ITC Is Ineligible In Relation To Construction Work Of Immovable Property Which Is Further Let Out

Held by 

Hon’ble Appellate Authority of Advance Ruling, West Bengal

In the matter of Assistant Commissioner, Shibpur Division, CGST & CX Vs. Mindrill Systems and Solutions Private Limited (GST AAAR West Bengal) (Appeal Case No. 04/WBAAAR/APPEAL/2023)

The Company constructed a warehouse and let it out. The Company paid the GST on such outward supply. The Company sought an advance ruling from WBAAR that whether the company is entitled to claim ITC on inward supplies received for construction of such warehouse. The Hon’ble WBAAR held that the restriction given under Section 17(5)(d) of CGST Act in respect of ITC on goods or services used for construction of warehouse is applicable in the instant case, i.e., the Company is not eligible for ITC with respect to inward supplies to the extent such expenditure is capitalised. However, where construction expenses are not capitalized in books, the claim of ITC is admissible.

The revenue filed an appeal against the order of Hon’ble WBAAR and contended that relaxation given in explanation to Section 17(5)(c) and (d) of CGST Act is applicable on re-construction, renovation, additions, alterations and repair work only and not the original work. The Hon’ble AAAR, West Bengal held that the condition of capitalization is applicable only in respect of reconstruction, renovation, additions, alterations or repairs Work. Accordingly, the taxpayer shall be entitled to ITC on such expenses if they are not capitalised in the books. However, for the purpose of “construction”, ITC is ineligible in all the scenarios and there is no scope of any other interpretation. 

In the given case, the Company has carried out original construction work and therefore, ITC is ineligible under Section 17(5)(c) and (d) of CGST Act.

1. Facts of the case

• M/s Mindrill Systems and Solutions Private Limited (“The Company” or “The Respondent”) constructed a warehouse in the state of West Bengal and let it out to M/s Zomato Hyperpure Private Limited. The Company paid the GST on such supplies.
• The Company sought an advance ruling before the West Bengal Authority of Advance Ruling (WBAAR) on the matter whether it is entitled to claim Input Tax Credit on input or input services used for construction of such warehouses.
• Further, whether the company can utilized such ITC for payment of GST payable on renting of warehouse in case such construction expenses are:
  • capitalized in books, and,  
  • not capitalized in books
• The Hon’ble AAR, West Bengal held that the restriction given under Section 17(5)(d) of CGST Act is applicable in the instant case, i.e., the Company is not eligible for ITC with respect to inward supplies related to construction of a warehouse which is capitalized in the books of account.
• However, where construction expenses are not capitalized in books, the claim of ITC is admissible. 
• The Department filed an appeal before Appellate Authority of Advance Ruling, West Bengal against such order.

2. Advance Ruling by Hon’ble Authority of Advance Ruling, West Bengal

• The Company contended before Hon’ble AAR, West Bengal that as per Section 17(5)(d) of CGST Act, registered persons are ineligible to claim ITC on inward supplies used for construction on account of own use.
• However, such provisions shall not apply to construction of immovable property for use by lessee or tenant.
• The Company further relied on judgement of Hon’ble Orissa High Court in the case of Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax. 
• In this context, the WBAAR observed that:
  • The issue before the Hon’ble Orissa High Court was to decide whether the petitioner is entitled to claim ITC on inward supplies, which are to be used for construction of mall. 
  • In the given case, the intention behind the construction of the warehouse is to let it out and earn rental income from it.
  • Therefore, as per facts, construction of the warehouse itself is intended to be permanent at a given place and the applicant would not shift it from one place to another. 
  • So, the warehouse as constructed by the applicant, for its permanent characteristics and in absence of mobility like other goods, would be regarded as an immovable property. 

• Therefore, WBAAR held that the restriction given under Section 17(5)(d) of CGST Act in respect of ITC on goods or services used for construction of warehouse is applicable in the instant case, i.e., the Company is not eligible for ITC with respect to inward supplies related to construction of a warehouse which is capitalized in the books of account.
• However, where construction expenses are not capitalized in books, the claim of ITC is admissible. 

3. Contention of the Revenue (“The Appellant”)

The Revenue contended following grounds while file appeal before AAAR, West Bengal:

• The Company had received inward supplies of goods and services, including works contract services, for construction of a warehose and has further let it  out.
• The WBAAR has erred by restricting the ITC to the extent of such construction expenses which are capitalised in books of accounts.  
• Section 17(5)(d) of the GST Act restricts ITC for construction of immovable property which deals with original construction.  
• Further, as per explanation, construction work includes re-construction, renovation, additions, alterations, repair and in these cases the availability of ITC is restricted only to the extent of capitalization. 
• However, in the given case, the Company has made an original construction work in the form of a warehouse. 
• Therefore, the company is not entitled to ITC on inward supplies used for construction of warehouse irrespective of whether the construction expenses have been capitalised or not.

4. Contention of the Company (“The Company”)

The Company made following submissions:

• Argument of the revenue holds no merit that ITC shall not be available under section 17(5)(d) of CGST Act, whether construction expenses are capitalised or not because said provision restricts ITC for construction of immovable property which deals with original construction. However, There is no concept of “original construction” in section.
• Section 17(5)(d) of CGST Act does not prevent a person from claiming ITC on non-capitalised construction, reconstruction, renovation,  additions, alterations, repairs expenses relating to immovable or movable property used in the course of or furtherance of business. 
• Upon plain reading of the provisions, it is amply clear that said provision in no manner deals with ITC on non-capitalised expenses relating to immovable or movable property used in the course of or furtherance of business. 
• Therefore, the tax-payer is entitled to claim ITC on non-capitalised construction, reconstruction, renovation, additions, alterations, repairs expenses relating to godown/ warehouse given on rent. 

5. Legal Provisions

Relevant extract of GST law is reiterated below for ready reference:

“Notwithstanding anything contained in subsection (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:- 

(a)…. 

(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 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 purpose 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.”

6. Analysis by Hon’ble AAAR, West Bengal

Hon’ble AAAR, West Bengal made following analysis:

• Section 17(5)(c) and (d) of CGST Act clearly states that ITC is not available in respect of works contract services or goods or services received for construction of an immovable property. 
• Therefore, for the purpose of construction, there is clearly states that ITC will not be available.
• However, through explanation, scope of ineligibility has been extended to the arena of re-construction, renovation, additions, alterations or repairs. Such ineligibility is subject to the condition that ITC on such portion shall be ineligible which is capitalized in books of accounts.
• The explanatory part actually is inclusive in nature which explains that the restrictions of ITC given in sub-clause (c)and (d) is also applicable on reconstruction, renovation, additions, alterations or repairs. 
• However, the condition of capitalization is applicable only in respect of reconstruction, renovation, additions, alterations or repairs to the said immovable property. 
• Therefore, the issue of “capitalization” is applicable only in the Explanation part to the clauses (c) and (d), i.e., only when the question of reconstruction, renovation, additions, alterations or repairs arises. 
• Accordingly, the taxpayer shall be entitled to ITC on such expenses if they are not capitalised in the books.
• Whereas, for the purpose of “construction”, ITC is ineligible in all the scenarios and there is no scope of any other interpretation. 
• The WBAAR has erred in interpreting the afore-stated provisions by applying the conditions of capitalisation both for construction as well as for reconstruction, renovation, additions or alterations or repairs. 

7. Ruling

The Hon’ble AAAR, West Bengal held that:

• In the given case, the company has constructed a warehouse and let it out. As this is a case of construction, provisions of Section 17(5)(c) and (d) shall apply and not the explanation. 
• Thus, ITC on such construction shall not be available to the respondent.