As per Section 16, every registered person is eligible to take ITC of goods and services intended to be used in the course or furtherance of business subject to other condition as mentioned in section 16(2) are fulfilled.
Section 17(5) restrict ITC on certain good or service although intended to be used in the course or furtherance of business.
Further section 17(5)(d) restrict ITC on 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 2 to section 17(5) 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;
Term Immovable property has not been defined in CGST Act. So, we need to look for the same in the other statute. As per Section 3(26) of the General Clauses Act, 1897, immovable property includes “land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.
Further the definition given above is inclusive one and leave the scope for many other things to come within definition of Immovable property. From the definition it looks that anything which become the integral part (i.e., coming within the civil structure) of anything attached to the earth is termed as immovable property.
Further As per Explanation 2 to section 17(5) 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—
From the above it is clear that intention of law maker is to restrict ITC on land, building or any other civil structures, whether such structure is made for office building or plant and machinery.
In general Lift and centralised AC are permanently fixed within the structure of any civil construction and assumed the integral part of civil structure hence ITC cannot be allowed with in the view of section 17(5) of CGST Act. (same view has given by Karnataka AAR)
Further if lift is being used in any Plant to carry material to process the goods and lift is capitalised in the book of account as plant and machinery, ITC on the same should not be denied.
Further ITC on centralised AC of Plant/ Manufacturing unit should not be denied subject to capitalised as Plant and Machinery. (Same view given by Maharashtra AAR)
So, ITC on Lift and centralised AC in office building intended to be sued for his own purpose is not allowed within the meaning of section 17(5).
An immovable property can be used for own office use, for sale or for let out.
ITC on goods or services or both received by a taxable person for construction of an immovable property intended to be used for self as office is not allowed.
ITC on goods or services or both received by a taxable person for construction of the immovable property intended to be sold is not allowed since sale of land or building (after completion) is not supply as given in para 5 of schedule III of CGST Act.
ITC on goods or services or both received by a taxable person for construction of an immovable property intended to be used for letting out by such person is allowed with in the view of recent Orissa High court decision.
ITC on goods or services or both received by a taxable person for construction of an immovable property is not allowed to the extent capitalized. So, ITC is allowed on such goods or services or both received by a taxable person for construction of an immovable property the cost of which is charged to profit and loss account.
AAR held “The provision of facilities like transformers, sewage treatment plant, Electrical Wiring and Fixtures, Surveillance systems, D.G. Sets, Lifts, Air Handling Units etc. are sine-qua-non for a commercial mall and hence cannot be considered separate from the building or civil structure. The provision of these are either statutory for a building or defines the nature of the building as a commercial mall. Hence the input tax credit on the inward supplies of goods or services involved in the construction of immovable property which is a civil structure or building is not available to the applicant and hence blocked”.
In the Nipro India corporation GST AAR Maharashtra has allowed ITC on Air conditioner and chilling unit to be used in medical equipment manufacturing Plants.
In view of recent Orissa High court decision, ITC on immovable property is available if such property is being used for rental services by such person.
Summary of judgement of Hon’ble High Court of Orissa on ITC on goods and services taken for construction on immovable property
The Hon’ble High Court of Orissa, vide its order dated 17 April 2019 (Order), in in Safari Retreats Private Limited v Chief Commissioner of Central Goods & Service Tax [W.P. (C) 20463 of 2018], has allowed availment of input tax credit (ITC) on goods and services used for construction of immovable property and used in the course or furtherance of business.
The petitioner therein was engaged in the business of constructing shopping malls for the purpose of letting out for commercial purposes. Inputs in the form of cement, sand, steel, aluminium, wires, plywood, paint, escalators, electrical equipment as also and input services such as architect fees etc. were used in construction of the complex that was ultimately leased out for commercial purposes (attracting goods and services tax). Section 17(5)(d) of Central Goods and Services Tax Act, 2017 (CGST Act) restricts ITC on goods and services received by a taxable person for construction of an immovable property on his own account even though such immovable property is used in the course or furtherance of business.
On account of the restriction prescribed in Section 17(5)(d) of the CGST Act, the petitioner was ineligible to avail ITC on aforesaid inputs and input services. The petitioner filed a writ petition challenging the vires of Section 17(5)(d) of the CGST Act and a separate prayer for allowing ITC.
The principal argument taken in the petition was that Section 17(5)(d) of the CGST Act restricts the seamless flow of credit and that denial of ITC in is unjust, arbitrary, oppressive and contradictory to the basic rationale of GST. The Petitioner argued that the restriction under Section 17(5)(d) of the CGST Act should apply only in those cases where there is a break in the tax chain. However, in the present case, there is no breakage in the tax chain as the Petitioner would be liable to pay goods and services tax (GST) on letting out of such properties for commercial purposes.
The counsel for the Government argued that the said provision should be given a literal interpretation and the restriction of Section 17(5)(d) of the CGST Act should apply accordingly to all circumstances.
Key Highlights of Order
Considering the above, the Hon’ble High Court of Orissa allowed ITC on goods and services used for construction of immovable property meant for letting out for commercial purposes (in the course or furtherance of business).
Author: CA Jignesh Panchal