Advance Ruling GST-Whether ITC is admissible on lease rental paid for the pre-operative period for the land on which a hotel is being constructed

Fol­low­ing Advance rulling passed by the WEST BENGAL AUTHORITY FOR ADVANCE RULING GOODS AND SERVICE TAX in the case of GGL HOTEL AND RESORT COMPANY LIMITED on 08.01.2019

1. The Appli­cant, stat­ed to be in the hos­pi­tal­i­ty and real estate busi­ness and is con­tem­plat­ing a new project on a lease­hold land, seeks a rul­ing as to whether Input Tax Cred­it is avail­able for lease rent paid dur­ing pre-oper­a­tive peri­od for the lease­hold land on which the resort is being con­struct­ed to be used for fur­ther­ance of busi­ness, when the same is cap­i­talised and treat­ed as cap­i­tal expen­di­ture. Advance Rul­ing is admis­si­ble on the ques­tion under Sec­tion 97(2) sub-clause (d) of the CGST/ WBGST Acts, 2017 (here­inafter referred to, col­lec­tive­ly, as “the GST Act”).

The Appli­cant fur­ther sub­mits that the ques­tion raised in the Appli­ca­tion is nei­ther decid­ed by nor pend­ing for deci­sion before any author­i­ty under any pro­vi­sions of the GST Act.

The offi­cer con­cerned rais­es no objec­tion to admis­sion of the Appli­ca­tion. The Appli­ca­tion is, there­fore, admitted.

2. The Appli­cant, stat­ed to be a sub­sidiary of Ambu­ja Neo­tia Hold­ings Pri­vate Lim­it­ed, is in the hos­pi­tal­i­ty and real estate busi­ness since 1997. Ben­gal Hous­ing Infra­struc­ture Devel­op­ment (here­inafter referred to as ‘WBHIDCL’/Lessor) has leased a piece of land mea­sur­ing 20,039.75 sq meters in New Town Area for a peri­od of 32 years to the Appli­cant (also referred to, at times, as the Lessee) for a lease pre­mi­um of Rupees Sev­en­teen Crores Twen­ty Lakhs only.

As per the Inden­ture of Lease dat­ed 21.08.2013, (here­inafter referred to as “the Agree­ment) the Appli­cant is liable to pay annu­al lease rent at the rate of 10% of the afore­said pre­mi­um for the first and sec­ond year, and the same would be esca­lat­ed at the rate of 5% per annum, in the sub­se­quent years from the start of the third year over the last annu­al lease rent per annum.

The project is pro­posed to be com­plet­ed with­in a peri­od of two years from the foun­da­tion of the project and the lease rent paid dur­ing the pre-oper­a­tive peri­od shall be cap­i­tal­ized in the books of account by the Applicant.

The con­cerned offi­cer sub­mits in writ­ing that cred­it of tax paid on goods and ser­vices used for con­struc­tion of immov­able prop­er­ty is allowed only if such  immov­able  prop­er­ty  is  in  the nature of plant and machin­ery. The expres­sion plant and machin­ery has been defined vide Expla­na­tion to sec­tion 17 in Chap­ter V of the GST Act to mean appa­ra­tus, equip­ment , and machin­ery fixed to earth by foun­da­tion or struc­tur­al sup­port that are used  for  mak­ing out­ward sup­ply of goods or ser­vices and includes such foun­da­tion and struc­tur­al sup­ports but excludes inter alia land, build­ing, or any oth­er civ­il struc­tures. The input tax cred­it is, there­fore, not admis­si­ble for the lease rent paid dur­ing the pre ‑oper­a­tive peri­od for the lease­hold land on which a resort is being constructed.

3. The Appli­cant states that :

(a) Sec­tion 16 of the GST Act deals with eli­gi­bil­i­ty and con­di­tions for tak­ing Input Tax Cred­it. Sub-sec­tion (1) of the said Sec­tion states

“Every reg­is­tered  per­son  shall,  sub­ject  to  such  con­di­tions  and  restric­tions as may be pre­scribed and in the man­ner spec­i­fied in sec­tion 49, be enti­tled to take cred­it of input tax charged on any sup­ply of goods or ser­vices or both to him which  are  used  or  intend­ed  to be  u s e d  in  t h e  c o u r s e  o r  f u r t h e r a n c e  o f  h is b u s in e s s and the said amount shall be cred­it­ed to the elec­tron­ic cred­it ledger of such person.”

(b) Sec­tion 17 of the GST Act deals with Appor­tion­ment of Cred­it and Blocked Cred­it Sub-sec­tion 5(d) of the said Sec­tion states

Notwith­stand­ing any­thing con­tained in sub-sec­tion (1) of sec­tion 16  and sub­sec­tion (1) of sec­tion 18, input tax cred­it shall n o t b e a v a i la b le in respect of the fol­low­ing, namely:

goods or ser­vices  or both received by  a tax­able per­son for con­struc­tion of an immov­able prop­er­ty (oth­er than plant or machin­ery) on his own account includ­ing when such goods or ser­vices or both are used in the course or fur­ther­ance of busi­ness.The expres­sion “con­struc­tion” is explained to include re ‑con­struc­tion, ren­o­va­tion, addi­tions or alter­ations or repairs, t o t h e e x t e n t o f c a p it a lis a t io n, to the said immov­able property

© The GST Act does not define the exact nature of the goods and ser­vices received that are deemed to relate to con­struc­tion of immov­able prop­er­ty. As  a result, the mean­ing of con­struc­tion cost is to be con­strued as is tak­en in the mod­ern par­lance. The Appli­cant is required to pay the lease rent to the Lessor whether or not the con­struc­tion has been car­ried out and shall be pay­ing the lease amount even after the com­ple­tion of the con­struc­tion of the immov­able prop­er­ty for the bal­ance peri­od of the lease period.

The lease rent for the pre-oper­a­tive peri­od is cap­i­tal­ized under the head ‘Lease­hold Land’ and not under the head ‘Build­ing Block’. It can, there­fore, be inferred that the lease rent is not used for con­struc­tion of the resort.

Hence, the rent­ing ser­vices can­not be said to be received for the con­struc­tion of immov­able prop­er­ty as there is no nexus, direct or indi­rect, between the con­struc­tion of the hotel and ban­quet and the rental ser­vice availed. Fur­ther, mere cap­i­tal­iza­tion of the lease rental can­not make such ser­vices as received for the con­struc­tion of immov­able property.

4. The moot ques­tion, there­fore, is whether the lease rental paid dur­ing the pre oper­a­tive peri­od should be treat­ed as part of the cost of goods and ser­vices received for the pur­pose of con­struct­ing an immov­able prop­er­ty (oth­er than plant and machin­ery) on the Applicant’s own account.

Para 23 of AS10 is rel­e­vant. It says that the cost of a self-con­struct­ed asset should be deter­mined using the same prin­ci­ples as for an acquired asset, and it is usu­al­ly the same as the cost of con­struct­ing an asset for sale. When an immov­able prop­er­ty like a build­ing is sold the prof­it is com­put­ed after deduct­ing from the sale pro­ceeds the cost of the prop­er­ty, includ­ing the land. The cost of con­struct­ing the immov­able asset, there­fore, includes the lease rental paid for right to use the land on which the asset is built. Being an inte­gral part of the cost of the immov­able prop­er­ty the lease rental paid for the ser­vice of right to use the land is a sup­ply for con­struc­tion of the said property.

The Applicant’s argu­ment about absence of any nexus – direct or indi­rect — between the lease rental and con­struc­tion of the build­ings for hotel etc. is incor­rect. Con­struc­tion of the hotel etc. is impos­si­ble unless the Appli­cant enjoys unin­ter­rupt­ed right to use the land. It is clear from the Agree­ment that the Appli­cant can­not enjoy that right if he fails to pay the lease rental. Construction

of the immov­able prop­er­ty is, there­fore, crit­i­cal­ly depen­dent on the sup­ply of the leas­ing ser­vice. The nexus between them is, there­fore, direct and the two are insep­a­ra­ble. The leas­ing ser­vice for right to use the land is, there­fore, a sup­ply for con­struc­tion of the immov­able property.

The pro­hi­bi­tion from avail­ing input tax cred­it, as pro­vid­ed under sec­tion 17(5)(d) of the GST Act, is not lim­it­ed to the civ­il struc­ture being con­struct­ed. It extends to the immov­able prop­er­ty in gen­er­al (oth­er than plant and machin­ery), which includes the sup­plies received for retain­ing the right to use and devel­op the land. Such sup­plies are essen­tial for con­struc­tion of the civ­il struc­ture on the piece of land.

The Appli­cant will admit­ted­ly cap­i­tal­ize the lease pre­mi­um [refer to the fixed assets sched­ule: Note 12 to the Bal­ance Sheet as on 31/03/2018, the Appli­ca­tion and the Applicant’s writ­ten sub­mis­sion on rebut­tal to the con­cerned officer’s views]. The prop­er­ty is, there­fore, admit­ted­ly being con­struct­ed on the Applicant’s own account and treat­ed as fixed asset, includ­ing the lease rental paid. Whether the lease rental paid for the pre-oper­a­tive peri­od is cap­i­tal­ized under the head ‘Lease­hold Land’ or ‘Build­ing Block’ is of lit­tle sig­nif­i­cance in this context.

In the light of the above dis­cus­sion, it is held that the lease rental paid dur­ing the pre-oper­a­tive peri­od should be treat­ed as part of the cost of goods and ser­vices received for the pur­pose of con­struct­ing an immov­able prop­er­ty (oth­er than plant and machin­ery) on the Applicant’s own account. Input tax cred­it is, there­fore, not admis­si­ble on such lease rental in terms of sec­tion 17(5)(d) of the GST Act.

In view of the fore­go­ing we rule as under

RULING

Input Tax Cred­it is not avail­able to the Appli­cant for lease rent paid dur­ing pre-oper­a­tive peri­od for the lease­hold land on which the resort is being con­struct­ed on his own account to be used for fur­ther­ance of busi­ness, when the same is being cap­i­talised and treat­ed as cap­i­tal expenditure.

This rul­ing is valid sub­ject to the pro­vi­sions under Sec­tion 103 until and unless declared void under Sec­tion 104(1) of the GST Act.