AAAR Tamil Nadu Holds ITC Blocked on GST Paid for Leasehold Rights Used in Construction of Immovable Property Not Qualifying as Plant and Machinery

Background and Context
Inox Air Products Pvt. Ltd., engaged in the manufacture and supply of industrial and medical gases, sought an advance ruling on whether it could avail Input Tax Credit (ITC) of GST paid to India Pistons Ltd. (IPL) for the transfer of leasehold rights in land, intended for setting up an Air Separation Plant (ASP). The transaction involved a substantial consideration and was supported by a Memorandum of Understanding and requisite approvals from SIPCOT.

The Authority for Advance Ruling (AAR) initially denied ITC, holding that Section 17(5)(d) of the CGST/TNGST Act blocked such credit when the inward supply was used for construction of immovable property, other than plant and machinery. This decision was upheld by the Appellate Authority for Advance Ruling (AAAR). Upon challenge, the Madras High Court remanded the matter for de novo consideration, directing the AAAR to address whether the ASP constituted movable or immovable property and, if immovable, whether it fell within the exception for plant and machinery.

Appellant’s Submissions
Inox contended that the leasehold rights were not used for ‘construction’ as contemplated under Section 17(5)(d), arguing that the ASP was either movable or, if immovable, qualified as ‘plant and machinery’ under the statutory explanation. The appellant relied on Supreme Court and CESTAT precedents, asserting that the ASP comprised modular, detachable equipment and that the leasing of land was an enabling input service, not directly linked to construction. They further argued that the statutory exclusion of land in the definition of ‘plant and machinery’ was classificatory, not prohibitory, and did not independently bar ITC on leasing services.

AAAR’s Analysis and Reasoning
The AAAR undertook a detailed examination of the statutory framework, the facts, and the legal arguments. It noted that Section 17(5)(d) blocks ITC on goods or services received for construction of immovable property (other than plant and machinery) on one’s own account, even if used in the course or furtherance of business. The Authority emphasized that the explanation to Section 17(5) defines ‘construction’ broadly to include additions, alterations, or repairs to the extent of capitalization.

The AAAR found that the acquisition of leasehold rights was integrally linked to the construction of the ASP, as the right to use the land was a prerequisite for setting up the manufacturing facility. The cost of acquiring the leasehold rights was capitalized along with the ASP, evidencing its direct nexus with construction. The Authority further determined that the ASP, as installed, constituted an immovable property, given the intention of permanent beneficial enjoyment of the land, the nature of the installation, and the lack of marketability of the plant as a whole.

The AAAR distinguished the precedents cited by the appellant, including the CESTAT decision in Inox’s own case and the Supreme Court’s rulings in Bharti Airtel and Solid & Correct Engineering, on the basis that those cases involved different statutory contexts and factual matrices. The Authority held that the ASP, as constructed on a long-term leased site with existing superstructures, was not analogous to temporary or modular installations considered movable in other cases.

On the question of whether the ASP qualified as ‘plant and machinery’ under the statutory explanation, the AAAR held that the definition required the installation to be apparatus, equipment, or machinery fixed to earth by foundation or structural support, used for making outward supplies, but expressly excluded land, buildings, and civil structures. The Authority concluded that the ASP, as a comprehensive manufacturing facility involving multiple components and infrastructure, did not fit within the statutory definition of ‘plant and machinery’ for ITC purposes.

Conclusion and Order
Based on its analysis, the AAAR ruled that the GST paid on acquiring leasehold rights for land used in constructing the ASP was blocked from ITC under Section 17(5)(d) of the CGST/TNGST Acts. The Authority held that the transaction was for construction of an immovable property on the appellant’s own account, and the facility did not qualify as ‘plant and machinery’ under the statutory definition. Accordingly, Inox Air Products Pvt. Ltd. was not entitled to avail or utilize ITC of GST charged by IPL for the transaction in question.