Facts of the Case:

In this case, the applicant a wholly owned subsidiary of Tata Sons, entered into a 50-year lease agreement with the Government of Gujarat for approximately 321 acres of land at Sanand GIDC, Ahmedabad, for industrial purposes, including construction of factory buildings, erection, repair, or demolition. The lease required annual rental payments at 6% of the total market value of the land, with a 10% escalation every five years.

The applicant sought an advance ruling on whether GST paid under reverse charge on the lease rental qualifies for ITC on GST charged on lease rental where factory building is to be constructed, ITC eligibility prior to and after construction, ITC on GST paid during repairs, maintenance, or renovation of the factory and ITC on lease rental relating to portions of the land left vacant.

The applicant argued that the term “for construction” in Section 17(5)(d) of the CGST Act should be interpreted narrowly, applying only to goods and services directly used for construction. They also relied on judgments such as CCE Pune vs Tata Engineering & Locomotives Ltd., to support a restrictive interpretation. Further, they distinguished the ruling in Re: M/s Bayer Vapi Pvt Ltd and invoked the Supreme Court judgment in Safari Retreats Pvt Ltd concerning the functionality test for plant and machinery.

Issue:

Whether the applicant is eligible to avail ITC on GST paid under reverse charge on annual lease rentals paid to GIDC for the industrial land, considering the construction of factory buildings, repairs, and vacant portions, in light of Section 17(5)(d) of the CGST Act, 2017.

Held that:

The Gujarat AAR ruled as follows:

• ITC on lease rental for construction of factory buildings – The applicant is not eligible to claim Input Tax Credit (ITC) on the GST paid under Reverse Charge Mechanism (RCM) on the lease rental paid to the Government of Gujarat for the industrial land. The Authority held that the lease of land is specifically for industrial purposes, including construction of factory buildings. Consequently, the GST on lease rental is blocked under Section 17(5)(d) of the CGST Act, 2017, which bars ITC on goods or services received for construction of immovable property (other than plant or machinery) on the applicant’s own account, including when such goods or services are used in the course or furtherance of business.
• ITC for periods before and after construction of the factory: The Authority ruled that the timing of lease payments—whether prior to or after the commencement/completion of construction—is immaterial. Since the land is leased for industrial purposes and the construction of immovable property is intended from the outset, the ITC remains blocked for both pre-construction and post-construction periods. The purpose of the land lease, rather than the timing of payment, governs ITC eligibility.
• ITC on lease rental during repairs, renovation, or maintenance: The ITC of GST paid on lease rental is also blocked when the factory building undergoes repairs, maintenance, or renovation. This is because Section 17(5)(d) explicitly defines “construction” to include reconstruction, renovation, additions, alterations, or repairs to the extent of capitalization of the immovable property. Therefore, any services (including lease-related GST) connected with such activities fall within the scope of blocked credit.
• ITC on lease rental for vacant portions of the leased land:  ITC of GST paid on lease rental for portions of land on which no construction is undertaken, including areas kept vacant for environmental or other purposes, is not admissible. The Authority noted that the leased land is dedicated to industrial purposes, and even vacant portions are integrally related to the overall industrial project. Therefore, GST on the lease rental of vacant land also falls under Section 17(5)(d) and is blocked from ITC.

The GST paid under RCM on lease rental of industrial land leased from the Government of Gujarat for construction of factory buildings, ongoing industrial operations, or associated vacant portions is fully blocked from ITC under Section 17(5)(d) of the CGST Act, 2017, irrespective of timing or nature of use.

Case Name: In Re: M/s. Agratas Energy Storage Solutions Pvt Ltd. dated 03.11.2025

To read the complete judgement 2025 Taxo.online 2930