ITC Not Allowed on Lease Rentals Paid for Industrial Land: AAAR

This case essentially boils down to a fight over whether a company can get a tax break on the rent it pays for industrial land. Agratas Energy Storage Solutions signed a long-term lease with the Gujarat Industrial Development Corporation (GIDC) to set up a massive battery factory. They paid a large upfront premium and then started paying regular annual rent. While everyone agreed the big upfront payment was tax-exempt, the GST Department stepped in when Agratas tried to claim Input Tax Credit (ITC) on the GST they paid on their yearly rent.

Issue Before Court: Whether GST paid on annual lease rentals for industrial land used in constructing a factory qualifies for ITC, or is hit by the bar under Section 17(5)(d) relating to immovable property.

HC Decided: The Gujarat Appellate Authority for Advance Ruling (AAAR) upheld the denial of ITC. The Authority held that the lease of land was intrinsically linked to the construction of the factory, which is an immovable property. Since Section 17(5)(d) restricts ITC on goods or services used for construction of immovable property (other than plant and machinery), the lease rentals fell squarely within the blocked credit category. It was further observed that the purpose of procurement i.e., construction of a capital asset takes precedence over the nature of the expense.

Even though lease rentals are revenue in character, their nexus with construction makes them ineligible for credit. The Authority also clarified that land does not qualify as “plant and machinery,” and therefore, the statutory exception under Section 17(5)(d) was not applicable.

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