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[2020] GTI 388 (AAR-Hyd)

[IN THE AUTHORITY FOR ADVANCE RULINGS, HYDERABAD]

HON’BLE J. LAXMINARAYANA & HON’BLE B. RAGHU KIRAN, MEMBER

IN RE: M/s. Daicel Chiral Technologies (India) (P) Ltd.

TSAAR Order No.05/2020 A.R.Com/26/2018

Dated. 24.6.2020.

INPUT TAX CREDIT— GST PAID ON PAYMENT OF “LEASE PREMIUM CHARGES (ONE-TIME CHARGES)— LAND LEASE FOR BUSINESS PURPOSE— ANNUAL LEASE RENTALS” (RECURRING) TOWARDS SUPPLY OF LAND ON LEASE FOR BUSINESS PURPOSE— MAINTENANCE CHARGES COLLECTED BY THE LESSOR

HELD.—

Sections 16 to 19 of the CGST Act, 2017 contain the provisions relating to allowance of Input Tax Credit subject to the conditions stipulated there under. Section 16(1) allows every registered person 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 used in the course or furtherance of his business subject to such conditions and restrictions as may be prescribed – Section 17(5) of the Act lists the circumstances wherein input tax credit in r/o goods/services shall not be available. It is pertinent to note that Section 17(5) starts with the phrase ‘notwithstanding anything contained in Section 16(1)’ which facilitates Section 17(5) to override the provisions of Section 16(1). Thus the pervasive domain of goods/services provided for under Section 16(1) was abridged by Sec 17(5)by specifying the situations wherein input tax credit in respect of certain goods/services has been restricted.

It is not under dispute that the “lease premium charges”, “annual lease rentals” and “maintenance charges” are paid by the applicant to the lessor towards lease of land. It is manifest from the terms and conditions of the lease agreement dated 17.8.2017 that the applicant acquired land from M/s IKP Knowledge Park on lease for the purpose of construction of a building where their own laboratory would be accommodated. This is self evident from clause 5 of the agreement. It has been reported by the applicant that the lessor has paid GST on lease premium charges at the rate of 18% treating them as services. The applicant will also be required to pay GST on the “annual lease charges” and “maintenance charges” which are in the nature of services.

All the referred services are received by applicant for construction of immovable property (other than plant & machinery) on their own account. The exclusion clause 17(5)(d) shows that the exclusion is applicable including when such services are used in the course or furtherance of business which is the claim of the applicant. Thus, the referred services in the instant case and in the given facts, squarely fall under the exclusion vide Section 17(5)(d) and hence ineligible to ITC.

The  impugned  services  referred  by  the  applicant  have  been  received  for onstruction of immovable property on their own account and therefore input tax credit on those services is barred under the provisions of clause (d) of Section 17(5).

ORDER

(Under Section 100(1) of the CGST/TGST Act, 2017, any person aggrieved by this order can prefer an appeal before the Telangana State Appellate Authority for Advance Ruling, Hyderabad, within 30 days from the date of receipt of this Order)

1. M/s. Daicel Chiral Technologies (India) Private Limited, Lab 4A, Phase III, ICICI Knowledge Park, Genome Valley, Turkapally Village, Shamirpet Mandal, Medchal Malkajgiri Dist, Hyderabad-500101, Telangana, (GSTIN No. 36AACCD8423B1Z1) have filed an application in FORM GST ARA-01 under section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules, seeking Advance Ruling with regard to tax implication in respect of supply of certain services mentioned in their application.
   1. At the outset, it is made clear that the provisions of both the CGST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the TGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression GST Act would mean CGST Act and TGST Act.
   1. It is observed that the queries raised by the applicant fall within the ambit of Section 97(2) (d) of the GST ACT. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/- for SGST and Rs. 5000/- for CGST towards the fee for Advance Ruling. The Applicant has declared that the questions raised in the application have neither been decided by nor are pending before any authority under any provisions of the GST Act. The application is therefore, admitted.
2. Brief facts of the case:

The facts, in brief, that were reported by the applicant in their application are as follows:

• M/s. Daicel Chiral Technologies (India) Private Limited (herein-after referred to As ‘Applicant’ or ‘Company’), Turkapally, Medchal Malkajgiri Dist, Hyderabad is a subsidiary of Daicel Chemical Industries Ltd, Japan.
• The company is engaged in providing Pharmaceutical Research & Development services. These services involve preparative separation and analysis of pharmaceutical compounds which are commonly referred to as chromatography services. They classified ‘chromatography services’ under the head technical Testing and Analysis Services (SAC No. 998346) which are liable to GST @18%. The Company is registered under the GST Act vide registration No. 36AACCD8423B1Z1(Registration Certificate enclosed as Exhibit 1).
• In order to render such services, the applicant requires a lab where such separation and analysis services can be performed. Currently, the applicant is rendering such chromatography services from their premises located at Lab 4A, Phase-II, IKP knowledge Park, Genome Valley, Turkapally Village, Shamirpet Madal, Medchal-Malkajgiri dist, Hyderabad 500 10. The applicant had to acquire a new premise on lease to cater to the growing demand for services.
• Accordingly, the applicant acquired land on lease from M/s. IKP Knowledge Park (lessor) for a period of 33 years and executed a lease deed(copy enclosed as Exhibit 2).As per the terms of the lease, the applicant is required to pay one-time lease premium at the beginning of the lease and also annual lease rentals at the end of every year to the lessor for 33 year. In addition to the above the applicant is also required to pay maintenance charges for the leased premises. The Lessor has classified the lease services rendered by him under Rental or Leasing services involving own or leased non-residential property having Service Account Code (SAC) as 997212. The lessor has collected GST@18% (i.e. SGST 9% +CGST 9%) on one time lease premium (invoices raised by lessor enclosed as Exhibit 3). Further, at the end of the year, the lessor will also be required to pay GST on the Annual Lease Charges and maintenance charges at the applicable GST rates.
• Questions raised:

With the above background, the applicant raised the following queries:

• Whether the applicant is eligible to avail input tax credit of GST paid on payment of “lease premium charges (one-time charges)” towards land lease for business purpose?
  • Whether the applicant is eligible to avail input tax credit of GST paid on “annual lease rentals” (recurring) towards supply of land on lease for business purpose?
  • Whether the applicant is eligible to avail input tax credit of GST paid on “maintenance charges” collected by the lessor?
• Applicant’s interpretation of law and facts:
  • The eligibility and conditions to take input tax credit of Central Goods and Service Tax (CGST) and State Goods and Services Tax (SGST) have been prescribed under section 16 of Central Goods and Services Tax Act, 2017 (‘CGST Act’) and Section 16 of Telangana State Goods and Services Tax, Act 2017 (‘SGST Act’) respectively. Section 16(1) of CGST Act and SGST Act allows a registered person to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business. Therefore, in order to avail credit, the person should be a ’registered person’ and the services supplied to him should be used in the course or furtherance of his business.
• Their unit is registered under the GST Act having a valid GSTIN as 36AACCD8423B1Z1. They have availed credit of CGST and SGST on supply of leasing services to them by the Lessor for the land acquired on lease. The land so acquired on lease will be used by them in rendering the Chromatography services from the lab to be constructed on the land. Thus, they are a registered person and have taken input tax on services which are used in the course of his business. Therefore, they are eligible to avail the credit of CGST and SGST paid on lease charges to the lessor.
• The input service has been defined in section 2(16) the CGST Act, 2017 and SGST Act, 2017 as follows:

“input service” means any service used or intended to be used by a supplier in the course or furtherance of his business.

The definition of input service is inclusive and not exhaustive. The statute has enlarged the scope of input services by the usage of the word “any service”. The definition does not provide for only specific activity relating to supply. Thus, all input services used in activities in relation to or for furtherance of business are input services, whatever may be its purpose. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include. The definition of input service seeks to cover every conceivable service used in provision of outward supply. Therefore, the charges for lease of land is an input services in terms of section 2(16) of the CGST Act, 2017 and SGST Act, 2017.

• The word “business” is to be understood as continuous activity and not confined or restricted to mere manufacture of the product or provision of a service. Activities in relation to the business cover all activities that are related to the functioning of the business. Words “in the course or furtherance” further widens the scope. The functions primarily encompass the entire gamut of activities involved in the process of manufacture of goods or provision of service. The other functions are in the realm of obligations some self imposed and others by way of laws enacted for the welfare of the working class. The definition of ‘input services’ clearly highlights the dichotomy of multifarious functions any business organization is required to undertake while pursuing their objectives. Therefore, it is apparently clear that the lease charges paid for land has been used in course of business and eligible for input credit under section 16(1) of the CGST Act, 2017 and SGST Act, 2017.
• GST is basically value added tax, which, in turn, is a destination based consumption tax. It is a consumption tax which ultimately must be borne by the consumer. It is operative through credit mechanism wherein the input relief is to neutralize cascading effect of tax. A ” consumption tax” derives its name from the fact that tax burden is ultimately borne by the final consumer and business does not bear the burden of the tax, since the business are allowed to take credit of tax paid on inputs supplied/received by them. If therefore input credit is denied to the input service received by the assessee, they will become burden to the assessee, which is against the very grain or principle of GST being a consumption tax. Therefore, they are eligible to avail input credit of GST paid on lease charges of land.
• Section 16(2) of CGST Act and SGST Act lays down the pre-conditions to avail input tax credit. The conditions prescribed under section 16(2) of the Act are as follows:
  • Possession of Tax Invoice: They are in possession of tax invoice issued by the lessor.
  • Receipt of Services: They entered into a lease agreement for 33 years with the lessor vide Lease Agreement dated 17.8.2017. Accordingly, the effective date of commencement of lease is 17.8.2017. They have the legal right over the land and are in possession of land with effect from 17.8.2017 and as such they are in receipt of services.
  • Payment of tax: They have already paid tax to the lessor and the payment of tax by the lessor to the Government is evident from the copy of GSTR-2A returns. The screenshot of the GSTR 2A return available online was enclosed as Exhibit 4.
  • Furnishing of return: They have filed the prescribed monthly return within due date in form GSTR-3B returns for the respective months. The copy of GSTR 3B return filed was enclosed as Exhibit 5. Thus, they have complied with the conditions to avail the credit and therefore they are eligible to avail input tax credit.
• Section 17(5) of the CGST Act, 2017 and SGST Act,2017 provides the list of input services on which input credit is not available. Section 17(5) of the CGST Act, 2017 and SGST Act, 2017 is reproduced below for your ready reference.

“(5) Notwithstanding anything contained in sub-section (1) of sec-tion 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a) motor vehicles and other conveyances except when they are used

• for making the following taxable supplies, namely:-
  • further supply of such vehicles or conveyances ; or
  • transportation of passengers; or
  • imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

• the following supply of goods or services or both:-
  • food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
  • membership of a club, health and fitness centre;
  • rent-a-cab, life insurance and health insurance except where
    • the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
    • such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and
  • travel benefits extended to employees on vacation such as leave or home travel concession;
• works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
• 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.

Explanation.-For the purposes of clauses (c) and (d), the expression construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

• goods or services or both on which tax has been paid under section 10;
  • goods or services or both received by a non-resident taxable person except on goods imported by him;
  • goods or services or both used for personal consumption;
  • goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
  • any tax paid in accordance with the provisions of sections 74, 129 and130.
• GST paid by them on the lease charges doesn’t get covered in the ineligible list of input services as reproduced above. Moreover, the-Hon’ble Supreme Court in Bajaj Tempo Ltd. Mumbai Vs. CIT,   SUPREME COURT (copy enclosed as Exhibit 6) observed that while interpreting the statute, provision granting incentives for promoting economic growth and development should be liberally construed. Restriction placed on it by way of exception should be construed in a reasonable and purposive manner so as to advance the objective of the provision. Therefore, the leasing service received by them is not an ineligible input service and they have rightfully availed services on the same.

(9) Schedule III of CGST Act 2017 provides the list of activities or transactions which shall neither be treated as a supply of goods nor a supply of services. Clause 5 of Schedule III includes sale of land or building and as such sale of land will be regarded as outside the scope of GST. The activity of leasing of land is not included in Schedule III of Act and as such the activity of leasing of land amounts to Supply under section 7 of the Act. Further, the activity of leasing of land has specifically been included in Schedule II of GST Act as supply of service and is thus liable to GST. In order to substantiate the same the Applicant would like to refer the recent judgments by Hon’ble High Court of Bombay in Builders Association of Navi Mumbai & Anr. Vs. Union of Indi and Ors, 2018 (4) 461 – BOMBAY HIGH COURT wherein the Hon’ble High Court held that

“…….expression “supply” includes all forms of supply of goods and/or services made or agreed to be made for a consideration by a person in the course or furtherance of business, and activities enlisted under Schedule II either as supply of goods or services would also be included therein;. As per Schedule II of CGST Act (Item No. 2), any lease, tenancy, license to occupy land and lease / letting out of a building for business is a supply of ‘service’…….., “Once this law, in terms of the substantive provisions and the Schedule, treats the activity as supply of goods or supply of services, particularly in relation to land and building and includes a lease, then, the consideration there for as a premium/one-time premium is a measure on which the tax is levied, assessed and recovered.”;

………it is entirely for the legislature to exercise powers conferred by section 7(2) of CGST Act and issue requisite Notification sans which, merely going by status of CIDCO, it cannot be held that lease premium would not attract / invite liability to pay GST;

In view of the above judgement, it is clear that the activity of leasing of land is liable to GST as supply of service and accordingly, they are eligible to avail the GST levied by the lessor on supply of land on lease.

(10) Thus, in the absence of any restriction on availment of credit under the GST Act on tax paid on leasing of land service and fulfilment of all the conditions to avail credit, they are eligible to avail credit of CGST and SGST paid to lessor on acquiring land on lease for business activities.

7. Personal Hearing:

A personal hearing was held on 20.12.2019 at 03.00 P.M. Sri Srikanth Balakrishnanan (F.C.A), Authorized Representative along with Sri K. Sivaraman(ACA), Authorized Representative of M/s. Daicel Chiral Tech-nologies (India) Private Limited appeared for the personal hearing. They reiterated the facts mentioned above and sought for clarifications in respect of the queries raised in their application.

• Discussion & Findings:
  • We have considered the submissions made by the applicant in their application for advance ruling as well as at the time of personal hearing. The applicant vide their application sought for clarification as to whether they are eligible to avail input tax credit of GST charged on (i) Lease Premium Charges; (ii) Annual Lease Rentals & (iii) Maintenance Charges paid to lessor towards land lease. To resolve the same, provisions relating to input tax credit as laid down under CGST Act, 2017 need to be perused.
  • Sections 16 to 19 of the CGST Act, 2017 contain the provisions relating to allowance of Input Tax Credit subject to the conditions stipulated there under. Section 16(1) allows every registered person 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 used in the course or furtherance of his business subject to such conditions and restrictions as may be prescribed.
  • Section 17(5) of the Act lists the circumstances wherein input tax credit in r/o goods/services shall not be available. It is pertinent to note that Section17(5) starts with the phrase notwithstanding anything contained in Section 16(1) which facilitates Section 17(5) to override the provisions of Section 16(1). Thus the pervasive domain of goods/services provided for under Section 16(1) was abridged by Section 17(5)by specifying the situations wherein input tax credit in respect of certain goods/services has been restricted.
  • At this juncture, it is relevant to refer to clause (d) Section 17(5) which is reproduced hereunder:

(d) 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.

Explanation. – For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

It may be observed from the above legal provision that input tax credit is barred in r/o goods or services used for construction of immovable property (other than plant or machinery) including when such goods or services are used in the course or furtherance of business. The term immovable property has not been defined under the GST Act. Nevertheless, Section 3(26) of the General Clauses Act, 1897 defines “immovable property” as under:

“immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.”

As may be observed from the above, the definition of “immovable property” is an inclusive definition and includes all the things attached to the earth or permanently fastened to anything attached to the earth.

• Now, coming to the case on hand, it is not under dispute that the “lease premium charges”, “annual lease rentals” and “maintenance charges” are paid by the applicant to the lessor towards lease of land. It is manifest from the terms and conditions of the lease agreement dated 17.8.2017 that the applicant acquired land from M/s IKP Knowledge Park on lease for the purpose of construction of a building where their own laboratory would be accommodated. This is self evident from clause 5 of the agreement. It has been reported by the applicant that the lessor has paid GST on lease premium charges at the rate of 18% (9% CGST + 9% SGST) treating them as services. The applicant will also be required to pay GST on the “annual lease charges” and “maintenance charges” which are in the nature of services.
• We opine and it is also not disputed that the ‘building’ constructed by the applicant unquestionably falls within the ambit of ‘immovable property’ in terms of the definition of the ‘immovable property’ mentioned supra. Further, as per the agreement, the building after completion of construction would be utilised by the applicant for their own utility to accommodate a laboratory which carries out chromatography services rendered by them. Thus, it is established that the referred services have been received by the applicant for the purpose of construction of immovable property on their own account.
• It is further observed that the restriction stipulated under section 17(5) (d) is not applicable to the goods and services used for construction of “plant and machinery”. To examine as to whether “building” falls under the category of “plant and machinery”, reference has to be made to the explanation appended to Section 17(5) which defines the term plant & machinery in the following manner:

Explanation.— For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes –

• land, building or any other civil structures; telecommunication towers; and

 (iii) pipelines laid outside the factory premises.

From the above definition, it is obvious that ‘plant and machinery’ excludes building from its purview.

8.8 From the above discussion, it clearly emerges that all the referred services are received by applicant for construction of immovable property (other than plant & machinery) on their own account. The exclusion clause 17(5)(d) shows that the exclusion is applicable including when such services are used in the course or furtherance of business which is the claim of the applicant. Thus, the referred services in the instant case and in the given facts, squarely fall under the exclusion vide Section 17(5)(d) and hence ineligible to ITC. The various contentions put forth and case laws cited by the applicant are found to be either not relevant or pertain to distinguishable facts/situations when compared with the facts in the instant case as above and hence inapplicable.

8.9. Accordingly, we hold that the impugned services referred by the applicant have been received for construction of immovable property on their own account and therefore input tax credit on those services is barred under the provisions of clause (d) of Section 17(5).

Advance Ruling

9. In view of the observations stated above, the following rulings are issued :

Question 1.

Whether the applicant is eligible to avail input tax credit of GST paid on payment of Lease Premium Charges (one-time charges) towards land lease for business purpose?

Answer:

No. the applicant is not eligible to avail input tax credit of GST paid on payment of Lease Premium Charges (one-time charges) towards land lease.

Question 2.

Whether the applicant is eligible to avail input tax credit of GST paid on annual Lease rentals (recurring) towards supply of land on lease for business purpose?

Answer:

No. The applicant is not eligible to avail input tax credit of GST paid on annual Lease rentals (recurring) towards supply of land on lease.

Question 3.

Whether the applicant is eligible to avail input tax credit of GST paid on maintenance charges collected by the lessor?

Answer:

No. The applicant is not eligible to avail input tax credit of GST paid on maintenance charges collected by the lessor

**

Citations:

1. Bajaj Tempo Limited Vs. Commissioner of Income-Tax – Supreme Court

Builders Association of Navi Mumbai, Neelsidhi Realties Vs. Union of India Through the Secretary, Ministry of Finance, The Commissioner of Goods and Service Tax, Thane & Others – Bombay High Court.