ITC Blocked on Leasehold Transfer for Air Separation Unit: Dissecting the Inox Air Products AAAR Order
Overview of the Dispute
There exists a category of GST dispute that does not stem from any wrongdoing — no misrepresentation, no deliberate evasion, no procedural lapse. Instead, it emerges from a commercially sound, fully documented, and genuinely business-driven transaction that nonetheless falls foul of a specific statutory restriction. The matter of Inox Air Products Private Limited, decided vide Order in Appeal No. AAAR/04/2026 (AR) dated 18.03.2026 by the Tamil Nadu State Appellate Authority for Advance Ruling, belongs squarely to this category.
What makes this ruling particularly instructive is not merely the legal outcome but the trajectory that led to it — spanning multiple rounds of adjudication before the AAR, the AAAR, the Madras High Court on remand, and the AAAR once again — all culminating in a denial of Input Tax Credit on ₹15 crore paid for the transfer of long-term leasehold rights over industrial land. The assessee did everything right commercially. Yet the ITC claim failed at every forum. Understanding the precise reasons why is essential for any enterprise undertaking large-scale industrial infrastructure investment under the GST regime.
The Factual Background
India Pistons Limited (IPL) held a 99-year lease from SIPCOT (State Industries Promotion Corporation of Tamil Nadu) over industrial land situated at Hosur. The assessee, Inox Air Products Private Limited, negotiated with IPL for the transfer of the remaining 72 years of leasehold rights over 5 acres of that land, inclusive of the existing shed and superstructures standing on the property.
The stated purpose — documented explicitly in the Memorandum of Understanding between the parties and corroborated by SIPCOT's approval letter — was the establishment of an Air Separation Unit (ASU), a sophisticated cryogenic facility designed to manufacture liquid and gaseous industrial and medical oxygen.
The consideration agreed upon was ₹15 crore. GST was duly charged on this transaction. Critically, the assessee capitalized this entire sum in its books of accounts, treating it as forming part of the overall cost of the Air Separation Plant (ASP).
When the assessee applied for an advance ruling seeking confirmation that it could claim ITC of the GST paid on this transaction, the answer returned — at every level of adjudication — was an unambiguous no.
The Statutory Framework: Section 17(5)(d) of the CGST Act, 2017
The Blocking Provision
Section 17(5)(d) of the CGST Act, 2017 operates as a specific restriction on ITC eligibility. It denies credit in respect of goods or services received by a taxable person for the purpose of construction of an immovable property — other than plant and machinery — undertaken on his own account, even where such construction is carried out in the course or furtherance of business.
The Explanation: Key Definitions
The Explanation appended to Section 17(5) provides two critical definitional anchors:
- "Construction" is defined broadly to encompass reconstruction, renovation, additions, alterations, and repairs — but only to the extent of capitalization in the assessee's books.
- "Plant and machinery" is defined as apparatus, equipment, and machinery that is fixed to earth by foundation or structural support and is used for making outward supply — but with an express carve-out excluding land, buildings, and other civil structures from its scope.
The Four Cumulative Conditions for the Block to Apply
For Section 17(5)(d) to operate and deny ITC, all four of the following conditions must be satisfied simultaneously:
- The inward supply must be utilized for construction;
- The construction must result in an immovable property;
- The immovable property must be other than plant and machinery; and
- The construction must be undertaken on the assessee's own account.
The assessee mounted serious legal challenges to each of these four limbs. The AAAR rejected every single one.
The Three Core Arguments Advanced by the Assessee — And the AAAR's Responses
Argument 1: The Leasehold Transfer Was an Enabling Service, Not a Construction Input
The assessee contended that the payment of ₹15 crore for transfer of leasehold rights was fundamentally an enabling service — one that merely granted the right to access and use land for commercial purposes. The true nexus of the transaction, it was argued, was with manufacturing operations, not with construction activity. Accordingly, the first condition under Section 17(5)(d) was not satisfied.
The AAAR's Rejection: