ITC not allowed on work contract services for construction of immovable property

By Editor2 Goods and Services Tax Judiciary February 16, 2021

TaxGuru Citation: 2021 taxguru.in 3362
Case Name: In re Rajasthan State Industrial Development & Investment Corporation Limited (GST AAR Rajasthan)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: AAR Rajasthan, Advance Rulings

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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

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.]