Controversies surrounding ITC on construction-related expenses (including land lease transactions)
As part of regular business, business entities incur various expenses relating to immovable property like construction (factory building, shed, ETP/STP plant etc.), taking land on lease to set up factory etc. Under lease arrangements, lessee pays onetime upfront premium, onetime common infrastructure & development premium, annual lease rentals, annual maintenance charges etc.
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||NITYA’s 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.
NITYA 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.