2022 (2) TMI 830 - AAR - GST

Civil and interior works for commercial property construction cannot claim ITC under Section 17(5) CGST Act

In Re: M/s. KRBL Infrastructure Limited

The AAR, UP held that ITC on civil and interior works for commercial property construction is not admissible under Section 17(5) of CGST Act, 2017. The ... Input tax credit - expenditure incurred for 'Civil and Interior Works' - said property is further used for letting out to different tenants on rental basis viz. for furtherance of business - ITC on construction of commercial complex - Section 16 of the CGST Act, 2017 - HELD THAT:- The applicant has agreed to renovate and built out interior of the Demised Office Space as per the specification of tenants and the cost of such renovation would be part of rent which would be calculated by adding 10% profit element (as interest cost) over the actual expenditure of renovation/furnishing/interior works and it shall be recoverable within the span of maximum five years as a component of rent payable on monthly basis Section 17 of the CGST Act, 2017 provides for apportionment of credit and blocked credit. It is pertinent to have a look at the relevant legal provisions under Section 17(5) of the CGST Act - According to Section 16 (1) of the CGST Act, 2017, every registered person is entitled 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 by him in the course or furtherance of his business. It is found that apart from conditions as laid down under Section 16 of the CGST Act, 2017; Section 17 provides for restrictions and factual position and situations where ITC would not be available. ITC restricted in case of construction undertaken on own account - HELD THAT:- Clause (d) restricts input tax credit of goods and services used by a person for construction of an immovable property (except plant and machinery) on his own account. Thus, if a person purchases construction material and engages a labor contractor to provide the constructions services using the purchased material, ITC shall not be available of both the goods purchased and the services of the labor contractor procured. ITC restricted in case of works contract services only to the extent expenses are capitalized - HELD THAT:- Clause (c) and clause (d) use the word 'construction' and as per the Explanation to clause (c) and clause (d) construction is only to the extent of capitalization. Consequently, ITC of any expenditure related to construction that is capitalized in the books of accounts shall be blocked. This shall not only cover the value of materials and works contract services but also expenditure directly related to the construction like inward supply of services from real estate agent, architect, interior decorators as these are involved in the establishment of the immovable property. ITC eligible when works contract services used in respect of construction of plant and machinery - HELD THAT:- Clause (c) and (d) of section 17(5) restricts ITC in respect of works contract services and goods or services used towards construction of immovable property. However, both the clauses clearly exclude 'plant and machinery'. This means that the ITC restrictions are applicable only in case of immovable property. These restrictions are not applicable on plant and machinery - the effect of this explanation is that ITC on input of any goods or services including works contract service used towards construction of immovable property that is desired to be capitalized in the books of accounts shall not be admissible. Clause (c) and (d) of section 17(5) restricts ITC in respect of works contract services and goods or services used towards construction of immovable property. As such, input tax credit (ITC) of GST paid in relation to 'civil and interior works' in building located at C-32, Sector-62, Noida and on 'construction of commercial complex' located at Plot No. 18, Block C, Sector-153, Noida does not seems to be admissible. Issues Involved:1. Eligibility to take input tax credit (ITC) for expenditures on 'Civil and Interior Works' in a building used for rental purposes.2. Availability of ITC on the construction of a commercial complex intended for rental purposes.Issue-wise Detailed Analysis:Issue 1: Eligibility to Take ITC for 'Civil and Interior Works'- The applicant sought to determine if ITC is available for expenditures on 'Civil and Interior Works' in a building used for rental purposes.- The applicant argued that Section 16(1) of the CGST Act, 2017 entitles every registered person to take credit of input tax charged on any supply of goods or services used in the course or furtherance of business.- Section 17(5) of the CGST Act, 2017 imposes restrictions on ITC availment, specifically stating that ITC is not available for goods or services received for the construction of an immovable property on one's own account.- The applicant contended that the 'Civil and Interior Works' should qualify as being in furtherance of business since the renovated property is used for renting out, which is a taxable supply under GST.- The authorities, however, highlighted that Section 17(5)(d) explicitly blocks ITC on goods or services used for construction of an immovable property, even if used in the course or furtherance of business, thus making ITC on 'Civil and Interior Works' inadmissible.Issue 2: Availability of ITC on Construction of a Commercial Complex- The applicant sought clarity on whether ITC is available for the construction of a commercial complex intended for rental purposes.- The applicant argued that constructing a commercial complex for renting out should be considered a business activity, and thus, ITC should be allowed to avoid cascading tax effects.- The authorities reiterated that Section 17(5)(d) of the CGST Act restricts ITC on goods or services used for constructing an immovable property on one's own account, including when used in the course or furtherance of business.- The applicant referenced the Orissa High Court ruling in the case of M/s. Safari Retreats Pvt. Ltd., which allowed ITC for construction of malls leased out. However, the authorities noted that this judgment is under appeal in the Supreme Court and thus, its applicability is uncertain.- Consequently, the authorities concluded that ITC on the construction of the commercial complex is not admissible under the current legal framework.Ruling:- Question 1: Whether the Applicant is eligible to take input tax credit in relation to expenditure incurred for 'Civil and Interior Works' in building located at C32, Sector-62, Noida, Gautam Buddha Nagar, Uttar Pradesh, 201301 at different floors, since the said property is further used for letting out to different tenants on rental basis viz. for furtherance of businessRs.Answer: Replied in negative.- Question 2: Whether ITC on construction of commercial complex located at Plot No. 18, BLOCK C, SECTOR -153, NOIDA, Gautam Buddha Nagar, Uttar Pradesh, 201310, will be available to Applicant in case the said building is used for the purpose renting outRs.Answer: Replied in negative.This ruling is valid only within the jurisdiction of the Authority for Advance Ruling Uttar Pradesh and subject to provisions under Section 104(1) of the Act.