2020 (8) TMI 103 - AAR - GST

Pharma R&D firm denied GST input tax credit on lease charges under CGST Act

The Authority for Advance Rulings (AAR) ruled that the applicant, engaged in Pharmaceutical Research & Development services, is not eligible to avail ... Input tax credit - Section 17(5)(d) exclusion of input tax credit for goods or services received for construction of immovable property (other than plant and machinery) - Immovable property includes land and buildings - Explanation excluding building from 'plant and machinery' - Notwithstanding override of Section 16(1) by Section 17(5)Input tax credit - Section 17(5)(d) exclusion of input tax credit for goods or services received for construction of immovable property (other than plant and machinery) - Immovable property includes land and buildings - Explanation excluding building from 'plant and machinery' - Whether input tax credit of GST paid on lease premium, annual lease rentals and maintenance charges paid to the lessor for lease of land is admissible to the applicant - HELD THAT: - Sections 16 to 19 govern entitlement to input tax credit but Section 17(5) carves out situations where credit is not available and begins with a non obstante clause capable of overriding Section 16(1). Clause (d) of Section 17(5) bars input tax credit in respect of goods or services 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 are used in the course or furtherance of business. The General Clauses Act definition of 'immovable property' includes land and things attached to the earth, and the lease agreement shows the applicant acquired land on lease for construction of a building to be used for its laboratory. The explanation to Section 17(5) defines 'plant and machinery' and expressly excludes buildings. On the facts, the lease premium, annual rentals and maintenance charges relate to land/activities for construction of immovable property on the applicant's own account and therefore fall squarely within the exclusion in Section 17(5)(d). The applicant's contentions and cited authorities were held inapposite to these facts and statutory scheme, and accordingly input tax credit on the referred charges is barred. [Paras 8, 9]Input tax credit on lease premium, annual lease rentals and maintenance charges paid for lease of land used for construction of immovable property on the applicant's own account is not admissible under clause (d) of Section 17(5).Final Conclusion: Advance Ruling: The Authority holds that GST paid on lease premium (one time), annual lease rentals and maintenance charges in relation to the leased land-used for construction of a building on the applicant's own account-does not qualify for input tax credit under clause (d) of Section 17(5). Issues Involved:1. Eligibility to avail input tax credit (ITC) on GST paid on lease premium charges.2. Eligibility to avail ITC on GST paid on annual lease rentals.3. Eligibility to avail ITC on GST paid on maintenance charges.Detailed Analysis:Issue 1: Eligibility to avail input tax credit (ITC) on GST paid on lease premium chargesThe applicant, engaged in Pharmaceutical Research & Development services, sought clarification on whether they are eligible to avail ITC on GST paid for lease premium charges towards land lease for business purposes. The applicant argued that the services received are used in the course of business, thus qualifying for ITC under Section 16 of the CGST Act, 2017. However, the Authority for Advance Rulings (AAR) observed that Section 17(5) of the CGST Act restricts ITC on goods or services used for the construction of immovable property (other than plant and machinery) on the taxpayer's own account. Since the lease premium charges are for acquiring land to construct a building for their laboratory, it falls under the category of immovable property. Consequently, the AAR ruled that the applicant is not eligible to avail ITC on GST paid on lease premium charges.Issue 2: Eligibility to avail ITC on GST paid on annual lease rentalsThe applicant also sought clarification on the eligibility to avail ITC on GST paid on annual lease rentals. The AAR reiterated that Section 17(5) of the CGST Act bars ITC on goods or services used for the construction of immovable property. The annual lease rentals paid for the land leased to construct a building for the applicant’s laboratory also fall under this restriction. Therefore, the AAR concluded that the applicant is not eligible to avail ITC on GST paid on annual lease rentals.Issue 3: Eligibility to avail ITC on GST paid on maintenance chargesLastly, the applicant inquired about the eligibility to avail ITC on GST paid on maintenance charges collected by the lessor. The AAR noted that the maintenance charges are also related to the leased land used for constructing an immovable property. As per Section 17(5) of the CGST Act, ITC is barred on services used for the construction of immovable property. Thus, the AAR ruled that the applicant is not eligible to avail ITC on GST paid on maintenance charges.Advance Ruling:1. The applicant is not eligible to avail input tax credit of GST paid on payment of lease premium charges (one-time charges) towards land lease.2. The applicant is not eligible to avail input tax credit of GST paid on annual lease rentals (recurring) towards the supply of land on lease.3. The applicant is not eligible to avail input tax credit of GST paid on maintenance charges collected by the lessor.