Gujarat AAR: No GST ITC Available to the Recipient of the Tax Paid on the Transfer of Leasehold Rights

The AAR, Gujarat, towards the case of M/s Bayer Vapi Private Limited [Ruling No. GUJ/GAAR/R/2023/29 dated August 24, 2023] directed that the transferee attaining the rights of the lease for construction of the immovable property is not allowed to take ITC of the Goods and Service Tax (“GST”) filed via them on the services obtained via the Transferor through the course of the lease under Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”).

Attributes

M/s Bayer Vapi Private Limited (“the Applicant”) has the business of manufacturing chemicals for agriculture and health science applications, joined into a Memorandum of Understanding (“MOU”) with M/s Vapi Enterprises Ltd. (“the Transferor”) for transferring the rights of lease of the leasehold land owned via Gujarat Industrial Development Corporation (“the Owner”).

Under the norms of the MOU, Applicant planned to use the aforementioned land to set up/expand its manufacturing facility for the manufacture of chemicals to be used via the Applicant for operating its business of manufacturing.

The applicant submitted a request for clarification to the AAR in Gujarat in order to determine whether it was eligible to claim a GST ITC for the tax paid on services obtained through a lease to establish or expand its manufacturing plant.

Problem

Is the applicant qualified to avail the ITC of the filed GST to take the rights of lease from the Transferor as service towards the construction of Immovable Property?

Had

The AAR, Gujarat in Ruling No. GUJ/GAAR/R/2023/29 stated as under:

• It seems that Section 17(5)(d) of the CGST Act mentioned that the registered individual is not qualified to opt for the Input credit on the GST filed on the goods and services obtained for the construction of an immovable property (not plant & machinery) on his account comprising when these Goods/Services are utilized for operating the business.
• Gujarat Authority for Advance Ruling in M/s GACL NALCO Alkalies & Chemicals Private Limited [Advance Ruling No. GUJ/GAAR/R/53/2021] directed that the legislature has expressed its intent that ITC does not be available in regard to the services related to land obtained via a taxable person for the construction of an immovable property, containing when these services are utilized for operating the businesses. The aforesaid was also confirmed by the Telangana State Authority in the ruling of M/s Daicel Chiral Technologies (India) Private Limited [TSAAR order No. 6/2020].
• It is our opinion that the Applicant’s intention, as evidenced by the attachments to the application and the Memorandum of Understanding (MOU), is unmistakably to acquire leasehold rights for industrial land adjacent to their manufacturing facility from the Transferor. This acquisition is intended for the purpose of establishing a new manufacturing plant or expanding their existing one.
• We have determined that, according to Section 17(5)(d) of the CGST Act, the Applicant is not eligible to claim Input Tax Credit (ITC) for the GST paid on the services provided by the Transferor in the form of leasehold land rights.

Our Observations:

As stipulated in Section 17(5)(d) of the CGST Act, the advance ruling holds binding authority in cases where lease rights have been acquired explicitly for the purpose of establishing or expanding a manufacturing facility within the scope of one’s business or manufacturing activities.

In a precedent case, specifically M/s Daicel Chiral Technologies (India) Private Limited [TSAAR order No. 6/2020], the Telangana Authority for Advance Ruling, invoking Section 17(5)(d), rendered an opinion that the applicant is not entitled to claim Input Tax Credit for the GST paid on lease premium charges (one-time fees), annual lease rentals (recurring payments), and GST paid on maintenance charges collected by the lessor in relation to the supply of land on lease for the purpose of advancing or expanding their business.

Applicable GST Section 17(5)(d) of CGST Act:

17(5)(d) goods or services or both obtained via the taxable person for the construction of an immovable property (excluding plant or machinery) on his own account consisting of when these goods or services or both are employed for operating the business.