17.02.2024: No ITC on inwards supplies used for construction of immovable property, irrespective of whether such expenses capitalized or not: AAAR West Bengal

The Appellate Authority for Advance Rulings (AAAR), West Bengal in the case of M/S. MINDRILL SYSTEMS AND SOLUTIONS PRIVATE LIMITED vide Order No. Appeal Case No. 04/WBAAAR/APPEAL/2023 dated 24.01.2024, has denied the ITC Claim on inward supplies on construction expenses for immovable property, whether or not such expenses has been capitalized in the books of accounts.

In this case, the Applicant built a warehouse for which it has received inward supplies of goods and services, including work contract services. Also, the Applicant was paying tax on renting services of warehouse.  

The Applicant sought Advance Rulings, as to whether they are eligible to claim ITC of the inward supplies used in the construction of the warehouse

The AAR, West Bengal vide Order 08/WBAAR/2023-24 dated 26.06.2023, observed that the Applicant has constructed the warehouse and capitalised the same in books of accounts and retains the ownership/ title of the said warehouse. Held that the Applicant is not eligible for ITC charged on inward supply of goods and services related to construction of warehouse which is capitalised in the books of account. However, where construction expenses are not capitalized in books, the claim of ITC is admissible.

Subsequently, The Assistant Commissioner filed the present appeal against the rulings of the AAR, West Bengal contending that the respondent taxpayer had received inward supplies of goods and services both including works contract services to construct a warehouse/ godown and has let it out to M/ s Zomato Hyperpure Private Limited. The issue involved in the instant case is related to admissibility of credit of input tax charged on aforesaid supplies received by the respondent taxpayer. The AAR, West Bengal has erred by restricting the input tax credit to the extent of construction expenses only which are capitalised in books of accounts.

The Respondent assessee contended that the restriction should not apply as the constructed warehouse does not constitute immovable property in the strict sense and that their case is akin to scenarios where ITC has been allowed, such as in the Safari Retreats case by the Orissa High Court.

The AAAR, West Bengal observed that The provisions of clauses (c) and (d) to sub-section (5) of section 17 of the GST Act thus clearly states that Input Tax Credit is not available in respect of works contract services or goods or services or both received for construction of an immovable property. Therefore, for the purpose of construction, the law is unambiguous in the main clauses (c) and (d) to sub-section (5) of section 17 of the GST Act that Input Tax Credit will not be available and thus it will be a blocked credit. It is only the Explanation part, where the law extends the ineligibility criteria for Input Tax Credit to the arena of re-construction, renovation, additions, alterations or repairs and that too conditionally, i.e. Input Tax Credit for such portion of the expenses pertaining to re-construction, renovation, additions, alterations or repairs which are capitalized stands ineligible.

Further, The issue of “capitalization” is applicable only in the Explanation part to the clauses (c) and (d) to sub-section (5) of section 17 of the GST Act i.e. only when the question of reconstruction, renovation, additions, alterations or repairs arises. If such expenses are not capitalised in the books, only under such circumstances the related Input Tax Credit may be available subject to fulfilment of other eligibility criteria. But for the purpose of “construction”, it is clear from the law that Input Tax Credit is blocked in all occasions and there is no scope of any other interpretation.

The respondent assessee  has constructed one warehouse and let it out. This being a ‘construction’, will attract the provisions of the clauses (c) and (d) to sub-section (5) of section 17 of the GST Act and not the Explanation part for determining the eligibility criteria for Input Tax Credit. Thus, the input tax credit for such construction shall not be available to the respondent.

The AAAR, West Bengal modified the WBAAR’s ruling, emphasizing that the law unequivocally blocks ITC on construction expenses for immovable property, regardless of capitalization in the books.

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