2023 (7) TMI 351 - AAR - GST

Taxpayer denied input tax credit on warehouse construction expenses under Section 17(5)(d) when costs capitalized

The AAR, West Bengal ruled that a taxpayer cannot claim input tax credit (ITC) on goods/services used for warehouse construction when such expenses are ... Input tax credit - Construction of immovable property - Section 17(5)(d) restriction - Capitalization - Immovable property - test of annexation and object of permanent beneficial enjoyment - on his own accountInput tax credit - Section 17(5)(d) restriction - Capitalization - on his own account - Input tax credit in respect of inward supplies used for construction of the warehouse where construction expenses are capitalized in the books - HELD THAT: - Section 16 permits ITC of tax on inputs used in the course or furtherance of business, but clause (d) of section 17(5) bars ITC in respect of goods or services received for construction of an immovable property on the taxable person's own account, with the Explanation limiting the prohibition to the extent of capitalization. The Authority examined the applicant's contention that the warehouse was not constructed on his own account because it was let out. Relying on the meaning of 'on his own account' and the facts that the applicant retained ownership, accounted for the warehouse in its books and provides outward supplies (rent/warehousing) on its own account, the Authority held the construction was on the applicant's own account. Applying the statutory test, and after considering whether the structure is immovable, the Authority concluded the warehouse is intended for permanent beneficial enjoyment at the site and is not reasonably movable so as to fall outside 'immovable property'. Consequently, inward supplies used for construction and capitalized are covered by the prohibition in section 17(5)(d) and ITC is not allowable. [Paras 4]ITC is not admissible for inward supplies used for construction of the warehouse where such construction expenses are capitalized in the books.Input tax credit - Section 17(5)(d) restriction - Capitalization - Input tax credit in respect of inward supplies used for construction of the warehouse where construction expenses are not capitalized in the books - HELD THAT: - The Explanation to section 17(5)(d) confines the prohibition on ITC to goods or services used in construction 'to the extent of capitalization' to the immovable property. The Authority noted this statutory limitation and ruled that where construction-related expenses are not capitalized in the books of account, they do not fall within the bar created by clause (d) and therefore ITC can be availed and utilized. [Paras 4]ITC is admissible for inward supplies used for construction of the warehouse where such construction expenses are not capitalized in the books.Final Conclusion: The Authority rules that ITC on inputs/services used for construction of the warehouse is disallowed to the extent such construction expenses are capitalized (section 17(5)(d) applies), but ITC is admissible where those construction expenses are not capitalized in the books. Issues Involved:1. Eligibility of Input Tax Credit (ITC) on inward supplies used for construction of a warehouse when expenses are capitalized.2. Eligibility of ITC on inward supplies used for construction of a warehouse when expenses are not capitalized.Summary of Judgment:Issue 1: Eligibility of ITC on Capitalized Construction ExpensesThe applicant constructed a warehouse to provide it on rent and sought to claim ITC on inward supplies used for its construction. The applicant argued that the warehouse was not constructed 'on his own account' as it was intended for renting out and that pre-engineered steel structures used in the construction could be dismantled and relocated, thus not qualifying as 'immovable property'. The applicant relied on the Supreme Court judgment in CCE vs. Solid & Correct Engg. Works and the Orissa High Court judgment in Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax.The Authority for Advance Ruling (AAR) rejected these arguments. It held that the phrase 'on his own account' includes constructing properties for renting out, as the applicant retains ownership and accounts for the warehouse in his books. The AAR also determined that the warehouse, despite using pre-engineered structures, is immovable property due to its permanent nature and the intent to provide rental services. Consequently, the restriction under Section 17(5)(d) of the GST Act applies, disallowing ITC on goods or services used for construction of the warehouse when capitalized.Ruling: The applicant is not eligible for ITC on inward supplies used for construction of the warehouse when such expenses are capitalized in the books.Issue 2: Eligibility of ITC on Non-Capitalized Construction ExpensesThe applicant also sought to claim ITC on inward supplies for warehouse construction when such expenses are not capitalized. The AAR ruled that ITC is admissible in such cases as the restriction under Section 17(5)(d) of the GST Act applies only to capitalized expenses.Ruling: ITC is admissible if the construction expenses are not capitalized in the books.