AAR rules no Input Tax Credit for MRO facility construction

The Authority for Advance Ruling (AAR) ruled that the applicant is not eligible to claim Input Tax Credit (ITC) on goods and services used in the construction of a Maintenance Repair and Overhaul (MRO) facility. The AAR emphasized that Section 17(5)(d) of the GST Act explicitly restricts ITC for construction of immovable property, irrespective of its business use or taxability of output supply. Therefore, the applicant's argument that the output supply (renting of the MRO facility) is taxable did not impact the ineligibility for ITC under Section 17(5)(d).

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Issues Involved:
1. Admissibility of input tax credit (ITC) for goods and services used in the construction of an immovable property (MRO facility).

Detailed Analysis:

1. Admissibility of Input Tax Credit (ITC) for Goods and Services Used in Construction of MRO Facility:

Applicant's Submission and Interpretation:
The applicant, a manufacturer of various rubber products, has entered into an agreement to lease a Maintenance Repair and Overhaul (MRO) facility to Elcom Systems Pvt. Ltd. The applicant contends that they should be eligible to claim ITC on goods and services procured for constructing the MRO facility. The applicant refers to several sections of the CGST Act, including:
- Section 2(59): Defines 'inputs' as any goods other than capital goods used in the course or furtherance of business.
- Section 2(60): Defines 'input service' as any service used in the course or furtherance of business.
- Section 2(62): Defines 'input tax' in relation to a registered person.
- Section 16: Provides eligibility and conditions for taking ITC, emphasizing that every registered person is entitled to ITC on supplies used in the course or furtherance of business.
- Section 17(5)(d): Restricts ITC for goods or services used for the construction of an immovable property (other than plant or machinery) on the taxpayer's own account.

The applicant argues that since the MRO facility will be rented out, the restriction under Section 17(5)(d) should not apply. They cite various case laws and circulars to support their claim that ITC should be available for construction materials and services used in the construction of immovable property meant for leasing, as it constitutes a taxable supply of service.

Jurisdictional Officer's Comments:
The jurisdictional officer concurs with the applicant to the extent that if the outward supply (renting of immovable property) is taxable, the applicant should be eligible to claim ITC on inputs and input services used for making the taxable supply.

Authority's Findings, Analysis, and Conclusion:
The Authority for Advance Ruling (AAR) analyzed the relevant provisions of the GST Act and found that:
- The activities carried out by the applicant (civil work and external development work) lead to the creation of an immovable property.
- Section 17(5)(d) explicitly restricts ITC for goods or services used for the construction of an immovable property, irrespective of whether the property is used in the course or furtherance of business.
- The applicant's interpretation that the restriction under Section 17(5)(d) applies only when the output is not taxable is considered an implicit interpretation, not the intentional outcome of the section.

The AAR emphasized that the primary purpose of Section 17(5)(d) is to block ITC for the construction of immovable property. The applicant's argument that the output supply (renting of the MRO facility) is taxable is immaterial when determining the eligibility of ITC for the construction phase.

Ruling:
The AAR ruled that the applicant is not eligible to claim ITC on the GST charged by vendors for goods and services used in the construction activities (Civil Work and External Developmental Works) for setting up the MRO facility.

Conclusion:
The applicant's request to claim ITC for goods and services used in constructing the MRO facility was denied based on the provisions of Section 17(5)(d) of the GST Act, which restricts ITC for the construction of immovable property, regardless of its use in business.

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