructed warehouse does not constitute immovable property in the strict sense and that their case is akin to scenarios where ITC has been allowed, such as in the Safari Retreats case by the Orissa High Court.

The Authority for Appellate Advance Ruling (AAAR) ultimately modified the WBAAR’s ruling, emphasizing that the law unequivocally blocks ITC on construction expenses for immovable property, regardless of capitalization in the books. This decision underscores the stringent interpretation of GST laws regarding ITC eligibility on construction costs, signaling a restrictive stance on leveraging ITC for reducing tax liabilities from rental income.

Read AAR Also: Denial of ITC on construction of warehouse capitalised in books of accounts

FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING, WEST BENGAL

1. This Appeal has been filed by Shri B Mahesh Babu, Assistant Commissioner, Shibpur Division, Howrah CGST & CX Commissionerate, in the matter of Mindrill Systems and Solutions Private Limited having GSTIN: 19AAECM3065G1ZG carrying on business under the trade name of Mindrill Systems and Solutions Private Limited at Domjur Mahiary Road, PO: Begri, Opposite Saraswati Complex, Howrah – 711411 against the Ruling passed by the West Bengal Advance Ruling Authority vide Order No. 08/WBAAR/2023-24 dated 26.06.2023, pronounced by the West Bengal Authority for Advance Ruling (hereinafter referred to as the ^„WBAAR^‟).

2. The concerned respondent, M/s Mindrill Systems and Solutions Private Limited [GSTIN­19AAECM3065G1ZG] has constructed a warehouse at Village: Mollarber, P.O. Dankuni Coal Complex, Durgapur Expressway, P. S. – Dankuni, Hooghly-712310 and has let it out to M/s Zomato Hyperpure Private Limited, GST being paid on such supply.

3. The Respondent sought an advance ruling under section 97 of the West Bengal Goods and Services Tax Act, 2017/ the Central Goods and Services Tax Act, 2017, (hereinafter collectively referred to as “the GST Act”) on the issue of whether input tax credit (in brevity “ITC”) against inward supply of said input/ input service used for construction of warehouse can be claimed and utilized to pay tax on the outward supply of services provided by way of renting of said warehouse in case such construction expenses are

a) capitalized in books, and,

b) not capitalized in books

4. The respondent taxpayer (i.e. applicant in WBAAR) contended before the WBAAR that as per provisions of clause (d) to sub-section (5) of section 17 of the GST Act, registered persons are ineligible for claiming ITC on inward supplies of goods or services used for construction on account of own use and such provisions will not extend to including construction of immovable property for use by lessee or tenant.

5. The respondent taxpayer (i.e. applicant in WBAAR) further contended that pre-engineered steel structures were used for construction of the warehouse and thus the said warehouse does not fall within the purview of immovable property. Hence, the restriction imposed under clause (d) to sub-section (5) of section 17 of the GST Act is not applicable in the instant case. Thus the benefit of input tax credit ought to be given on inward supply of input/input service used for construction of warehouse.

6. The respondent taxpayer (i.e. applicant in WBAAR) has referred to the judgement delivered by the Hon’ble Orissa High Court in the case of Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax. In this context, the WBAAR observed that the issue before the Hon^‟ble Orissa High Court was to decide whether the petitioner is eligible for input tax credit in respect of inward supply of goods and services received by him and used for construction of shopping mall. Issues like whether the shopping mall can be regarded as immovable property or not and whether the petitioner has received such inward supplies on his own account or not were not a matter of dispute before the Hon^‟ble Court. The WBAAR observed that the intention behind the construction of the warehouse, as submitted by the applicant, is to let it out and earn rental income from it, i.e., to provide outward supplies of warehousing service and/or renting or leasing service. This submission establishes the fact that construction of the warehouse itself is intended to be permanent at a given place and the applicant would not shift it from one place to another. So, the warehouse as constructed by the applicant, for its permanent characteristics and in absence of mobility like other goods, would be regarded as an immovable property. Further, admissibility of input tax credit to the extent of capitalization in the books of accounts was also not a subject of discussion in the Safari Retreat case. WBAAR thus found that the aforesaid case was not identical with the case being dealt with and opined that the ratio of the aforesaid judgment was not applicable to the present case.

7. WBAAR therefore held that the restriction under clause (d) of sub-section (5) of section 17 of the GST Act in respect of input tax credit on goods or services received by the applicant for construction of warehouse is applicable in the instant case i.e., the applicant is not eligible for credit of input tax charged on inward supply of goods and services related to construction of warehouse which is capitalized in the books of account. However, where construction expenses are not capitalized in books, the claim of ITC is admissible.

8. The Appellant has filed the instant appeal against the above mentioned Advance Ruling dated 26.06.2023 on the following grounds:

a) In the instant case, the respondent taxpayer had received inward supplies of goods and services both including works contract services to construct a warehouse/ godown and has let it out to M/ s Zomato Hyperpure Private Limited. The issue involved in the instant case is related to admissibility of credit of input tax charged on aforesaid supplies received by the respondent taxpayer. The WBAAR has erred by restricting the input tax credit to the extent of construction expenses only which are capitalised in books of

b) Clause (d) of sub-section (5) of section 17 of the GST Act restricts input tax credit for construction of immovable property which deals with original construction.

c) Further, explanation given under clause (d) of sub-section (5) of section 17 of the GST Act clarifies that construction work includes re-construction/renovation/ additions/ alterations / repairs and in these cases the availability of input tax credit is restricted only to the extent of capitalization.

d) In the instant case, the applicant taxpayer made an original construction work in form of a warehouse to let it out to M/s Zomato Hyperpure Private Limited. Hence, irrespective of whether the construction expenses have been capitalised or not, the input tax credit shall not be available to the applicant taxpayer.

9. The Appeal petition was heard on 03.10.2023 in virtual mode and subsequently on 08.01.2024 on physical hearing mode on request of the respondent. Both the Appellant and the Respondent tax-payer along with the State Revenue Authority were asked to file their written submissions regarding the issue under consideration.

10. The appellant gave further written submission wherein he reiterated the submissions made in the Appeal application.

11. The respondent taxpayer filed a written submission wherein the following points were submitted:

a) There is no merit in the ground ventilated by the Revenue that the Input Tax Credit shall not be available even if the construction expenses have been capitalised or not under clause (d) of sub-section (5) of section 17 of the GST Act because said provision restricts input tax credit for construction of immovable property which deals with original There is no concept of “original construction” in said provision and clause (d) of sub-section (5) of section 17 of the GST Act does not debar a person from claiming ITC on non-capitalised construction/ reconstruction / renovation / additions / alterations / repairs expenses relating to immovable or movable property used in the course of or furtherance of business.

b) Section 17 of the GST Act deals with apportionment of credit and blocked credits. Clauses (c) and (d) of sub-section (5) of section 17 of the GST Act deal with non availability of credit relating to immovable property in certain situation.

c) Upon plain reading of the provisions of section 17(5)(d) of the Act, it is amply clear that said provision in no manner deals with ITC on non-capitalised construction/ reconstruction / renovation / additions / alterations / repairs expenses relating to immovable or movable property used in the course of or furtherance of business.

d) Therefore, in view of definitions provided under section 2(19), 2(52), 2(59), 2(62), 2(102) and 2(119) of the GST Act, the tax-payer is entitled to claim ITC on non-capitalised construction/ reconstruction / renovation / additions / alterations / repairs expenses relating to godown / warehouse given on rent.

12. The State Revenue Authority also filed a written submission wherein they expressed their complete agreement with the order/ruling passed by the WBAAR. They also mentioned that the concerned taxpayer issued invoice for supply of services to M/s Zomato Hyperpure Pvt. Mentioning SAC as 997212 (Rental or Leasing services involving own or leased non­residential property) under Real Estate Service (9972). By supplying real estate service, the applicant himself established the nature of such property is immovable one. So, revenue also echoed the view of WBAAR in this regard.

13. All the parties were duly heard and their submissions were carefully considered. In the instant case, the entire issue stands upon a very plain and simple reading of the provisions of clauses (c) and (d) to sub-section (5) of section 17 of the GST Act.

14. For the sake of clarity, the provisions of clauses (c) and (d) to sub-section (5) of section 17 of the GST Act is reproduced as below:

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

(a)….

(b)….

(c) works contract services when supplied for construction of an immovable property (other than plant and 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 immovable property (other than plant or 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 purpose 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.”

15. The provisions of clauses (c) and (d) to sub-section (5) of section 17 of the GST Act thus clearly states that Input Tax Credit is not available in respect of works contract services or goods or services or both received for construction of an immovable property. Therefore, for the purpose of construction, the law is unambiguous in the main clauses (c) and (d) to sub­section (5) of section 17 of the GST Act that Input Tax Credit will not be available and thus it will be a blocked credit. It is only the Explanation part, where the law extends the ineligibility criteria for Input Tax Credit to the arena of re-construction, renovation, additions, alterations or repairs and that too conditionally, i.e. Input Tax Credit for such portion of the expenses pertaining to re-construction, renovation, additions, alterations or repairs which are capitalized stands ineligible.

16. The explanatory part actually is inclusive in nature which explains that the restrictions of Input Tax Credit as per clauses (c) and (d) to sub-section (5) of section 17 of the GST Act is not only applicable on construction but also on reconstruction, renovation, additions, alterations or repairs. However, the condition in regard to capitalization is applicable only in respect of reconstruction, renovation, additions, alterations or repairs to the said immovable property.

17. Thus, to reiterate, the issue of “capitalization” is applicable only in the Explanation part to the clauses (c) and (d) to sub-section (5) of section 17 of the GST Act i.e. only when the question of reconstruction, renovation, additions, alterations or repairs arises. If such expenses are not capitalised in the books, only under such circumstances the related Input Tax Credit may be available subject to fulfilment of other eligibility criteria. But for the purpose of “construction”, it is clear from the law that Input Tax Credit is blocked in all occasions and there is no scope of any other interpretation.

18. The WBAAR has erred in interpreting the afore-stated provisions by applying the conditions of capitalisation both for construction as well as for reconstruction, renovation, additions or alterations or repairs.

19. In view of above discussions, we are of the opinion that in the instant appeal case, the concerned respondent has constructed one warehouse and let it out. This being a ^„construction^‟, will attract the provisions of the clauses (c) and (d) to sub-section (5) of section 17 of the GST Act and not the Explanation part for determining the eligibility criteria for Input Tax Credit. Thus, the input tax credit for such construction shall not be available to the respondent.

20. The WBAAR Ruling No. 08/WBAAR/2023-24 dated 26.06.2023 is thus modified and the Appeal stands confirmed.

Send a copy of this order to the Appellant and the Respondents for information.