Gujarat AAAR Upholds Denial Of ITC On Lease Rent For Industrial Land Used In Factory Construction

The Gujarat Appellate Authority for Advance Ruling (AAAR) held that Input Tax Credit (ITC) of GST paid on lease rentals for land taken on a long-term lease for setting up a factory is blocked under Section 17(5)(d) of the CGST Act, as the provision bars credit on inputs and input services used for construction of immovable property.

A Bench comprising SGST Member Arti Kanwar and CGST Member Sunil Kumar Mall dismissed the appeal by Agratas Energy Storage Solutions Pvt. Ltd. and upheld the denial of ITC on GST paid under reverse charge on lease rentals for land used for construction of factory premises. It observed:

“Section 17(5)(d) explicitly prohibits the availment of Input Tax Credit (ITC) on goods and services utilized for the construction of immovable property… This restriction applies regardless of whether the construction is undertaken in the course or furtherance of business.”

The dispute arose from a case where the appellant had taken land on a 50-year lease from the Government of Gujarat for setting up a manufacturing facility for battery cells. GST was discharged on lease rentals under the reverse charge mechanism, and the appellant sought ITC on the same.

The appellant argued that lease of land is not directly used “for construction” of immovable property and therefore does not fall within the restriction under Section 17(5)(d). It further submitted that ITC should be allowed at various stages, including pre-construction, post-construction, repairs, and even for portions of land not directly built upon.

The Advance Ruling Authority rejected the submissions and held that the lease arrangement is intrinsically linked to the construction of factory premises and is covered within the scope of Section 17(5)(d).

Upholding this view, the AAAR observed that Section 17 begins with a non-obstante clause and overrides Section 16, thereby excluding ITC even where inputs are used in the course or furtherance of business, if they relate to construction of immovable property. It rejected the contention that the term “for” in Section 17(5)(d) warrants a narrow interpretation. It held:

“Input Tax Credit (ITC) is restricted on land used for construction of immovable property… the tax treatment cannot be dictated by the periodicity of lease rentals.”

The Authority further held that “construction” includes reconstruction, renovation, and repairs, and therefore the restriction continues even post-construction.

It also clarified that vacant land and green belt areas form part of the integrated factory project and cannot be segregated for the purpose of availing ITC.

Accordingly, the AAAR dismissed the appeal and upheld the denial of ITC on GST paid on lease rentals for land used for construction of factory buildings under Section 17(5)(d) of the CGST Act.

Appearance for the Appellant: Shri Ishan Bhatt, Advocate, Ms. Shaifali Arora, Head Taxation, Agratas Energy Storage Solutions Pvt. Ltd. and Ms. Snehal Atre, DGM, IDT, Tata Motors Global Services.