Seamless Input Tax Credit (ITC) under GST Regime In The Cases of Civil Constructions Intended For Renting or Leasing

One of the primary mottos behind introduction of GST is to provide seamless input tax credit till the chain of supply breaks for consumption, as it’s introduction is to eliminate cascading effect. A simple example to understand it is, if a manufacturer of pen purchases raw material to be used in his business he will get tax credit equivalent to the amount of tax levied on raw material purchased; after completion of manufacturing, pens will be sold to wholesaler by levying applicable taxes. Now manufacturer can avail the benefit of ITC against the output tax on sale of pens to wholesaler and thereafter the wholesaler would also be eligible to avail the input tax credit benefit when it is sold to a retailer by charging tax and this benefit of exemption of Input Tax Credit continues till the product reaches the ultimate consumer.

Relevant provisions for availment of input tax credit were provided under Sec.16 of CGST Act, i.e, every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in Section 49 of the CGST Act, 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 and the said amount shall be credited to the electronic credit ledger of such person.

However, some input taxes were blocked among total inputs vide provisions of Sec.17(5) of the Act. Thus only un-blocked input taxes are eligible and shall be credited to the electronic credit ledger. One such a blockage specified under 17(5)(d) is notwithstanding anything contained in sub section (1) of Section 16 of CGST Act and sub section (1) of Section 18 of CGST Act, input tax credit shall not be available in respect of the goods and 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.

These provisions are, no doubt, applicable in the case of construction of immovable properties intended to be sold after receiving completion certificate for the reason that the sale of immovable property, post issuance of completion certificate, does not attract any levy of GST. Consequently, in such a situation, there is a break in the tax chain and, therefore, there is full justification for denial of input tax credit in as much as upon the completion of the transaction no GST will be payable and, therefore, no set-off of the input tax credit would be required or warranted or justified. But the position is totally different where the immovable property is constructed for the purpose of letting out the same, because, in that event, the tax chain is not broken.

If a commercial space is given for lease, rental income will be received and GST @ 18% is applicable on such income. This is a chain transaction pursuant to the construction activity which was carried out in which event the point that arises for consideration is w.r.t. the benefit of input tax credit against the GST payable on such rental income. To appreciate the underlying principle, the following observations of the Apex court in the case of Eicher Motors Ltd. v. Union of India, reported in (1999) 2 SCC 361, would be useful;

We may look at the matter from another angle. If on the inputs, the assessee had already paid the taxes on the basis that when the goods are utilised in the manufacture of further products as inputs thereto then the tax on these goods gets adjusted which are finished subsequently. Thus a right accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed…”

If the benefit of taking credit of input tax under Section 16 of the CGST Act is denied by invoking Section 17(5) (d) of the CGST Act, in that event, the very object of enacting CGST Act for reducing the cascading effect of various indirect taxes and reduction of multiplicity of indirect taxes, will be frustrated. It is a well settled law that the interpretation which defeats the very intention of the legislature should be avoided and that interpretation which advances the legislative intent will have to be accepted.

In the case of M/s Safari Retreats Pvt Ltd. Vs. Chief Commissioner of CGST (W.P.(C) No.20463 of 2018, Orissa high courts observations & conclusions were as follows

“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.

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 (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.”

There is no contrary judgment on this aspect till date. It is well settled principle of law that on an application of the principles of ‘stare decisis’, unless a judgment of a High Court is found to be palpably wrong, the same has to be followed by all the other forums. In the case of Godavari Devi Saraf 113 ITR 589, the honourable Bombay high Court observed as under:

Until contrary decision is given by any other competent High Court, which is binding on a Tribunal in the State of Bombay, it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land.

In the case of Thana Electricity Supply Ltd. 206 ITR 727 Bom, while reconsidering the issue of doctrine of Res judicata, Estoppel and binding precedents, it was observed that though the judgment of one High Court is not binding on the other High Court, it should ordinarily be followed in the absence of contrary judgments, a view taken by one High Court has a persuasive value, and even if there are two views possible, a view which is in favour of the Assessee has to be followed, as held by the Supreme Court in the case of Vegetable Products 88 ITR 192. It is also trite law that a view taken by Advance Ruling Authority has no precedent value since it cannot be equated to the judgment to a constitutional court(High Courts or Supreme Court).

In the case of M/s Sree Varalakshmi Mahaal LLP, the Advance Ruling Authority(Tamil Nadu) has no doubt taken a different view but the fact remains that it is contrary to the view taken by the honourable Orissa High Court(supra); Honourable Court has allowed the ITC but has not regarded section 17(5)(d) as ultra-vires. Though the Department filed a special leave petition(SLP), it has not been admitted by the Apex Court as on date. Till a finality is reached on the issue it is fervently hoped that the principle laid down by the honourable Orissa High Court is followed by all the other forums while considering the aspect of giving Input tax Credit against the rental income.

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May 2021