The Applicant was engaged in the business providing Pharmaceutical Research & Development services, which inter alia involves preparative separation and analysis of pharmaceutical compounds. Catering to expansion of the business, the Applicant had acquired land on lease for a period of 33 years and executed a lease deed;
As per the terms of the deed, the Applicant was required to pay one-time lease premium at the beginning of the lease and also annual lease rentals at the end of every year to the lessor for 33 year. The Applicant was also required to pay maintenance charges for the leased premises. Further, at the end of the year, the lessor would also be required to pay GST on the Annual Lease Charges and maintenance charges at the applicable GST rates;
The Applicant contended that Section 16(1) of CGST Act allows a registered person to take credit of ITC on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. Therefore, in order to avail credit, the services supplied to him should be used in the course or furtherance of his business;
The Applicant had availed credit of GST on supply of leasing services to them by the Lessor for the land acquired on lease. The land so acquired on lease would be used by them in rendering the Chromatography services from the lab to be constructed on the land. Thus, they have had taken ITC on services which were used in the course of business;
The Applicant further submitted that the word ‘business’ is to be understood as continuous activity and not confined or restricted to mere manufacture of the product or provision of a service. Activities in relation to the business cover all activities that are related to the functioning of the business. Words ‘in the course or furtherance’ further widens the scope. The functions primarily encompass the entire gamut of activities involved in the process of manufacture of goods or provision of service. The other functions are in the realm of obligations – some self-imposed and others by way of laws enacted for the welfare of the working class. Therefore, it would be apparently clear that the lease charges paid for land has been used in course of business and eligible for ITC;
It was further submitted by the Applicant that GST paid by them on the lease charges does not get covered in the ineligible list of input services in terms of Section 17(5) of the CGST Act. The Applicant submitted that restriction for availement of ITC placed by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision. Therefore, the leasing service received by the Applicant was not an ineligible input service and they have rightfully availed services on the same.
Lastly, the Applicant had submitted that the activity of leasing of land is not included in Schedule III of the CGST Act and as such the activity of leasing of land amounts to Supply. Further, the activity of leasing of land has specifically been included in Schedule II of CGST Act as supply of service and is thus liable to GST.
The Telangana AAR observed that in terms of Section 17(5) of the CGST Act, the definition of ‘immovable property’ is an inclusive definition and includes all the things attached to the earth or permanently fastened to anything attached to the earth. The AAR further observed that the ‘building’ constructed by the Applicant unquestionably falls within the ambit of ‘immovable property’. Further, as per the agreement, the building after completion of construction would be utilised by the Applicant for their own utility to accommodate a laboratory;
It was further observed that as the building to be constructed by the Applicant does not amount to ‘plant and machinery’, the same would not be excluded from Section 17(5) of the CGST Act. Basis the above observations, the Telangana AAR held as follows:
GLS Comments:
This ruling of the Telangana AAR comes as no surprise as other AARs have also similarly denied ITC on construction of immovable property on own account. Most notably, the Tamil Nadu AAR in the case of Shree Varalakshmi Mahaal LLP [Order No. 51/ARA/2019 dated 25 November 2019] had denied ITC on construction of Marriage hall used in furtherance of ‘renting’ business. Similarly, the West Bengal AAR in the case of GGL Hotel and Resort Company Limited [30/WBAAR/2018-19 dated 08 January 2019] had disallowed ITC of lease rent paid during pre-operative period for leasehold land on which resort was being constructed on his own account to be used for furtherance of business.
Basis the instant ruling of the Telangana AAR and several other rulings, it is inferred that the issue of ITC on immovable property would be further litigated at higher judicial forums.
Daicel Chiral Technologies (India) Private Limited [TSAAR Order No. 05/2020 dated 24 June 2020]
Disclaimer:
The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned hereinrra quis.
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