In the flashy world we live in, splurging on interior decoration and furnishing services has become the key to attract consumers specially in industries like the hotels, restaurants, gymnasiums, spas, etc. While the taxpayers feel that input tax credit of these service must be allowed in the light of their indispensability for their trade, the revenue has formed a generalized opinion that any input tax credit in relation to construction, repair, renovation or services are inadmissible in the light of the provisions of Section 17(5) of the CGST Act, 2017 (‘CGST Act’).

The Article below summarizes the subject of admissibility of input tax credit in respect of works contract and construction services in the light of the provisions of the CGST Act and the related judicial pronouncements.

I. Legal Provisions

At the outset, it is pertinent to have a look at the legal provisions under Section 17(5) of the CGST Act. The same are given below:

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

(c)		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;
(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 capitalization, to the said immovable property;

……”

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-

i.		land, building or any other civil structures;
ii.		telecommunication towers; and
iii.		pipelines laid outside the factory premises.

II. Pursuant to the aforesaid legal provisions the following conclusions can be drawn:

1.		No ITC restricted for further supply of works contract services
		Clause (c) does not restrict input tax credit of works contract services when availed for further supply of works contract services. For example: Mr. A is providing works contract services in respect of residential premises of Mr. B which included plumbing works, electrical works, paint jobs and plastering of walls. Now, Mr. A subcontracts the plumbing works to Mr. C and Mr. C charges GST on his invoice. Now, ITC of works contract services in the nature of plumbing works shall be admissible to Mr. A as he is engaged in further supply of works contract services;
2.		ITC restricted in case of construction undertaken on own account
		Clause (d) restricts input tax credit of goods and services used by a person for construction of an immovable property (except plant and machinery) on his own account. Thus, if a person purchases construction material and engages a labor contractor to provide the constructions services using the purchased material, ITC shall not be available of both the goods purchased and the services of the labor contractor procured;
3.		ITC restricted in case of works contract services only to the extent expenses are capitalized

3.1.		Clause (c) and clause (d) use the word ‘construction’ and as per the Explanation to clause (c) and clause (d) construction is only to the extent of capitalization. Consequently, ITC of any expenditure related to construction that is capitalized in the books of accounts shall be blocked. This shall not only cover the value of materials and works contract services but also expenditure directly related to the construction like inward supply of services from real estate agent, architect, interior decorators as these are involved in the establishment of the immovable property. However, for any repairs and renovations that are in the nature of revenue expenditure, ITC shall be eligible as the restriction is only in respect of goods and services used for construction to the extent of capitalization. It is pertinent to note here that General Accounting Policies must be followed strictly while capitalizing or charging the expenditure to revenue as the accounting treatment shall be a good alibi in deciding whether or not ITC is eligible.
3.2.		At this juncture, it becomes necessary to discuss the judgment of Appellate Authority for Advance Ruling, West Bengal in the case of GGL Hotel and Resort Company Ltd. [2019] 105 taxmann.com 248. The appellant for the construction of Eco Resort on DBO (Design, Built and Operate) Model in ECO Park, New Town, Kolkata had taken certain land on lease from West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL) for 32 years on a lease premium of Rs. 17.20 crores with an annual lease rent at the rate of 10 per cent of the lease premium for the first two years, which will be escalated at the rate of 5 per cent per annum in the subsequent years from the start of the third year over the last annual lease rent per annum. took land on lease. The project was proposed to be completed within a period of 2 years and the lease rent paid during the pre-operative period had to be capitalized in the books of account by the appellant. The WBHIDCL was charging GST at the rate of 18 per cent on the lease rent. The appellant sought advance ruling on the following question:
		‘Whether credit is available on input tax paid on lease rent 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 capitalized and treated as capital expenditure.’
		It was held that:
		14.……”The lease rent paid during pre-operative period for the lease hold land, on which the construction activity had been taken for furtherance of business, has direct nexus between the lease rent and construction of resort. Had the appellant not paid the lease rent during pre-operative period it would not be able to take any construction activity thereon. Further the asset will be capitalized in the books of account of the appellant. So it is clear that the appellant is building the Eco Resort on its own account for furtherance of business and credit of tax paid on input goods/service is debarred in terms of section 17(5)(d). “
		15. …… “It transpires from the above discussion that the Appellant is constructing the Eco Resort on his own account in course of furtherance of its business of providing hospitality service, for which one of the input service availed is lease rental service. The ambit of the blocked credit as per clause (d) of sub-section (5) of section 17 is broad as it includes such goods or services or both when used in the course of furtherance of business.”
		It can be inferred from the above that the Appellant Authority for Advance Ruling found a direct nexus in the lease rent paid during the pre-operative period and the construction activity undertaken to bring the building into existence. In this regard, the capitalization of this lease rent during the pre-operative period in accordance with the accounting policies was testimony of the nexus. Thus, ITC of lease rent paid during pre-operative period was held to be inadmissible under the provision of Section 17(5)(d) of the Act.

4.		ITC eligible when works contract services used in respect of construction of plant and machinery
		Clause (c) implies that there is no restriction of ITC with respect to works contract services used for construction of plant and machinery, the restriction being applicable only in the case of immovable property. Thus, it becomes pertinent to understand what shall constitute plant and machinery under the Act. The Explanation to Section 17(5) has been reiterated below:
		“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-

i.		land, building or any other civil structures;
ii.		telecommunication towers; and
iii.		pipelines laid outside the factory premises”

		A perusal of the aforesaid definition might make it difficult for the registered person to distinguish between plant and machinery and immovable property which is defined under Section 3(26) of the General Clauses Act as:
		” immovable property” shall include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth
		In this regard, the following points must be kept in mind while determining whether a works contract services are being procured for plant and machinery or immovable property:

•		Accounting treatment shall serve to be an alibi whether an item is plant and machinery or immovable property. Whether a particular asset is treated as land and building in the books of accounts or taken to the fixed assets register under the head of plant and machinery or any other head shall be of relevance.
		Often it is seen that, in order to fasten turnkey responsibility of supply and installation of equipments and installations a single contract is awarded. Articles that do not form an integral part or create the identity of immovable property such as electronic equipments including audio- video equipment may be included in the same contract but as a separable item of supply with its own price and terms. In such circumstances, such audio video equipments might have to be separated under the applicable accounting policies from the construction material and labor for putting up the immovable property for the reason that they items DO NOT form an integral part or create the identity of the immovable property. This segregation might be for the reason that characteristics of use, usefulness and useful-life of that particular item/items is different from that of the immovable property. Hence, their distinct capitalization under the applicable accounting policies shall turn out to be an important factor in determining credit eligibility under the Act;
•		In determining whether a particular asset is immovable property or land and building, reference may also be had to the purpose of fixation of that particular asset. If the attachment or fixation of the equipment is for the beneficial enjoyment of the land (or building) then the equipment becomes immovable property itself. But, if the attachment is for the beneficial enjoyment of the equipment then the equipment remains movable property. For example- if a structure is built as an enclosure for plant and machinery in the factory to protect it from the outside climate, although the same is immovable, it has been built for the efficient working of the plant and machinery and hence it should not be held as immovable property and ITC should be eligible.

III. While an opinion about credit eligibility may be formed on the basis of the preceding paragraphs, it becomes pertinent here to discuss a landmark judgment of the Hon’ble High Court of Orissa in the case of Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax [2019] 105 taxmann.com 324 (Orissa), the Hon’ble High Court allowed ITC of construction material and services used for construction of mall in which shops were leased post construction instead of being sold. The Hon’ble High Court read down the provisions of the Section 17(5)(d) of the Act and held that the narrow interpretation of the revenue with respect to the provisions of Section 17(5)(d) was not acceptable. It was held that, in the present case, the Appellant had instead of selling the shops had leased out the same. Had the shops been sold before obtaining the completion certificate GST would have been paid and ITC would have been held to be admissible indisputably. Hence, it was held that the ITC of goods and services used for construction of mall were admissible and narrow interpretation of the provisions of Section 17(5)(d) was not acceptable.

The above judgment of the Hon’ble High Court should serve as a blessing for registered taxpayers who are generally obsessed at the receiving end of the department’s narrow interpretation of the provisions of Section 17(5). Further, these are the views of the Hon’ble HC, in the absence of contradictory decisions of any other jurisdictional HC or SC, this decision should continue have force.