Department cannot deny ITC on work contract services received by contractor from sub-contractor for the construction of immovable property.

Case Title: SR Constructions v. Union of India

Court: High Court of Tripura

Petition No.: W.P. (C) No. 399 of 2022

Category of Dispute: Input Tax Credit

Date of Judgement: 4 April 2023

Relevant Section: Section 17(5)(c), Section 74(1) of the CGST Act, 2017

Facts of the Case:

1. The petitioner, SR Constructions, engaged in constructing a hotel for M/s Hotel Polo Pvt. Ltd. at Agartala under a works contract. [Para 2]
2. It availed Input Tax Credit (ITC) on inward supply of goods and services, including those from sub-contractors, used in the construction project and discharged GST liabilities through returns. [Para 2]
3. A show cause notice dated 30.09.2019 was issued to the petitioner alleging wrongful ITC claim in violation of Section 17(5)(c), stating that ITC is not admissible on works contract services for construction of immovable property. [Para 2]
4. The adjudication order dated 13.10.2020 and subsequent appellate order dated 01.02.2022 confirmed the demand of ITC reversal and penalty under Section 74(1). [Para 2]

Questions in Consideration:

1. Whether SR Constructions is entitled to avail Input Tax Credit on inward supply of goods and services used for construction of a hotel building under a works contract? [Para 4]
2. Whether the demand raised under Section 74(1) and denial of ITC under Section 17(5)(c) is legally sustainable? [Para 8]

Observation of the Court:

1. The appellate authority’s order lacked reasoning and simply reiterated that ITC is not admissible without legally justifying the disallowance. [Para 4]
2. The petitioner rendered taxable works contract services to another party (Hotel Polo Pvt. Ltd.) and not for self-consumption. Therefore, the disallowance under Section 17(5)(c) is not attracted. [Para 7]
3. As per Section 17(5)(c), ITC is disallowed when the works contract is for construction of immovable property for own use—not when used as an input service for outward taxable supply. [Para 6-7]
4. The petitioner fulfilled all conditions of providing taxable works contract services and was eligible to claim ITC on inward supplies used in such contracts. [Para 7]

Judgement of the Court:

1. The High Court held that SR Constructions was wrongly denied ITC and that the invocation of Section 17(5)(c) and penalty under Section 74(1) was legally unsustainable. [Para 8]
2. The impugned appellate order dated 01.02.2022 and the adjudication order dated 13.10.2020 were quashed and set aside. [Para 9]
3. The writ petition was allowed. [Para 10]

Between Fine Lines (Simple Summary):

• The court ruled in favor of SR Constructions, stating they were eligible for ITC on construction-related expenses incurred while executing a works contract for another entity.
• The denial of ITC based on Section 17(5)(c) was held to be incorrect, as the restriction applies only when the construction is for the taxpayer’s own use.
• The demand and penalty imposed were quashed.
• The order lacked adequate reasoning and violated the principle of natural justice.
• The judgment clarified the eligibility of ITC in genuine works contract service scenarios.

Summary of Referred Cases:

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