Background
The GST Law brought with it a fresh tax rate structure and the availability of additional input tax credit. Section 17(5) of the CGST Act, 2017 and the respective state GST Acts have led to a paradoxical situation by denying credits as the objective of the GST is free flow of credits when the output is in the course or furtherance of business. Many hotels, malls and real estate companies have been denied input tax credit on construction services under the GST mechanism.
Writ petition filed before Orissa High Court challenging denial of ITC to real estate companies, hotels, malls in cases where construction is undertaken by the Company itself
Facts: M/s Safari Retreats Private Limited (“the Petitioner”) is engaged in carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenant and lessees. The Petitioner purchased cement, steel, sand, aluminium, wires, etc., in bulk. Additionally, it also availed services like consultancy service, architectural services, legal and professional service etc. As these supplies were taxable, the Petitioner had accumulated input tax credit in respect of purchases of inputs and input services. It applied for availing credit, however, by applying section 17 (5) (d) of the CGST Act, the Revenue took a view that input tax credit shall not be available in respect of goods and services or both received by a taxable person 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 course of furtherance of business. The benefit of input tax credit was denied to the Petitioner
Issues Involved: The key issue raised before the Court was
Where inputs are consumed in the construction of an immovable property which is meant and intended to be for the provision of taxable output services, whether input tax credit was available to the assessee?
Held: The Hon’ble Orissa High Court in Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax in W.P. ( C) No. 20463 of 2018 vide order dated April 17 2019 read down section 17 (5) (d) of the CGST Act for the purpose of interpretation in continuation to give benefit to the person who has paid GST and it has to be interpreted in continuity of the transaction since rent income is arising out of the malls which are constructed after paying GST on different items. If input tax credit is denied on building meant and intended to be let out, it would amount to treating the transaction as identical to a building meant and intended to be sold. Further, treatment of these two different types of transactions as one for the purpose of GST, is contrary to the basic principles regarding classification of subject matter of tax levy and, therefore, violative of Article 14 of the Constitution.
Hence, the interpretation adopted by the Revenue is frustrating the objective of the CGST and other respective state GST Acts inasmuch as the Petitioner in that case has to pay huge amount without any basis. Relying on (1999) 2 SCC 361, the very purpose of the credit is to give benefit to the assessee. Therefore, if the Petitioner is required to pay GST on the rental income arising out of the investment on which he had paid GST, it is required to have the input tax credit on the GST.
Delhi High Court issues notice to Revenue in similar matter
On the same lines, the Delhi High Court issued notice to Revenue while hearing Petitioner’s challenge to section 17 (5) (c) & (d) of the CGST Act pertaining to blocked credit for hotels. The Revenue in this case denied input tax credit on procurement of goods and services including works contract used for immovable property construction. This petition was filed seeking to declare section 17 (5) of the CGST Act, 2017 to be ultra-vires of Article 14 of the Constitution of India, as same is violating its fundamental right. The Petitioner has also requested for formation of High-Level Committee for addressing interpretational issues. The matter is listed on August 21, 2019.
Conclusion
On the one hand, amendments have been carried out in the CGST Act to widen the scope of input tax credit, while on the other, the aforesaid provision [section 17 (5) (c) & (d)] stands against the objectives of GST and accordingly have been challenged on the ground of arbitrariness and vagueness.
The outcome of these ruling for cases where input tax credit is denied when the output is in the course or furtherance of business would provide relief of availing credit and clarity to trade and industry and might facilitate in eliminating the unwarranted litigation on the issues in future.
Citation: [TS-353-HC-2019 (DEL)-NT]
Author Bio
Any clarity whether to avail ITC on building construction for Hotels or to reverse it u/s 17(5)?
Final Decision or clarity by the Department is of utmost urgency.