2019 (1) TMI 488 - AAR - GST

Input Tax Credit not available for lease rent during pre-operative period for construction of resort on leasehold land

The ruling determined that Input Tax Credit is not available for lease rent paid during the pre-operative period for construction of a resort on leasehold ... Input Tax Credit - input tax credit blocked for goods or services received for construction of immovable property (other than plant or machinery) under section 17(5)(d) of the GST Act - construction cost of a self constructed asset (AS 10 principles) - capitalisation of pre operative lease rent as part of cost of leasehold land - nexus between supply of leasing service and construction of immovable propertyInput Tax Credit - input tax credit blocked for goods or services received for construction of immovable property (other than plant or machinery) under section 17(5)(d) of the GST Act - capitalisation of pre operative lease rent as part of cost of leasehold land - nexus between supply of leasing service and construction of immovable property - construction cost of a self constructed asset (AS 10 principles) - Whether input tax credit is admissible on lease rent paid during the pre operative period for leasehold land, when that lease rent is capitalised as part of the cost of the immovable property constructed on the applicant's own account. - HELD THAT: - Applying the accounting principle in AS 10 that the cost of a self constructed asset includes amounts that are an integral part of the cost (including the right to use land), the Authority held that pre operative lease rent paid for the right to use the land on which the resort is built forms part of the cost of constructing the immovable property. Construction of the hotel is dependent on the uninterrupted right to use the land and the lease payments are directly connected to that construction; therefore a direct nexus exists between the leasing service and the construction activity. Since the applicant admits capitalisation of the lease rent as a fixed asset and the immovable property is being constructed on the applicant's own account, the payments fall within the prohibition in section 17(5)(d) of the GST Act which disallows input tax credit for goods or services received for construction of immovable property (other than plant or machinery). Consequently, the tax paid on such lease rent during the pre operative period is not eligible for input tax credit. [Paras 4]Input tax credit is not admissible on lease rent paid during the pre operative period for leasehold land capitalised as part of the cost of an immovable property (other than plant and machinery) constructed on the applicant's own account.Final Conclusion: The Authority rules that input tax credit is not available to the applicant on lease rent paid during the pre operative period for the leasehold land, where such lease rent is capitalised and treated as part of the cost of the immovable property being constructed on the applicant's own account; the ruling is subject to the statutory provisos governing advance rulings. Issues:1. Availability of Input Tax Credit for lease rent paid during pre-operative period for leasehold land being constructed for business purposes.Analysis:The Applicant, engaged in hospitality and real estate, sought an Advance Ruling on the eligibility of Input Tax Credit for lease rent paid during the pre-operative period for a leasehold land where a resort is being constructed. The officer contended that credit is allowed only for immovable property in the nature of plant and machinery, as per the GST Act. The Applicant argued that the lease rent is not directly related to construction and should not be considered part of construction cost.The Applicant, a subsidiary of a larger entity, entered into a lease agreement for a land parcel in New Town Area for a resort project. The lease agreement specified escalating annual lease rent, to be capitalized during the pre-operative period. The officer's stance was that input tax credit is not admissible for lease rent paid during pre-operative period for construction of immovable property other than plant and machinery.The Applicant cited relevant sections of the GST Act, emphasizing that the lease rent was not for construction purposes but for the right to use the land. They argued that the lease rent was capitalized under 'Leasehold Land,' not 'Building Block,' indicating it was not used for construction. The Applicant contended that the lease rent did not have a direct or indirect nexus with the construction of the resort.The ruling authority analyzed the situation, considering AS10 guidelines on self-constructed assets and the nexus between lease rental and construction. It was determined that the lease rental paid during the pre-operative period should be treated as part of the construction cost for immovable property. The ruling clarified that input tax credit is not available for such lease rental, as per section 17(5)(d) of the GST Act.In conclusion, the ruling stated that Input Tax Credit is not available for lease rent paid during the pre-operative period for construction of a resort on leasehold land, when capitalized and treated as capital expenditure. The ruling's validity is subject to provisions under Section 103 unless declared void under Section 104(1) of the GST Act.