ITC on GST for lease rent paid to State for land used for industrial construction blocked under Section 17(5)(d)

AAR held that ITC of GST on lease rental paid to the State for land leased specifically for construction of an industrial unit is blocked under Section 17(5)(d) of the CGST Act. The bar applies irrespective of whether payments relate to periods before, during or after construction, and extends to vacant portions of the leased land held for industrial purposes. Clause (c) and (d) are distinct and do not alter this result. Repairs, renovation, reconstruction, additions or alterations are treated as "construction" and thus ITC on lease rental for such activities is also disallowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether input tax credit (ITC) of GST paid under reverse charge on annual lease rental for long-term lease of industrial land is available where the lessee intends to construct a factory building on the leased land.

2. Whether ITC of GST on such lease rental is available for periods (a) prior to initiation of construction and (b) after construction of the factory building.

3. Whether ITC of GST on such lease rental is available when repairs, maintenance, renovation or similar activities are undertaken on the factory building.

4. Whether ITC of GST on such lease rental is available in respect of portions of the leased land which remain vacant and on which no immovable property is constructed.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: AVAILABILITY OF ITC ON LEASE RENTAL WHERE LAND IS LEASED FOR CONSTRUCTION OF FACTORY

Legal framework: Section 16(1) entitles registered persons to take ITC of tax charged on supplies used or intended to be used in the course or furtherance of business, subject to restrictions in Section 17(5). Section 17(5)(d) (a non-obstante provision) denies ITC in respect of goods or services received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, with an explanation that "construction" includes reconstruction, renovation, additions, alterations or repairs to the extent of capitalization. Amendment substituting "plant and machinery" for "plant or machinery" is noted.

Precedent treatment: Earlier advance rulings of this Authority on comparable facts held such credits blocked under Section 17(5)(d); those rulings were affirmed on appeal. The judgment of the Supreme Court discussing the scope of "for" in statutory phrases is cited as interpreting "for" as indicating purpose and thus capable of broader application than a narrow direct-nexus test. A later Supreme Court decision applying the functionality test for "plant" in another clause is recognized, but legislative amendment thereafter altered the relevant wording in Section 17(5)(d).

Interpretation and reasoning: The word "for" in Section 17(5)(d) indicates purpose - i.e., services received for construction of immovable property. When land is granted on lease specifically for industrial purposes with conditions requiring commencement of production and restricting change of purpose, the lease service is a precursor and inextricably linked to construction of immovable property. The statutory exclusion of "land" from "plant and machinery" (as indicated by the express phrasing and explanation) demonstrates legislative intent to treat services relating to land used for construction as blocked. Distinctions between upfront premium and periodic rent do not alter the statutory scope; law treats premium (capital receipt) and rent (revenue receipt) differently and the exemption for certain upfront payments does not create an entitlement to ITC on recurring lease rentals otherwise barred by Section 17(5)(d).

Ratio vs. Obiter: The core ratio is that services received in respect of lease of land that is given for industrial construction - where land use and construction are purposively linked by lease terms - fall within the prohibition of Section 17(5)(d) and ITC is blocked. Observations distinguishing premium vs rent and legislative intent behind exemptions are supportive reasoning rather than separate binding ratios.

Conclusion: ITC of GST paid under reverse charge on annual lease rental for land leased for construction of a factory is not available; such lease-related services are blocked by Section 17(5)(d).

ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: AVAILABILITY OF ITC BEFORE AND AFTER CONSTRUCTION

Legal framework: Same provisions (Sections 16 and 17(5)(d) and the explanation defining "construction") govern temporal availability of ITC.

Precedent treatment: Prior rulings applied Section 17(5)(d) to credits taken in periods preceding construction where the lease service was purposively connected to subsequent construction.

Interpretation and reasoning: The statutory test hinges on purpose ("for construction"), not merely on temporal occurrence of works. Where lease conditions require industrial use and impose obligations (e.g., commence production within a specific period; restrict change of purpose), the lease service is aimed at enabling construction and business operations - thus the credit is blocked irrespective of whether tax was paid before or after physical construction. The argument that ITC should be allowed pre-construction or post-construction because land per se is not "used" in construction is rejected because the lease is granted for industrial construction and the purpose is determinative under the statutory language.

Ratio vs. Obiter: Ratio - ITC is blocked for the entire lease period when the lease service is procured for the purpose of construction of immovable property; temporal distinctions (pre/post construction) do not negate the purpose-based bar. Observations on legislative policy and GST Council awareness are persuasive context.

Conclusion: ITC of GST on lease rental is not available either prior to initiation of construction or after construction when the lease is for industrial construction.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 3: AVAILABILITY OF ITC WHEN REPAIRS, MAINTENANCE OR RENOVATION ARE UNDERTAKEN

Legal framework: Explanation to Section 17(5) expressly includes reconstruction, renovation, additions, alterations or repairs within the meaning of "construction" for clauses (c) and (d).

Precedent treatment: Advance rulings applying the explanation have held that repair/renovation leading to capitalization are encompassed by the blocked category.

Interpretation and reasoning: Since "construction" in Section 17(5)(d) expressly includes repairs, renovation and similar activities (to the extent of capitalization), services or taxes attributable to leasehold arrangements procured for such activities fall within the statutory bar. Permitting ITC for repair/maintenance would be inconsistent with the statutory explanation that these activities are treated as construction for the purpose of the prohibition.

Ratio vs. Obiter: Ratio - ITC is blocked for services/taxes related to repairs, renovation or similar activities when those activities fall within the statutory definition of "construction."

Conclusion: ITC of GST on lease rental is not available in periods when repairs, maintenance or renovation of the factory building are undertaken, to the extent covered by the explanation to Section 17.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 4: AVAILABILITY OF ITC IN RESPECT OF VACANT PORTIONS OF LEASED LAND

Legal framework: Section 17(5)(d) applies to goods or services received for construction of immovable property on the taxable person's own account; there is no statutory mechanism for apportionment of ITC on a plot-by-plot or area-by-area basis where the lease as a whole is granted for industrial purposes.

Precedent treatment: Prior rulings have rejected proportionate credit claims where part of the leased land remains open or used for environmental/other statutory compliances, noting absence of statutory provision for proportionate allocation.

Interpretation and reasoning: When the entire leased land is granted for industrial purposes and lease conditions tie the plot to industrial construction (including mandated environmental set-asides), any vacant portions forming part of the leased industrial plot are integral to the industrial unit and its compliance requirements. The statute does not envisage proportionate allowance of ITC for vacant areas within a single lease granted for industrial construction; attempts to segregate vacant portions as non-construction use are not supported where lease conditions and intended use indicate an integrated industrial purpose.

Ratio vs. Obiter: Ratio - ITC is not available in respect of vacant portions of land forming part of a lease granted for industrial construction; statutory scheme does not permit proportionate allocation in such circumstances.

Conclusion: ITC of GST on lease rental is not available for areas of the leased land that remain vacant when the lease as a whole is for industrial construction.

CONSOLIDATED CONCLUSION

Applying the statutory language of Sections 16 and 17(5)(d) (and its explanation), and construing "for construction" as indicating the purposive link between the lease service and construction activities, ITC of GST paid on annual lease rental for land granted for industrial construction is blocked for the entire lease period, including pre-construction and post-construction periods, during repair/renovation phases covered by the definition of "construction," and in respect of vacant portions of the leased plot forming part of the industrial lease.

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