Issues and Disputes Regarding ITC for Construction-Related Costs, Including Land Lease Transactions

 During their regular operations, business entities often accrue a range of expenses related to immovable properties, such as construction for structures like factory buildings, sheds, ETP/STP plants, as well as securing land through lease agreements for factory setups. These lease agreements typically involve one-time upfront premiums, one-time common infrastructure and development fees, annual lease rentals, and annual maintenance charges.

 

Vide this Outlook, we intend to update you on ITC eligibility on various debatable construction-related expenses:

 

·                Section 17(5)(c) of the CGST Act bars ITC on works contract services received for construction of immovable property (other than plant and machinery). Further, Section 17(5)(d) bars ITC on goods and services received by a person for construction of immovable property on own account (other than plant and machinery). Explanation to these clauses provides that ‘construction’ includes re-construction, renovation, additions or alterations or repairs to immovable property, to the extent of capitalisation. Hence, ITC on aforesaid goods and services is barred even if they are used in course or furtherance of business.

 

·                Basis above, following understanding can be drawn:

 

‒               Bar is in case of immovable property (other than plant and machinery). Hence, ITC is eligible on:

 

o        Movable property (irrespective whether it qualifies as plant and machinery or not)

o        Immovable property in nature of plant and machinery.

 

‒               Bar is only on goods and services received for construction. Hence, nexus with construction is necessary.

 

‒               Bar on renovations, repairs, alterations etc. will be only when cost is capitalized in books of accounts. Hence, ITC is eligible on goods and services received for renovations, repairs, alterations etc. cost of which is not capitalized in books of accounts.

 

‒               Bar on construction of immovable property is only when undertaken by taxpayer on its own account.

 

·                Considering above, ITC eligibility on various debatable expenses and relevant factors to be considered for determining the same are tabulated hereunder:

 

Scenario	TBM View	Relevant factors to determine ITC eligibility
Construction of specific structures (Factory shed, ETP, Lift, Fire-fighting works, Electrical fittings etc.)	ITC available on ETP, Lift, Fire-fighting works & Electrical fittings.	·            Qualification as movable or immovable property ·            Qualification of Immovable property as plant and machinery
Onetime premium and annual land lease rentals (for pre and post construction period)	ITC available	·            Nexus with construction activity
One time and annual common infrastructure & development premium	ITC available	·            Construction of immovable property on own account
Monthly / Yearly maintenance charges	ITC available	·            Nexus with construction activity ·            Accounting treatment in books of accounts
Construction of building for further letting out	ITC not available*	·            Construction of immovable property on own account

 

*Notably, in case of Safari Retreats Private Limited v. CC, CGST, 2019-VIL-223 (Ori.), the Orissa High Court read down Section 17(5)(d) while granting benefit of ITC on construction of building used for further letting out. However, the Revenue filed an appeal before the Supreme Court against above decision (Refer CC, CGST v. Safari Retreats Private Limited, Civil Appeal No. 2948/2023). The final arguments are concluded in this case and ruling is awaited.

 

 Comments: DGGI & other authorities are currently conducting investigations / inquiries for denial of ITC on land lease transactions by relating them to construction. Many taxpayers are reversing ITC under protest or otherwise due to the pressure from authorities. Notably, out of total ITC in land lease transactions, substantial amount relate to common infrastructure & development premium, maintenance charges etc. which have no relation with construction activity, Hence, ITC is available on the same.

For ITC on construction of specific structures like ETP, Lift, Fire-fighting works, Electrical works etc., ITC is denied in various advance rulings mainly ground that they are immovable. The Authorities failed to appreciate that such structures qualify as plant and machinery and hence ITC is available thereon.

It is important to note that last date to avail ITC for FY 2022-23 is November 30, 2023. Hence, taxpayers can thoroughly analyze their transactions to determine ITC eligibility on various construction related expenses. Further, since validity of Section 17(5)(c) & (d) is sub-judice before the Supreme Court and is likely to be announced in next few months, taxpayers can consider availing ITC on such expenses and not utilize it till pronouncement of the Supreme Court’s verdict. Pertinently, interest under Section 50 of the CGST Act is payable only on ITC availed and utilised. Therefore, taxpayers will not be liable to pay interest on such ITC availed but not utilized even if they have to subsequently reverse ITC without utilization.