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 (ITC) on GST paid for lease premium charges, annual lease rentals, and maintenance charges. This decision was based on Section 17(5) of the CGST Act, which restricts ITC on goods or services used for the construction of immovable property, including the land lease for constructing a building for the laboratory. Consequently, the applicant was denied ITC on these charges.

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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 charges
The 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 rentals
The 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 charges
Lastly, 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.

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