2025 (1) TMI 512 - AAAR - GST

GST paid on surrender of leasehold rights not eligible for ITC despite planned plant construction

In Re: M/s. GACL-NALCO Alkalies & Chemicals Private Limited.

The AAAR Gujarat dismissed an appeal regarding ITC eligibility on GST paid for services involving surrender of leasehold rights. The appellant sought ITC ... Input Tax Credit (ITC) of the GST paid on services provided by GACL in the form of agreeing to surrender/relinquish its right on leasehold property in favor of the appellant - HELD THAT:- The Hon’ble Supreme Court in the case of M/s. Safari Retreats P Ltd [2024 (10) TMI 286 - SUPREME COURT] while analyzing the expression plant or machinery, held that there could be a plant that is an immovable property; that the word ‘plant’ not having been defined under the Act, its ordinary meaning in commercial terms will have to be attached to it. The Hon’ble Court, thereafter laid down a functionality test, further concluding that if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed thereunder are fulfilled; that however, if the construction of a building by the recipient of service is for his own use, the chain will break, and ITC would not be available. The appellant has not denied the fact that construction activity has not been done on the leasehold land acquired from GACL. Though the averment is that the chartered engineers certificate states that 99.85% of the land would be utilized for construction of plant and machinery; that plant building will be constructed on a part of leaseholding premises and the unconstructed area will be used for auxiliary services. Conclusion - The GST paid on the surrender of leasehold rights is ineligible for ITC. Appeal dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the appellant, M/s. GACL-NALCO Alkalies & Chemicals Private Limited, is entitled to claim Input Tax Credit (ITC) of the GST paid on services provided by GACL in the form of agreeing to surrender/relinquish its right on leasehold property in favor of the appellant.2. ISSUE-WISE DETAILED ANALYSISIssue: Eligibility to Claim ITC on GST Paid for Surrender of Leasehold RightsRelevant legal framework and precedents:The legal framework primarily involves Sections 16 and 17 of the Central Goods and Services Tax Act, 2017 (CGST Act), particularly Section 17(5) which deals with blocked credits.The judgment also references the Supreme Court decision in the case of M/s. Safari Retreats P Ltd, which provides interpretation of clauses (c) and (d) of Section 17(5).Court's interpretation and reasoning:The court analyzed whether the services received by the appellant for the construction of an immovable property fall under the exceptions provided in Section 17(5)(d) of the CGST Act.The court applied the 'functionality test' as established by the Supreme Court to determine if the construction qualifies as 'plant or machinery.'Key evidence and findings:The appellant argued that the land acquired was for furtherance of business and not for constructing immovable property for personal use.The appellant presented various documents, including plans and certificates, to support their claim that the land was used for constructing a plant and machinery.Application of law to facts:The court found that the appellant's construction on the leasehold land was for their own account, as it was used to set up a caustic soda plant, which is considered an immovable property.The court concluded that the construction did not qualify for the exceptions under Section 17(5)(d) as it was for the appellant's own use.Treatment of competing arguments:The appellant's argument that the services received were not leasing services and should be eligible for ITC was rejected based on the Supreme Court's interpretation of the law.The court dismissed the appellant's reliance on various judgments regarding statutory interpretation, as the Supreme Court had already established the relevant legal principles.Conclusions:The court concluded that the appellant is not entitled to claim ITC on the GST paid for the surrender of leasehold rights, as it falls under the blocked credits as per Section 17(5)(d) of the CGST Act.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning:'The Hon'ble Supreme Court, while analyzing section 17 (5) (d), ibid, has concluded that it seeks to exclude from the ambit of sub-sections 16 (1) & 18 (1), ibid, services received by a taxable person to construct an immovable property on his own account subject however, to two exceptions.''The Hon'ble Court further explains taxable person's 'own account' to be when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out.'Core principles established:The judgment reinforces the interpretation of Section 17(5)(d) of the CGST Act, emphasizing the conditions under which ITC is blocked for construction of immovable property.The functionality test is crucial in determining whether a building qualifies as a plant for ITC purposes.Final determinations on each issue:The appeal filed by M/s. GACL-NALCO Alkalies & Chemicals Private Limited was rejected, upholding the Advance Ruling that the GST paid on the surrender of leasehold rights is ineligible for ITC.