GST - ITC not available on transfer of leasehold rights in land

 Recently, Authority for Advance Ruling, Gujarat (‘AAR’) in the case of GACL NALCO Alkalies & Chemical Private Limited, 2021 (12) TMI 36, has held that Input Tax Credit (‘ITC’) is not available on input service of ‘transfer of leasehold rights in the land’ to be used for construction of admin building / factory.

 

Facts of the Case

 

·                The Applicant is developing a Greenfield project of caustic soda plant. For developing the plant, the Applicant takes the land on lease from the lessor. The arrangement stipulates that the lessor will surrender / transfer its leasehold rights in favour of the Applicant.

 

·                The Applicant has contended that all the eligibility conditions specified under Section 16 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). Thus, the ITC is eligible.

 

AAR Ruling

 

·                AAR has observed that Section 17(5)(d) restricts the ITC on service received ‘for’ construction of immovable property. Since land taken on lease is an input service for construction of immovable property, ITC is disallowed.

 

·                AAR has further held that ‘land’ is not a plant and machinery and therefore, is not excluded from Section 17(5) restrictions.

 

. | Remarks

 

·                In our view, construction of immovable property is happening on land. It cannot be said that land is received for construction of immovable property. Land is an independent parcel on which immovable property will be constructed.

 

·                Further, in our view, transfer of leasehold right in itself is a sale of land and GST is not payable at the first place. As per the definition of  ‘Land’ under various laws and jurisprudence, the term ‘land’ includes ‘interest arising out of land’. Thus, permanent transfer of right in or over land is itself is permanent transfer of land.

 

·                Having said above. we are also conscious that various Advance Rulings have held that GST is payable on assignment or transfer of leasehold rights. We, however, humbly disagree with those decisions.

 

·                It is also pertinent to mention that Bombay High Court decision in Builders Association (now pending in Apex Court) is on one-time lease premium and not on the ‘permanent transfer of leasehold rights’.