ITC Denied on Land Lease Rentals for Factory Construction; Section 17(5)(d) Block Applies.
Issue
Whether a manufacturing company (Agratas Energy) is eligible to claim Input Tax Credit (ITC) on GST paid under Reverse Charge Mechanism (RCM) for long-term annual lease rentals of industrial land used to set up a factory, or if such credit is blocked under Section 17(5)(d) of the CGST Act.
Facts
The applicant, Agratas Energy Storage Solutions, entered into a 50-year lease with the Government of Gujarat for 321 acres of land to set up a battery cell manufacturing plant.
The consideration involved annual lease rentals (taxable under RCM), unlike the “upfront lease premium” which is often exempt.
The applicant argued that:
The land is used for “industrial operation,” not just construction.
Denying ITC on rentals while exempting upfront premiums is discriminatory.
Section 17(5)(d) should only block inputs directly used in construction (like cement/steel), not land leases.
Decision (Ruling of the AAR)
The Gujarat Authority for Advance Ruling (AAR) ruled against the applicant, holding that ITC is not admissible on the lease rentals.
Blocked by Section 17(5)(d): The AAR held that the lease services were received “for” the construction of an immovable property (the factory) on the applicant’s own account. Therefore, the specific block under Section 17(5)(d) is attracted.
Scope of “For”: Relying on the Supreme Court’s interpretation in Oblum Electrical Industries, the AAR ruled that the word “for” in the statute enlarges the scope. It covers not just direct materials but any supply (including the land lease) that is essential for the construction purpose.
Timing is Irrelevant: The block applies irrespective of whether the rentals are paid during the pre-construction, construction, or post-construction phase. The purpose of the lease (setting up the factory) remains constant.
Rent vs. Premium: Citing the Supreme Court in Panbari Tea Co., the AAR rejected the discrimination argument. It clarified that “premium” (price for transfer of right) and “rent” (payment for continuous enjoyment) are legally distinct concepts. The government deliberately exempted only the upfront premium (via Notification 12/2017) while leaving annual rentals taxable.
Vacant Land & Renovations: The block extends to lease rentals attributable to vacant parts of the plot (as they are part of the single project) and to future repairs/renovations (as “construction” includes capitalized renovations).
Key Takeaways
Lease Rentals are a Cost: For manufacturers, GST paid on annual lease rentals for factory land is a “sunk cost” as ITC is unavailable.
Strict Interpretation of “Construction”: The term “for construction” in Section 17(5)(d) is interpreted broadly to include the underlying land lease services, creating a comprehensive block on real estate-related credits.
Premium vs. Rent: Businesses must note the GST distinction: Upfront premiums for long-term industrial leases (by State bodies) are exempt, but annual rentals for the same land are taxable and ITC-ineligible.
Consistency in Rulings: This decision aligns with earlier adverse rulings like Bayer Vapi and GACL-NALCO, solidifying the position that land-related credits are barred for factory setups.