A recent order by the Appellate Authority for Advance Ruling (AAAR) in Gujarat has clarified the applicability of Input Tax Credit (ITC) on GST paid for lease of land used for factory construction. M/s. Agratas Energy Storage Solutions Pvt. Ltd., a subsidiary of the Tata Group, leased 321 acres of land from the Government of Gujarat for 50 years to construct a battery manufacturing facility. They paid GST on the lease rent under reverse charge and sought to claim ITC on these payments, arguing that not all leased land was used directly for construction, such as green belt areas.
The Gujarat Advance Ruling Authority (GAAR) had previously denied this claim, citing Section 17(5)(d), which blocks ITC on goods or services received for the construction of immovable property. The company appealed, but the AAAR upheld GAAR's decision, emphasizing that the statutory language clearly intends to block ITC for land leased with the purpose of constructing a factory, regardless of whether the land is directly used or vacant.
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The AAAR clarified that the restriction applies absolutely, covering both pre-construction and post-construction periods. It stated that even vacant or non-constructed areas are part of the overall factory setup, and ITC is blocked as they serve the construction purpose. The authority also noted that business hardships or arguments of fairness cannot override clear legislative provisions, and courts cannot reinterpret unambiguous statutory language to favor taxpayers.
Order Date - 04 April 2026
Facts -
- M/s. Agratas Energy Storage Solutions Pvt. Ltd., a Tata Group subsidiary, took a 50-year lease of 321 acres land from the Government of Gujarat to build a battery manufacturing factory and paid annual lease rent with GST under reverse charge.
- The company believed that since lease of land is not directly used for construction, it should be allowed to claim Input Tax Credit (ITC) on GST paid on lease rentals, including before and after construction and even for vacant land.
- The Gujarat Advance Ruling Authority (GAAR) rejected this claim entirely, stating that ITC is blocked under Section 17(5)(d) because the land is meant for constructing an immovable property (factory).
- Aggrieved, the company appealed, arguing narrow interpretation of “for construction”, fairness in tax treatment, and that not all leased land (like green belt areas) is used for construction.
Issue -
- Whether ITC is available on GST paid on lease rentals for land used to construct a factory, including pre/post construction and unused portions?
Order -
- The authority held that Section 17(5)(d) clearly blocks ITC on goods or services received for construction of immovable property, and the word “for” indicates purpose, not direct usage. Since the land was leased with the intention to build a factory, the restriction squarely applies.
- It rejected the argument of different treatment for pre-construction or post-construction periods, stating that once land is meant for construction, ITC restriction applies absolutely, irrespective of timing or payment structure. Allowing otherwise would defeat legislative intent.
- The court clarified that vacant land or green belt areas are not separate, but integral parts of the factory setup. Even if no construction occurs on such portions, they are still linked to the overall construction purpose, hence ITC remains blocked.
- It emphasized that equity or business hardship cannot override clear tax provisions, and where statutory language is unambiguous, courts cannot reinterpret it to benefit taxpayers, even if it increases business costs.
