Entire Leased Land Treated As Industrial Construction: Gujarat AAR Blocks ITC On Rent, Repairs & Vacant Portion For Tata-Subsidiary

The bench of Mr. Vishal Malani (Member- Central Tax) and MS. Sushma Vora (Member- State Tax) has ruled on ITC eligibility of GST paid on lease rental by dismissing the view of applicant that as leased land would not be used for factory construction for the whole period of lease, ITC would be admissible pre and post activity of construction. Gujarat AAR observed that “…. land has been given on lease specifically for construction of the factory…..purpose of land for industrial purpose, cannot be changed. Thus, the land being used for industrial construction…and any services specific to land is blocked….”. Accordingly, Gujarat AAR disallowed ITC of GST paid on lease rental for construction of factory for both the period i.e. (a) for the period prior to initiation of the construction of the factory building (b) for the period after construction of the factory building.

Applicant, a wholly owned subsidiary of Tata Sons. They have been granted leasehold rights from the Gujarat Government for a duration of 50 years to use a plot of land for the purpose of carrying out their business activities including industrial construction. The applicant would use the land for setting up a factory for manufacturing of battery cells for motor vehicles.

Applicant sought advance ruling on the following questions

• Whether the applicant would be eligible to avail the ITC of the GST charged on the lease rental, where the factory building would be constructed on lease land?
• Whether the ITC of GST charged on the lease rental paid would be available for the period prior to initiation of the construction of the factory building or after construction of the factory building.
• Whether ITC of GST would be available when the repairs, maintenance and renovation activities are undertaken on the factory building?
• Whether ITC of GST paid on lease rental would be available with respect to the area of the land on which no immovable properly is constructed i.e. vacant portion of the land?

ITC of GST paid on lease rental for construction of factory

Applicant's interpretation was that it was eligible to avail ITC of GST charged on lease rental as the lease of was not 'for construction' of immovable property. The term 'for' used in section l7(5)(d) of the CGST Act, 2017 i.e. 'for construction' should be applicable only to those goods and services which are directly used in the construction of factory building and would not cover supplies indirectly/remotely related to construction activities. This could include goods/services viz. cement, steel, construction contractor, electrical, plumbing, engineering, architect etc.

AAR refers to the ruling in case of Bayer Vapi and GACL-NALCO Alkalies and Chemicals Pvt Ltd. (as affirmed by the Gujarat Appellate Authority for Advance Ruling) which have held that ITC of GST paid on leasehold rights is blocked credit in terms of Section 17 (5) of the CGST Act 2017.

Gujarat AAR rejects the restrictive meaning sought to be applied by applicant to the word 'for' appearing in Section 17(5) as that would mean only those services which have a direct nexus to 'construction' such as works contract, services of engineer/contractor, services of architect etc. are only covered. Thus, observes that “the term 'for' does not infact restrict the scope of Section 17(5)(d) to materials having a direct nexus to construction, but enlarges it.”

As for applicant's view that 'land' falls out of Section 17(5) (c ) and therefore, transaction related to land (such as lease) cannot be said to be covered under the service part of blocked credit provision i.e. Section 17(5) (d), AAR rejecting the same observes that “clauses (c ) and (d)…are independent of each other and one cannot be read in context of the other”.

As for the dichotomy put forth by applicant between upfront premium for leasehold rights and annual lease payments stating that the former is exempt whereas later is taxable under GST, AAR referred to 37^th GST Council Meeting Agenda wherein non-availability of ITC on leasing for construction of immovable property was deliberated upon and it was recommended that new projects would become unviable.

Accordingly, AAR held that applicant was not eligible for ITC of GST charged on the lease rental paid for the construction of factory.

ITC of GST paid on repairs, maintenance of factory building

AAR held that the expression 'construction' used in Section 17(5)(d) includes 'repairs' i.e. reconstruction, renovation, additions, or alterations to the extent of capitalization, and hence, the ITC on such services would also be blocked.

Thus, Applicant would not be eligible for ITC of GST paid on lease rental for the repairs, maintenance, and renovation activities undertaken on the factory building.

ITC of GST paid on lease rental on vacant portion of the land

Applicant claimed that in present case ITC of GST paid on lease rental over vacant portion of the land where construction does take place at all would not be blocked by Section 17(5) of the CGST Act, unlike the case of Bayer Vapi wherein ITC eligibility pertains to GST paid on one time transfer of leasehold rights.

AAR held that “any land kept vacant for meeting the mandatory environment guidelines would be a part of the industry being constructed by the applicant on the leased land”. Thus, AAR clarified that applicant was not eligible for ITC of GST paid on lease rental with respect to the vacant portion of the land since 'whole land' had been leased out.

Case Name: Agratas Energy Storage Solutions Private Limited

Case No.: Service Tax Appeal No. 42121 of 2016

Date of Decision: 03.11.2025

Appearance: Advocate Ishan Bhatt, Mr. Rajesh Shukla, Mr. Vinod Rai appeared on behalf of the applicant

Tagging Details:

Order date: November 3, 2025

In Favour of: Revenue

Category Tag: GST, Advance Ruling, Input Tax Credit,

Industry: Real Estate

Section No. and Act: Section 97,98,100 of the CGST Act, 2017

Click Here To Read/Download The Order