Why is ITC of GST denied on land leased for the purpose of setting up a manufacturing facility?

 

A recent AAR has denied ITC of the GST paid by the recipient towards leasing of land to be used for setting up a manufacturing facility.​ ​The AAR is of the view that ​the leased-land cannot be a part of the Plant & Machine​ry​, ​hence, ​ITC cannot be claimed as per the restriction placed u/s 17(5)(d).

As per my view, whether land is covered under P&M or not is irrelevant and that cannot be a determining factor ​u/s 17(5)(d). What is restricted under ​the said clause is the ITC on goods/services received for construction of an immovable property. ​'​Land​'​ per se is not used for construction of an immovable property​,​ rather​,​ an immovable property is being constructed on a parcel of land.​ The main purpose of leasing the land is for use in the manufacturing business.​

The expression ’for construction of’ is clear and it suggests that there should be an inextricable link between the goods or services received and the ​​construction of immovable property. Hon'ble SC earlier held that ‘for’ has various shades and it implies the end w.r.t. which something is done. Hence, goods or services that ​are ​procured only for the purpose of construction of immovable property should be restricted under the above clause else the said restriction doesn’t apply.

The below FAQ by CBIC may also be referred to.

Question - Whether GST is payable on royalty (to be paid to Government)for Mining Lease granted by State Govt.

Answer: Yes, on royalty GST will apply under reverse charge mechanism. Further, such payment of GST under reverse charge mechanism would be eligible as ITC in the hands of the recipient of supply for payment of GST.

Question - Is ITC available on hiring of immovable properties (land, office, warehouse, processing unit, stock yards) for facilitation of mining operations?

Answer: Yes. GST paid on hiring of land, office, warehouse, processing unit, stock yards when these are used in the course or furtherance of business, would be allowed as ITC.

Question - Will ITC be available on steel, timber and sometimes cement which are used in the underground mines to provide a protective device for security purposes?

Answer: Credit will not be available if these goods are supplied for construction of an immovable property. But if these are temporarily placed for protective purposes, credit will be available.

Hence, it can be inferred that it is the construction of immovable property for which the underlying goods or services if received will be hit by the negative provision barring which I myself do not see any ineligibility in availing the credit.