Recipient of Service Not Eligible for ITC on GST Paid for Transfer of Rights of Leasehold Land as Services Constitute Construction of Immovable Property: AAR [Read Order]

The Goods and Services Tax (GST) Authority for Advance Ruling (AAR), Gujarat has held that a recipient of services is not eligible to claim Input Tax Credit (ITC) on the GST paid for the transfer of leasehold rights in land.

The ruling came in response to an application filed by M/s. Bayer Vapi P. Ltd., seeking clarity on its eligibility to claim ITC for the Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) paid on services received from Vapi Enterprise Ltd. (VEL).

The central issue in this case revolved around the interpretation of Section 17(5)(d) of the Central Goods and Services Tax Act, 2017, which restricts ITC for services used in the construction of an immovable property.

The bench distinguished between “goods” and “services” as per the CGST Act. Goods were defined as movable property, explicitly excluding land, while services encompassed anything other than goods, including activities related to the use of money or its conversion.

The bench stated that although the CGST Act did not explicitly define “immovable property”, it was derived from the General Clauses Act, 1897. The General Clauses Act defines immovable property as land, benefits arising from land and things attached to the earth. This definition included anything permanently attached to or forming part of the land.

The bench also highlighted Section 17 of the CGST Act which outlines restrictions on ITC, particularly sub-clause (d), which restricts ITC on goods or services used for the construction of an immovable property, other than plant and machinery, whether for one’s account or business purposes.

The ruling emphasised that land was explicitly excluded from the definition of “goods” and did not fall within the definition of “services”. However, the applicant sought ITC for leasehold rights on land, indicating an intent to construct an immovable property. This led to the application of Section 17(5)(d) to block the ITC, as services were received for constructing an immovable property for business purposes.

The definition of “supply” in the CGST Act indicated that any lease or license to occupy land was considered a supply of services. However, the sale of land or a completed building was explicitly excluded from being regarded as a supply.

The applicant had acquired leasehold rights from VEL for an industrial plot adjacent to their existing manufacturing plant, with the intention to set up a new manufacturing plant or expand their current one. This confirmed the intention to use the land for construction and brought the transaction within the scope of Section 17(5)(d).

The ruling considered the arguments put forth by the applicant, represented by Ms. Khushboo Kundalia, Shri Ranjan Khatavkar and Shri Nrupesh Machchhar such as distinguishing the nature of services received for pre-construction and the accounting treatment of leasehold rights. These arguments were found to lack a legal basis and were deemed non-tenable.

In conclusion, the two-member authority comprising Milind Kavathar (SGST Member) and Amit Kumar Mishra (CGST Member) clarified that the recipient of services was not entitled to claim ITC on the CGST and SGST paid on the services received from VEL for the transfer of leasehold rights. This decision was based on the application of Section 17(5)(d) of the CGST Act, which restricts ITC when services are used for the construction of an immovable property, other than plant and machinery, for one's account or business purposes.

To Read the full text of the Order CLICK HERE

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