ITC on Factory building

[Venkatesh Dhongadi]

Respected experts,

My query is in relation to ITC u/s 17(5). One of my client is giving contract to build a factory. He is letting out this factory on monthly rent basis. I have 2 queries -

1) whether the contractor can claim ITC on inputs he purchased to build the factory? (Later the contractor will bill for the building construction).

2) Whether contractee i.e, my client will be eligible to claim ITC on what contractor has billed as he is going to let out the factory building on monthly rent basis?

[Sadanand Bulbule]

Dear Venkatesh

The matter related to your query stands well settled. Please peruse discussion ID No. 115652 dated 11/11/2019 for experts' views.

[Venkatesh Dhongadi]

Sir What about the contractor. Whether contractor can claim ITC?

[Sadanand Bulbule]

Dear Venkatesh

As long as the  supply of construction services fall under the definition of “ Works Contract”,the contractor is entitled for ITC. 

[Shilpi Jain]

Contractor can claim ITC.

Your client - take and wait for the decision of the SC. Can consider reversing under protest or not utilising also.

[Amit Agrawal]

Please note Apex Court ruling dated 03.10.2024 in case of M/s Safari Retreats Pvt. Ltd. -2024 (10) TMI 286 - SUPREME COURT, wherein it is ruled as follows:

"65. Some of our conclusions can be summarised as under: 

a. The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act is not established;  

b. The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17;

c. The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business.  If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant.  Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16.  Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5).

66. In the light of what we have held above, by setting aside the impugned judgment in Civil Appeal Nos. 2948 and 2949 of 2023, the writ petitions are remanded to the High Court of Orissa for limited purposes of deciding whether, in the facts of the case, the shopping mall is a “plant” in terms of clause (d) of Section 17(5).  Appeals are partly allowed in above terms.  

67. While deciding these cases, we cannot make any final adjudication on the question of whether the construction of immovable property carried out by the petitioners in Writ Petitions amounts to plant, and each case will have to be decided on its merit by applying the functionality test in terms of this judgment. The issue must be decided in appropriate proceedings in which adjudication can be made on facts. The petitioners are free to adopt appropriate proceedings or raise the issue in appropriate proceedings."

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Amit Agrawal]

I am of the view that Apex Court has made it simpler to take ITC against goods / services used in construction of 'Shopping Mall / Warehouse / Commercial Buildings / Factory to be given on lease / rental / license'. This can be more complicated for 'Income Tax Purpose' (as depreciation related provisions for building & plant are different with different objectives etc.). But, for GST purpose, this will be relatively simpler. 

All such tax-payer needs is to involve expert consultant to guide. It would be much better to get such an expert during building construction stage itself as well as before entering into lease / rental / license agreements. This in-turn will help tax-payer to prove eligibility of ITC against goods / services used in construction of those buildings using 'functionality' test. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[deepak gulati]

Even this Apex court ruling will have huge implications if we consider building as plant or Machinery. As whenever TP will sell same he has to discharge GST. Considering the appreciation in Building, the GST charge will be much more than what is saved. Also, the buyer, at that time, may or may not get input of same and this will have significant impact on price. 

[Amit Agrawal]

Attention is invited to Supreme Court ruling in case of M/s Bharti Airtel Ltd., dated 20.11.2024 (reported as c - SUPREME COURT), wherein concept of movable property & immovable property is minutely explained by the Apex Court. 

It is a landmark judgement worth through reading as it's implications are very significant & far reaching under GST law wherever issue involved is Movable V/S Immovable Property.

This ruling gives additional grounds in many situations to the tax-payer to defend ITC against blockage under clause (c) & (d) of Section 17(5) as for applicability of both clauses to deny ITC, underlying property has to be 'construction of immovable property' first. 

This ruling is directly help cellular & tower companies under GST (as mobile towers are held as movable property) thereby ITC blockage under clause (c) & (d) of Section 17(5) will NOT apply DESPITE the given explanation for 'Plant & Machinery' which specifically excludes 'telecommunication towers'. 

This ruling will also help tax-payers to avail ITC despite blockage under clause (c) & (d) of Section 17(5). For example: ITC against 'Factory Plants' can be claimed if it can proven that 'movable property' using yardsticks explained by SC. And, Safari Retreat reported as 2024 (10) TMI 286-SC can be used as additional defense (i.e. if it cannot be proven as 'movable property') by passing the 'functionality test' for such 'Factory Plant'. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion or recommendation.

[Sadanand Bulbule]

Dear all 

I wish to add here that, ITC benefit under Section 17[5][c] & [d] arising by way of Hon'ble Supreme Court's judgement rendered in Safari Retreat - 2024 (10) TMI 286 - SUPREME COURTcase is not as easy as milking the cow or plucking the hanging fruits in the tree.

Rather it is in the wisdom & discretion of the adjudicating authority. So taxpayers/professionals need not relax banking upon the ratio of the said judgement. They need to continue the fight against fallible orders. On this count, I have an adjudication order by-passing the above ruling to saddle huge tax liability.

Authority prevails over the rulings and not vice versa. Knocking the doors of court once again is only the remedy.

AI Summary

Input tax credit eligibility for construction depends on the functionality test determining whether a building is a plant. Entitlement to input tax credit for construction of a factory for letting depends on whether the construction qualifies as a works contract for the contractor and whether the resulting building qualifies as a plant or machinery for the owner under the functionality test; the latter is a fact sensitive inquiry focused on whether the building is essential to the supplier's business of renting or leasing and performs the functional role of a plant, and adjudicating authorities retain discretion in assessing entitlement.