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 - GST paid on payment of “lease premium charges (one-time charges) - land lease for business purpose - annual lease rentals”(recurring) towards supply of land on lease for business purpose - maintenance charges collected by the lessor - HELD THAT:- Sections 16 to 19 of the CGST Act, 2017 contain the provisions relating to allowance of Input Tax Credit subject to the conditions stipulated there under. Sec. 16(1) allows every registered person to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business subject to such conditions and restrictions as may be prescribed - Sec. 17(5) of the Act lists the circumstances wherein input tax credit in r/o goods/services shall not be available. It is pertinent to note that Section 17(5) starts with the phrase ‘notwithstanding anything contained in Section 16(1)’ which facilitates Sec. 17(5) to override the provisions of Sec. 16(1). Thus the pervasive domain of goods/services provided for under Sec. 16(1) was abridged by Sec 17(5)by specifying the situations wherein input tax credit in respect of certain goods/services has been restricted. It is not under dispute that the “lease premium charges”, “annual lease rentals” and “maintenance charges” are paid by the applicant to the lessor towards lease of land. It is manifest from the terms and conditions of the lease agreement dated 17.08.2017 that the applicant acquired land from M/s IKP Knowledge Park on lease for the purpose of construction of a building where their own laboratory would be accommodated. This is self evident from clause 5 of the agreement. It has been reported by the applicant that the lessor has paid GST on lease premium charges at the rate of 18% treating them as services. The applicant will also be required to pay GST on the “annual lease charges” and “maintenance charges” which are in the nature of services. All the referred services are received by applicant for construction of immovable property (other than plant & machinery) on their own account. The exclusion clause 17(5)(d) shows that the exclusion is applicable including when such services are used in the course or furtherance of business which is the claim of the applicant. Thus, the referred services in the instant case and in the given facts, squarely fall under the exclusion vide Sec. 17(5)(d) and hence ineligible to ITC. The impugned services referred by the applicant have been received for construction of immovable property on their own account and therefore input tax credit on those services is barred under the provisions of clause (d) of Sec. 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.