Case Law Details
In re Rajasthan State Industrial Development & Investment Corporation Limited (GST AAR Rajasthan)
AAR held that applicant cannot 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.
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 Section 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.”
- Further, Section (17) (5)(d) bars a taxable person, in the subject case the applicant, from taking input tax credit 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, Section 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 Section 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 Section (17) (5)(d) squarely applies in the subject case and thus the applicant cannot avail input tax credit.
Further also the input tax credit 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, input tax credit 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 input tax credit 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 Section 17(5)(c) & (d) of the CGST/RGST Act, 2017, No ITC is available to the applicant.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, RAJASTHAN
Note: Under Section 100 of the CGST/RGST Act, 2017, an appeal against this ruling lies before the Appellate Authority for Advance Ruling constituted under section 99 of CGST/RGST Act, 2017, within a period of 30 days from the date of service of this order.
> At the outset, we would like to make it clear that the provisions of both the CGST Act and the RGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the RGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / RGST Act would be mentioned as being under the “GST Act”.
> The issue raised by M/s RAJASTHAN STATE INDUSTRIAL DEVELOPMENT & INVESTMENT CORPORATION LIMITED, UDYOG BHAWAN, TILAK MARG, C-SCHEME, JAIPUR, Rajasthan – (hereinafter the applicant) is fit to pronounce advance ruling as it falls under the ambit of the Section 97(2) (a) given as under: –
a. Classification of goods and /or services or both
> Further, the applicant being a registered person (GSTIN is 08AABCR4695J1ZW as per the declaration given by him in Form ARA-01) the issue raised by the applicant is neither pending for proceedings nor proceedings were passed by any authority. Based on the above observations, the applicant is admitted to pronounce advance ruling.
A. SUBMISSION AND INTERPRETATION OF THE APPLICANT:
1. M/s Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO) (hereinafter referred to as the applicant) is a Rajasthan State Government owned Public Sector Undertaking. The corporation (RIICO) has been setup by the Rajasthan Government 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 is a registered person under GST for the purpose of providing various taxable and exempt outward supplies of leasing of Industrial and Non-Industrial Plots as well as financing activities of providing term loan to various projects.
3. 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 governmental/ 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. In this connection, flow chart of the entire process from acquisition of land upto the development of same is enclosed herewith as Annexure-III.
4. As the applicant 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.
5. The brief nature of the development work and the expenditure carried out by the applicant for the development of various Industrial areas is provided herein below for your reference:
(a) Nature of Development works: – This includes civil works like 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.
Nature of Development Expenditure: – Development expenditure for creation of infrastructure for new industrial area is incurred generally in the initial years. These expenditures cover expenditure on land compensation, civil works like 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. Administrative cum financial sanction for incurring above development expenditure is sanctioned by competent authority for each new industrial area.
(b) Nature of Special Maintenance: – This Includes improvement/up-gradation of industrial infrastructure in subsequent years after initial development of any industrial area is approved under above sanctions. Example: – Up-gradation of damage BT road to Cement Concrete Road (CC), Up-gradation of masonry drain to RCC drain, up-gradation of sodium vapour/Tube light based street light to LED based street light system etc.
6. The main activity of applicant is development and leasing of the developed land to various industrial/ non-industrial users. Due to nature of its business, the applicant considers the land as its stock in the books of accounts. Hence, the applicant is charging all the development and special maintenance expenses in its profit and loss account considering the same as revenue expenditure. The accounting treatment of both the development expenses and special maintenance expenses are provided here in below for ready reference:
(a) Accounting Treatment of development expenses: – Expenditure incurred on development of each industrial area is debited to profit & loss account under the head “Expenditure on development of land”. It is so because RIICO deals in land which is stock in trade for RIICO. Applicant acquires raw land, convert it into developed land by incurring development expenditure and allots the developed plot of land to industrialist for their project. Hence various expenditure incurred for development of the land are debited to development expenditure and charged to profit & loss account.
(b) Accounting Treatment of special maintenance expenses: – Expenditure incurred for improvement/up-gradation of infrastructure through approval under Additional A.S./Special maintenance are charged to profit & loss account under the main group other administrative and selling expenses.
7. The applicant carries out the development work of an area after acquiring raw land from the state government. 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 Nonindustrial purpose which can be allotted for commercial/institutional /residential purpose and is supportive to the industrial projects.
8. The plot of land in the developed industrial area is allotted on lease to the industrial unit which is generally for 99 years. In this connection, the term Industrial Area has been defined in the “RIICO Disposal of Land Rules, 1979” which is reproduced here in below for ready reference:
“Industrial Area” means an area of land transferred to or placed at disposal of the Corporation by the state Government or the land purchased, acquired or otherwise held by the Corporation or reserved or set apart or here after reserved or set apart under any law for setting up an industry or industries including essential welfare and supporting services, e.g Post Office, Labour Colony, Residential Colony/Housing Complex & Township, Educational Institutions, RSEB, Power Station and water and Sewerage facilities, Dispensary or Hospital, Police, Fire service Station, Bank, Weigh Bridge, shops and markets, Cinema, Hotel and Restaurant and Petrol pump as mentioned in Rajasthan Land Revenue (Industrial Areas Allotment) Rules, 1959.
9. It is to be further submitted that the long-term leasing of more than 30 years of Industrial land to an Industrial unit is exempt as per entry no. 41 of the Notification No. 12/2017-Central Tax (rate) dated: 28.06.2017 (relevant entry is reproduced here in below for ready reference). The applicant charges upfront amount in the name of ‘Development Charges’ for recovery of the cost of land including the development expenses incurred for the development of such land from the allotted of the plot of land. On such development charges, no GST is payable in view of exemption provided in the Notification No. 12/2017- Central Tax (rate) as mentioned below: –
Notification No. 12/2017- Central Tax (Rate)
SI. No. |
Chapter, Section, Heading, Group or Service Code (Tariff) | Description of Services | Rate (per cent.) | Condition |
41 | Heading 9972 | [Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 50 per cent, or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area.]
[Explanation. – For the purpose of this exemption, the Central Government, State Government or Union territory shall have 50 per cent, or more ownership in the entity directly or through an entity which is wholly owned by the Central Government, State Government or Union territory.] |
Nil | Nil |
10. The above exemption is only for the lease of an industrial plot to an industrial unit. Therefore, the lease of Non-industrial plot/ commercial plot of land is taxable under GST and therefore the applicant is paying GST on leasing of such Non-industrial/ commercial plot of land. The GST is paid at the time of issue of the allotment letter on the entire amount of development charges taken from the allottee of plot of land.
11. The applicant recognizes the revenue in the books of accounts according to the various accounting principles. The mechanism of recognizing the revenue is provided here in below for ready reference: –
Mechanism of revenue recognition in the books of accounts in relation to the allotted land
Revenue in relation to land allotted on long term lease basis is recognised and accounted for in the following manner:-
a. In case of land component, the revenue is recognised as lease revenue as per “IND AS 17 – Leases”.
b. In case of component of development activities, revenue is recognised as per the percentage of completion method after reasonably measuring the progress of performance obligation, as per “IND AS 115 – Revenue recognition from contracts”.
12. For carrying out the development and maintenance work in the various areas, the applicant procures various input services by way of construction/works contract services from contractors. There is certain time gap between the development of an area and allotment of plots in that area. The allotment starts only after the basic development work is carried out like roads, powerwater supply system etc. is done in that industrial area. Thus, the cost is incurred first by way of development expenses and thereafter the revenue is received when the plot of land is allotted.
13. The applicant debits the 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. As mentioned above, the land is stock of the applicant, therefore the inputs and input services procured for the development of such land is included in the cost of stock and charged to Profit and Loss account as revenue expenditure. It is not a capital expenditure, hence the same is not capitalized to any fixed assets in the books of accounts of the applicant.
14. At present the applicant is not availing Input tax credit (ITC) on the GST paid to the contractors from whom the input services of works contract / construction are taken. The applicant is charging the GST amount along with the expenditure as revenue expenditure in its Profit and Loss account with the development cost.
Statement of Applicant’s interpretation of Law/Facts in respect of the Questions on which the advance ruling is sought
Applicant’s view point on the availability of Input tax credit on development and special maintenance Expenses:
1. As the applicant is engaged in development of land and leasing thereof for 99 years, the same is part of the current assets as stock in the books of accounts of the applicant. Therefore, the expenses incurred for the development, improvement, upgradation and maintenance of the land is charged to the Profit and Loss account as revenue expenditure and becomes part of cost of stock.
2. The question on which advance ruling is sought is of eligibility of ITC of the GST charged by the contractors on such development work. Therefore, it is relevant to discuss the provisions of section 16 of the CGST Act, which provides the eligibility and conditions for taking input tax credit. As per the section 16(1) of the CGST Act,2017, every registered person shall 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 course of furtherance of the business. There are certain conditions which needs to be fulfilled for taking the input tax credit. Relevant provisions of the section 16 are reproduced herein below for ready reference:-
16. Eligibility and conditions for taking input tax credit.- (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 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 tax paying documents as may be prescribed;
(b) he has received the goods or services or both.
[Explanation. -For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services,-
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.]
(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
3. The applicant fulfils all the above conditions. Firstly, the applicant is engaged in leasing of the plot of land for industrial and non-industrial purposes which is in the course or furtherance of the business of the applicant. The applicant receives services (work contract service) of various contractors and possesses the tax invoices issued by them. The GST paid by the applicant as charged by the supplier in their invoices is reflected in GSTR-2A of the applicant. The applicant files the monthly GST returns and therefore, the applicant is eligible to claim the credit as per section 16 of the CGST Act, 2017.
4. After discussing the provisions of Section 16, it is equally important to discuss the provisions of Section 17 which provides for Apportionment of credit and blocked credits. The relevant clause (c) and (d) of section 17(5) of the CGST Act, 2017 are reproduced below: –
“17. Apportionment of credit and blocked credits
(5) 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 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 reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
5. As per above provisions, the works contract services when supplied for construction of an immovable property is blocked. The term ‘construction’ has been defined in the Explanation provided below the clause (c) and (d) of section 17(5) of the CGST Act, 2017. As per the Explanation the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs to the extent capitalised to the said immovable property. After combined reading of the above clauses and the explanation, it is clear that the Input tax credit of works contract services or services received for the construction of an immovable property is blocked when the same is capitalised to the said immovable property.
6. In the case of Applicant, the developed land becomes part of the stock and therefore the expenses incurred on the development of such land is charged to the profit and loss account as revenue expenditure. The development and special maintenance expenses become part of cost of stock and charged to P&L. It is not capitalised to immovable property. Therefore, the restriction of ITC as provided in the above stated clause (c) and (d) of the Section 17(5) of the CGST Act, 2017 does not apply in case of the applicant. Hence the applicant is eligible to claim the Input tax credit of the works contract services and the services received by it for the development, upgradation, improvement and maintenance of the undeveloped land and it is not blocked under section 17(5) (c) & (d).
7. The above view is strengthened from the services of construction of a complex provided by the builder where the supply of service is taxable except where the entire consideration has been received after issuance of completion certificate as provided in clause (b) of entry 5 of Schedule-II of the CGST Act,2017. For providing the output services, builders take works contract services, procures inputs and other input services for the construction of buildings or complex. The builder is eligible to claim input tax credit of GST charged on such input & input services as per N. No. ll/2017-CT(Rate).
8. Further scope of supply under section 7(1) of the GST Act includes all forms of supply of goods and services, including a sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made. Section 7(1A) read with Schedule II under the GST Act provides which of such supplies shall be treated as supply of goods or services. Paragraph 2 of Schedule II provides that transactions relating to land and buildings, any lease, tenancy, easement, license to occupy the land, letting out of a building including a commercial, industrial or residential complex for business or commerce is the supply of services. In other words, benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but it is the supply of service for the purpose of the GST Act. For providing such outward supply of leasing of plot of land, it is essential to incur the development and special maintenance expenses. Hence the ITC in relation to the inward supplies of development and special maintenance for providing such outward services is eligible and not blocked by the provisions of section 17(5).
9. In case of the applicant, the credit of GST charged by the various suppliers /contractors providing works contract service or other services for the development of the land should be allowed as the land is the part of stock of applicant. Otherwise the basic principal of the GST which is to prevent the cascading effect of multistage taxation will fail and ultimately this will increase the cost of the services for the end users. The above credit of input tax is not blocked under Section 17(5)(c) and (d) of CGST Act for the reasons that it is not capitalized to immovable property (fixed asset). The input services of development, upgradation is essential for providing the taxable outward supply of services of leasing of plot of land.
10. The above view of the applicant finds support from the following case law:
SAFARI RETREATS PRIVATE LIMITED Versus CHIEF COMMISSIONER OF CGST 2019 (25) G.S.T.L. 341 (Ori.): In this case the Hon’ble High Court of Orissa has held that:
19. The very purpose of the Act is to make the uniform provision for levy collection of tax, intra-State supply of goods and services both Central or State and to prevent multi taxation.
Therefore, the contention which has been raised by the Learned Counsel for the petitioners keeping in mind the provisions of Section 16(1)(2) where restriction has been put forward by the legislation for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.
20. In that view of the matter, in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in (1999) 2 SCC 361= 1999 (106) E.L.T. 3 (S.C.) (supra), the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.
10. In view of above, where the land is stock of the applicant and being the continuous nature of supply by way of leasing of land there is no break in the tax chain as the applicant is paying tax on the leasing services supplied by it and also the expenses incurred on the development of land is charged to the profit and loss account as revenue expenditure and becomes part of cost of stock, the restriction of ITC as provided in the clause (c) and (d) of the section 17(5) of the CGST Act on works contract services and on goods or the services received for the construction of an immovable property is not applicable in case of the applicant. The applicant is eligible to claim credit of ITC of input services.
Applicant’s view point on the apportionment of Input tax credit to be claimed on development and special maintenance Expenses:
11. Having discussed the issue of eligibility to claim ITC, the next issue is the apportionment of such ITC as the applicant is providing both taxable as well as exempt supply. As mentioned in the facts that the applicant is providing services by way of long-term lease of an industrial plot of land to an industrial unit for more than 30 years which is exempt under Notification No. 12/2017-Central Tax (Rate) and the leasing of a non-Industrial plot /commercial plot of land is a taxable supply under GST on which the applicant is paying GST on the development charges received against leasing of such non-industrial plot of land. Though the term ‘industrial plot’ is not defined in GST law but as per the general understanding any plot of land allotted to any industry which is involved in manufacturing/production, or providing service in any industrial area is a ‘Industrial Plot’ and long term leasing of such industrial plot to an industrial unit is exempt.
12. As per section 17(2) of the CGST Act, where the goods or services or both are used partly for effecting taxable supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the Input Tax as is attributable to the taxable supplies. Therefore, the attributable input tax to the taxable supply is to be worked out. The manner of determination of such attributable input tax is provided in the Rule 42 of the CGST Rules, 2017. As per the said Rule the attributable inputs and input services exclusively used for effecting the exempt and taxable supply is to be determined and denoted separately and the common credit is to be apportioned based on turnover of taxable and exempt supply during the tax period.
13. As mentioned in the facts of the case that there is certain time gap between development of a particular area and leasing of plot in that area. The issue of claiming ITC arises at the time of incurring the expenses for the development whereas the output liability of GST arises at the time of leasing of plot after the completion of substantial development work in that area. Thus, the tax period of claiming ITC and tax period in which outward supply is made will differ and substantial time gap arises. Thus, one to one correlation of claiming ITC with respect to outward taxable supply of that particular area is not practically feasible. In this scenario there are two methods for determining the attributable input tax credit related to taxable outward supply:-
(i) In the tax period in which the ITC of input services is availed, the aggregate turnover of exempt and taxable supplies of that particular tax period be considered. The applicant has developed so many industrial areas in the state of Rajasthan. Thus, in the particular tax period the total supply of taxable and exempt services of leasing, may it be from any area developed earlier should be considered. In this method there would not be any correlation between the ITC claimed which belongs to a particular area under development and the taxable supply of leasing services made from any other area developed earlier. The ITC would simply be attributed based on the total exempt and taxable supply of that tax period irrespective of area and irrespective of correlation between the inward and outward supply.
(ii) Alternately the ITC of the particular area which is under development can be attributed based on the total area of industrial plot of land, leasing of which is exempt and total area of non-industrial plot of land, leasing of which is taxable supply under GST. The ITC related to the development of a particular area is apportioned based on the size of plot of land in the particular industrial area being developed. Thus, under this method, ITC related to non -industrial plot (which is a taxable supply under GST) can be claimed. The value of supply of such plot of land is not known at the point of time of availing ITC because the supply of outward service would be made subsequently after the development work is over.
In view of the applicant the determination of attributable ITC between taxable and exempt outward supplies based on size of the total area of the plots of land developed (industrial and non-industrial) is more reasonable and logical.
B. QUESTIONS ON WHICH THE ADVANCE RULING IS SOUGHT
1. 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 of the area??
2. If the answer of question No. 1 is affirmative then what would be the mechanism for apportionment of ITC between exempt and taxable supplies as in an industrial area, long term leasing of ‘industrial plot’ of land is exempt under N. No. 12/2017-Central Tax(Rate) but leasing of ‘nonindustrial plot’ of land/commercial plot of land is a taxable supply?
C. PERSONAL HEARING
The PH was held on 04.02.2021 at Room No. 2.11, NCRB, Statue Circle, Jaipur. Sh. Ashok Pathak (Finance Adviser), Sh. R. K. Limba (CGM) alongwith Sh Virendra Parwal (CA) authorized representative have appeared for Ph. During the PH, he reiterated the submissions already made in the application.
D. COMMENTS OF THE JURISDICTIONAL OFFICER:
Comments received from the Deputy Commissioner, SGST, Circle-N, Jaipur vide letter dated 17.09.2020 are reproduced as under: –
Comment on Question No.1
1. 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 of the area?
As per Section 16 of Central goods and service tax Act 2017 and Rajasthan goods and service tax Act 2017. Provided the conditional which we have to satisfied for taking the input tax credit the relevant portion of section 16 is re produce as under,-
Section 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed75 and in the manner specified in section 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 tax paying documents as may be prescribed75;
(b) he has received the goods or services or both.
76 [Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services,-
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.]
(c) subject to the provisions of 77[section 41 or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and
(d) He has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed78:
Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or 78a [***] debit note pertains or furnishing of the relevant annual return, whichever is earlier:
78aa[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]
Further sub section 5 of Section 17 of Central goods and service tax Act 2017 and Rajasthan goods and service tax Act 2017 provided the goods and service for which input tax credit is not allowed to taken in simple words we can say that the credit for the same is block credit, further in this section on of the items is defined for the works contract the relevant portion of the is reproduces as under,-
Section 17 (5)
(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 capitalizations, to the said immovable property;
Conclusion
Since your company want to claim the Input tax credit on the Input services of construction or works contract procured for the development of an Industrial area or the special maintenance expenses of the area, However as per section sub section 5(c ) and 5(d) of section 17 Provided the input tax credit will not allowed for works contact service along with the good and service use by the taxable person, until they were user for further supply of works contract service, Since your company is supply the service of long term lease of land which is not fall under the service of work contract service, So in simple word we can say that your company is are not supply the service of works contract in the light of section sub section 5(c ) and 5(d) of section 17 your company is not eligible for input tax credit.
Question No.2: If the answer of question No. 1 is in affirmative then what would be the mechanism for apportionment of ITC between exempt and taxable supplies as in an industrial area, long term leasing of ‘industrial plot’ of land is exempt under N. No. 12/2017- Central Tax (Rate) but leasing of ‘non-industrial plot’ of land/commercial plot of land is a taxable supply?
Commenting on Question No. 2 having no relevancy because the answer of question No. 1 is non-affirmative.
E. FINDINGS, ANALYSIS & CONCLUSION:
We have considered the submissions made by the applicant in their application for advance ruling as well as the additional submissions made by the applicant during the personal hearing. We also considered the issues involved on which advance ruling is sought by the applicant and relevant facts. At the outset, we would like to state that the provisions of both the CGST Act and the RGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the RGST Act.
1. It is evident that the applicant is a Rajasthan State Government owned Public Sector Undertaking. The corporation (RIICO) has been setup by the Rajasthan Government 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 government/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 government. 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.
Subject to the conditions and restrictions as may be prescribed, the taxpayer entitled to take input tax credit 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 sub-section (1) of Section 16 of the Central Goods and Services Tax Act, 2017 which reads as under: –
Section 16 (1) and (2) of the CGST Act
“Eligibility and conditions for taking input tax credit.
16.(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 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.”
5. Thus, Section 16 (1) of the 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 Government etc. as provided under Section 16(2) of the GST Act, 2017. However, the availability of credit is subject to the restrictions as stipulated under Section 17(5)(d) of the GST Act, 2017.
6. The relevant provisions of Section 17(5)(d) of the CGST Act reads as under:-
“(5) 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 :-
(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 Government/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 Sub Section 5(c) and 5(d) of Section 17 of CGST Act, 2017 the input tax credit will not be allowed for works contract service and on the goods and service used by the taxable person on his own account. Section 17(5)(c) clearly states that no input tax credit 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 service for further supply of works contract services.
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 Section 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.”
9. Further, Section (17) (5)(d) bars a taxable person, in the subject case the applicant, from taking input tax credit 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, Section 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 Section 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 Section (17) (5)(d) squarely applies in the subject case and thus the applicant cannot avail input tax credit.
Further also the input tax credit 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, input tax credit 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 input tax credit 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 Section 17(5)(c) & (d) of the 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 M/s. Safari Retreats Pvt. Ltd. versus Chief Commissioner of Central Goods & Services Tax & Others (supra). In the said case it is seen that the party had constructed malls which were given further on lease. While holding that Section 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 Private Limited v. Chief Commissioner of Central Goods & Service Tax, which is presently pending. The Hon’ble Supreme Court, in the case of Union of India v. West Coast Paper Mills Ltd., as reported in [2004 (164) E.L.T. 375 (S.C.)], 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.
12. Hence in view of the above, we are of the opinion that since the case of M/s. 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 Section 17(5)(d) to be ultra vires. Therefore, we are not relying upon the judgment of the Hon’ble High Court.
13. In view of the above discussions and finding, we rule as under :
RULING
14. 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.