Input Tax Credit on Lifts in Hotel Construction: A Comprehensive Analysis

Introduction

The case of Jabalpur Hotels Private Limited, In Re adjudicated by the Authority for Advance Rulings (AAR) on June 8, 2020, addresses a pivotal issue concerning the eligibility of Input Tax Credit (ITC) under the Goods and Services Tax (GST) framework. The Applicant, Jabalpur Hotels Private Limited, embarked on constructing a multi-storied hotel in Jabalpur, incorporating essential amenities including lifts. The crux of the dispute revolves around whether the tax paid on the purchase and installation of lifts can be claimed as ITC, given their integral role in the hotel’s operations.

Summary of the Judgment

The Authority for Advance Rulings concluded that the ITC on lifts procured and installed in the hotel building is not available to Jabalpur Hotels Private Limited. This decision is grounded in the provisions of Section 17(5)(d) of the CGST Act, 2017, which explicitly blocks credit for goods or services received for the construction of immovable property, excluding plant and machinery. However, the Authority interpreted lifts as integral parts of the building, thereby categorizing them under immovable property and denying the ITC.

Analysis

Precedents Cited

The Applicant referenced several pre-GST judicial pronouncements to substantiate the eligibility of ITC on lifts:

Rattha Holding Co. Pvt. Ltd. v. Commissioner of Central Services Tax (Chennai, 2018): Held CENVAT credit on input services used for construction was admissible.
Commissioner of Central Excise, Vishakhapatnam-II v. Sai Samhmita Storages (P) Ltd. (2011): Affirmed CENVAT credit on goods essential for providing storage services.
Commissioner of Central Excise, Salem v. Ashok Agencies (2016): Granted CENVAT credit to input services integral to output services.

Additionally, cases like Commissioner of Central Excise & Service Tax v. India Cements Ltd. (2014) and Saraswati Sugar Mills v. Commissioner Of Central Excise (2011) were cited to argue that parts of machinery should retain their distinct identity for ITC eligibility.

However, the Authority dismissed these precedents, noting their pre-GST context and the unambiguous statutory language of Section 17(5)(d), which took precedence over earlier interpretations.

Legal Reasoning

The Authority’s interpretation hinges on the statutory language of Section 17(5)(d) of the CGST Act, 2017, which excludes ITC for inputs used in constructing immovable property, explicitly saving plant and machinery. The Applicant contended that lifts qualify as plant and machinery, thereby making them eligible for ITC. However, the Authority reasoned that lifts, when installed, become integral parts of the building, effectively transforming them into sections of immovable property. This integration negates their classification as standalone plant and machinery within the context of the statute.

Furthermore, the Authority emphasized the customized nature of lifts in hotel constructions, asserting that their tailored installation aligns them closely with the building structure, further justifying their exclusion from ITC eligibility under Section 17(5)(d).

Impact

This judgment has significant implications for the hospitality industry and other sectors involving the construction of immovable properties with integrated machinery. It clarifies the boundaries of ITC eligibility, reinforcing that certain integrated components, despite being machinery, may be excluded if they become integral to the immovable property. Future constructions involving similar integrations must account for this precedent, potentially influencing budgeting and tax planning strategies.

Complex Concepts Simplified

Input Tax Credit (ITC)

ITC allows businesses to reduce the tax they have paid on inputs (materials or services) from the tax they owe on outputs (goods or services sold). It prevents the cascading effect of taxes.

Section 17(5)(d) of the CGST Act, 2017

This section explicitly denies ITC for goods or services used in constructing immovable property, except for plant and machinery. It aims to prevent misuse of ITC in capital-intensive projects that could lead to tax evasion.

Plant and Machinery

Defined as apparatus, equipment, and machinery fixed to the earth by foundation or structural support, used for making outward supply of goods or services. Excludes land, building, and other civil structures.

Conclusion

The Authority for Advance Rulings in Jabalpur Hotels Private Limited, In Re has set a clear precedent that ITC on lifts used in hotel construction is not permissible under Section 17(5)(d) of the CGST Act, 2017. By classifying lifts as integral parts of immovable property, the ruling affirms the strict interpretation of the statute over previous tax doctrines. This decision underscores the importance for businesses to meticulously assess the eligibility of ITC claims in capital projects, ensuring compliance with the latest GST provisions.

This judgment not only clarifies the scope of ITC but also serves as a guiding principle for similar cases, emphasizing the necessity of distinguishing between capital goods that remain separate from the construction of immovable properties and those that become an inseparable part of them.