GST Input Tax Credit on Leasehold Rights for Manufacturing Facilities: Evaluating the AAAR Ruling on Immovable Property and Plant Machinery Exceptions

Introduction: The Complex Landscape of Blocked ITC on Infrastructure

The seamless flow of Input Tax Credit (ITC) is the foundational pillar of the Goods and Services Tax (GST) regime. However, the legislation incorporates specific statutory roadblocks, most notably under Section 17(5) of the Central Goods and Services Tax Act 2017 (CGST Act). Among these restrictions, the disallowance of ITC on inward supplies used for the construction of immovable property remains one of the most heavily litigated domains in indirect taxation.

A critical nuance within this restriction is the statutory carve-out provided for "plant and machinery." Tax authorities and businesses frequently clash over what constitutes an immovable property versus what qualifies as plant and machinery. The recent De Novo appellate ruling by the Tamil Nadu State Appellate Authority for Advance Ruling (AAAR) in the matter of M/s. Inox Air Products Private Limited provides a comprehensive judicial interpretation of these overlapping concepts. The authority meticulously dissected whether the acquisition of long-term leasehold rights for erecting a massive industrial facility attracts the ITC restriction under Section 17(5)(d) of the Central Goods and Services Tax Act 2017.

This detailed analysis explores the factual matrix, the procedural history, the intricate legal arguments presented by the assessee, and the definitive parameters established by the AAAR regarding capital expenditure, immovability, and the strict boundaries of the plant and machinery exception.

Factual Matrix: The Foundation of the Dispute

The assessee, M/s. Inox Air Products Private Limited, operates as a registered entity under the GST framework, specializing in the production and distribution of medical and industrial gases such as argon, nitrogen, and oxygen in both gaseous and liquid states.

To expand its manufacturing footprint, the assessee identified a strategically located parcel of land at Hosur. This land was originally leased by the State Industries Promotion Corporation of Tamil Nadu (SIPCOT) to M/s. India Pistons Ltd. (IPL) for a tenure of 99 years. The assessee initiated negotiations with IPL to acquire the leasehold rights over a 5-acre portion of this land, which included pre-existing superstructures and sheds. The remaining lease period transferred to the assessee was 72 years.

The primary objective behind acquiring this long-term lease was to construct an advanced Ultra High Purity Cryogenic Liquid Medical and Industrial Oxygen Plant, technically categorized as an Air Separation Unit (ASU) or Air Separation Plant (ASP).

To formalize this transaction, the assessee and IPL executed a Memorandum of Understanding (MOU) on 20.11.2020, subsequent to receiving the mandatory approval from SIPCOT. The financial consideration agreed upon for the transfer of these leasehold rights was exactly Rs. 15,00,00,000/-.

The fundamental tax dilemma that emerged was whether the assessee could legally avail and utilize the ITC on the GST levied by IPL on the Rs. 15,00,00,000/- consideration, assuming the transfer of leasehold rights qualifies as a taxable supply under the prevailing GST statutes.

The Procedural Journey: From Advance Ruling to High Court Remand

Seeking statutory clarity, the assessee initially approached the Authority for Advance Ruling (AAR), Tamil Nadu. On 30.07.2021, the AAR delivered its verdict, explicitly denying the ITC claim by invoking the restrictive provisions of Section 17(5)(d).

Aggrieved by this decision, the assessee escalated the matter to the Appellate Authority for Advance Ruling (AAAR), Tamil Nadu. The first appellate order, issued on 02.12.2021, affirmed the lower authority's stance, maintaining that the credit was rightfully blocked.