ARA, Rajasthan has pronounced Ruling on 16.2.2021, in the case of Rajasthan State Indusl. Dev. & Investment Corpn. Ltd. (2022) 37 J.K.Jain’s GST & VR 210, that;
ITC claim on the input services for construction or works contract procured for the development of an industrial area or the special maintenance expenses of the area, is not allowed.
Background.─ 1.The applicant is a Rajasthan State Govt. owned Public Sector Undertaking. The corporation (RIICO) has been setup by the Rajasthan Govt. for the purpose of development of various industrial areas for the purpose of setting up of Industries and other supportive services in the State of Rajasthan. It has total 30 regional offices all across the State of Rajasthan for the purpose of development, improvement, up-gradation and maintenance of various Industrial areas in various regions.
2. The applicant for the development of industrial areas in the various regions of the Rajasthan for the purpose of setting of Industries first identifies the suitable Govt./private land. Thereafter applicant starts the acquisition process of such land and later planning for the development of such land. After that for the purpose of getting land developed, the applicant prepares a detailed project report for the purpose of mapping of entire area, for estimating the cost of the development and to plan the development of such area.
3. The applicant has stated that they acquires the raw/undeveloped land, the applicant has to initially carry out the development work like levelling of the land, development of the basic amenities like construction of roads, drainage system, boundary wall, water and power supply system, dumping yard and various other types of related development works. In this connection the applicant prepares a Detailed Project Report (DPR) which includes the details of the area to be developed, Map of the entire area which is to be developed and the cost estimation for the development of the area. Based on that, approval is taken from the Board. After development of a new industrial area, applicant also shoulders responsibility of maintenance/upkeep of infrastructure as well as upgradation of infrastructure from time to time in future.
4. Since the applicant carries out the development work of an area after acquiring raw land from the State Govt. In this connection it is to be submitted that after the development work, the plot of the land is allotted on 99 years lease to the various persons who applies for the same. In the area developed by the applicant, certain part of the area is demarcated as to be used for Non-industrial purpose which can be allotted for commercial/institutional/residential purpose and is supportive to the industrial projects. It is not disputed that the goods or services or both obtained by the applicant are in the course or furtherance of business.
5. Analysis by ARA.─5.Subject to the conditions and restrictions as may be prescribed, the taxpayer entitled to take ITC on the tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of business as per S.16(1), CGST Act, 2017 which reads as under:–
S.16.“Eligibility and conditions for taking ITC.─(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in S.49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,………………………
(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other taxpaying documents as may be prescribed;
(b) he has received the goods or services or both.”
Thus, S.16(1), CGST Act specifically provides 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 his business. Such entitlement is subject to fulfillment of certain conditions such as possession of invoice, receipt of goods/service, payment of tax to Govt. etc. as provided u/s 16(2) of the GST Act, 2017. However, the availability of credit is subject to the restrictions as stipulated u/s 17(5)(d), GST Act, 2017.
6. The relevant provisions of S.17(5)(d), CGST Act reads as under:
“(5) Notwithstanding anything contained in S.16(1), and S.18(1), ITC 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 an 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 purposes of clauses (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;
Explanation–For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes–
(i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.”
7. Section 17(5)(c) and (d) of the CGST Act, 2017 denies availment of ITC on works contract service and on goods and services when supplied for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the furtherance of business. Applicant does not deny that the civil work i.e., roads drainage, approaches, culverts, rain water harvesting system, power supply related work like laying of new power lines, street light work, work for common facilities in the industrial area like Administrative office, building for fire tenders, Post office/Bank building etc. is an immovable property. In fact, they have obtained land from State Govt./private land and after the development work, the land is allotted on lease to the various persons who applies for the same. We find that as per S.5(c) and 5(d) of S.17 of CGST Act, 2017 the ITC will not be allowed for works contract service and on the goods and service used by the taxable person on his own account. S.17(5)(c) clearly states that no ITC would be available on the tax paid on works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input
Findings by ARA.─8. It is admitted by the appellant that they are getting civil works done from the contractor. On perusal of fact submitted by the appellant, we find that the appellant has constructed roads drainage, approaches, culverts, rain water harvesting system, power supply related work like laying of new power lines, street light work, work for common facilities in the industrial area like Administrative office, building for fire tenders, Post office/Bank building etc. on the land for leasing the same to other. All the civil construction undertaken by the appellant is certainly an immovable property in the first place in terms of S.3(26) of the General Clauses Act, 1897 which reads as under–
“Immovable Property shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.”
8. Further, S.(17)(5)(d) bars a taxable person, in the subject case the applicant, from taking ITC for construction of immovable property (as in the subject case) which is on his own account, even when such goods or services or both are used in the course or furtherance of business (in the subject case, Leasing of the said property). Further, it is also seen from the submissions that the immovable property in the subject case is not a plant or machinery. Thus we find that, S.17(5)(d) provides that no ITC is available in respect of any goods or services received by a taxable person for construction of an immovable property on his own account even if such inputs and input services are used in the course and furtherance of business. In the instant case the applicant has himself built the immovable property for which he has received various goods or services or both and is using the said property for giving the same on long term leasing to his customers. Therefore, as per S.17(5)(d), no ITC is available on any goods or services received by him for such construction and the same cannot be claimed by him. Thus, the provisions of S.(17)(5)(d) squarely applies in the subject case and thus the applicant cannot avail ITC.
9. Further also the ITC is not allowed on the work contract services when supplied for construction of an immovable property except when such services are received for the construction of plant and machinery. Similarly, ITC is not allowed on goods or services or both received by a taxable person for the purpose of construction of an immovable property except when the same are used for the construction of plant and machinery. However, the explanation gives a clarity that ITC on work contract service when supplied for construction of immovable property and goods or services or both received by a taxable person for construction of an immovable property is not allowed only to the extent of capitalisation. But in this case the applicant argued that entire expenses incurred on the development and maintenance of the areas including GST charged by the contractor in the profit and loss account as revenue expenditure and it is not a capital expenditure, we do not agree with the applicant’s view that the land development work on immovable property is not a capital expenditure. The term ‘extent to which capitalized’, only suggests that the extent of such expenses are expected to be capitalized or else will be treated as capitalized to such immovable property.
Since, the work done by the applicant on the acquired land is not of the nature of any type of repair or maintenance on immovable property, but a new fixed asset is constructed and it appreciate the value of the property/land.
Hence, such expenses, which enhance the value of the property permanently and as per accounting convention, the expenditure are capital in nature, has to be capitalized and cannot be treated as revenue expenditure. The applicant’s contention cannot be accepted. Therefore, as per S.17(5)(c) & (d), CGST/RGST Act, 2017, No ITC is available to the applicant.
10. Further, the applicant has placed reliance on the judgment rendered by the Hon’ble High Court Orissa in the case of Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd. (2020) 33 J.K.Jain’s GST & VR 201 (SC), (supra). In the said case it is seen that the party had constructed malls which were given further on lease. While holding that S.17(5)(d) was not ultra vires, the Hon’ble Court ruled that the party was eligible for credit.
11. However, we find that the department has filed an appeal against the said judgment of the Hon’ble Orissa High Court, in case of Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2019) 31 J.K.Jain’s GST & VR 429 which is presently pending. The Hon’ble Supreme Court, in the case of Union of India v. West Coast Paper Mills Ltd.(2004) 164 E.L.T. 375 (SC), has held that once a special leave to appeal is granted and appeal is admitted, correctness or otherwise of judgment of Tribunal becomes wide open and in such appeal, Court is entitled to go into both questions of fact and as well as law and correctness of judgment is in jeopardy. Appeal is considered to be a continuation of suit and a decree becomes executable only when the same is disposed by the final Court of Appeal.
Conclusion by ARA.─12. Hence in view of the above, we are of the opinion that since the case of Safari Retreats Pvt. Ltd. is pending with the Hon’ble Supreme Court, has not attained finality. We also find that the Hon’ble High Court has given the relief to the party invoking its writ jurisdiction while categorically holding that they are not inclined to hold S.17(5)(d) to be ultra vires. Therefore, we are not relying upon the judgment of the Hon’ble High Court.
12. In view of the above discussions and finding, we rule as under:
Ruling by ARA.─For reasons as discussed in the body of the order, the questions are answered thus–
Question : Whether the applicant can claim the ITC on the input services of construction or works contract procured for the development of an industrial area or the special maintenance expenses or the area?
Answer : Answered in the negative.