SAFARI RETREATS PRIVATE LIMITED VS. CHIEF COMMISSIONER OF CGST [TS-350-HC-2019(ORI)-NT]
SUPREME COURT OF INDIA
HELD THAT: To give a plain interpretation to clause (d) of Section 17(5), the word "plant" will have to be interpreted by taking recourse to the functionality test.
THE ISSUES
1. Whether ITC will be available in case of construction of commercial properties such as Malls, Shopping Centres, Ports, Jetties etc.
2. Whether provisions of Sections 17(5) (c) and (d) are unconstitutional.
OBSERVATIONS OF THE HIGH COURT
In 2019, the Hon'ble Orissa High Court in this case of Safari Retreats Private Limited vs. Chief Commissioner of CGST [TS-350-HC-2019(ORI)-NT] gave a favourable decision to the Petitioner and held that the input tax credit pertaining to goods and services used for the construction of the mall cannot be denied under Section 17(5)(d) of Central Goods and Services Tax Act, 2017 ('CGST Act') since the Petitioner is using them for construction of a building which is not used for his own purpose but for fresh stream of GST revenue in the form of rental income.
The Hon'ble High Court further held that a narrow interpretation of Section 17(5)(d) of the CGST Act will frustrate the very intention of the Goods and Services Tax Act which is to avoid the cascading effect of multistage taxation.
The judgment of the Hon'ble Odisha High Court was challenged by the Revenue Authorities before the Hon'ble Supreme Court.
The Hon'ble Supreme Court pronounced its verdict on October 3, 2024.
OBSERVATIONS & DECISION OF HON'BLE SUPREME COURT
- The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act is not established as the said provisions involved an intelligible classification with a rational nexus to the legislative objective, and there was no discrimination in the treatment of ITC claims related to immovable property.;
- The expression "plant and machinery" used in Section 17(5)(d) cannot be given the same meaning as the expression "plant and machinery" defined by the explanation to Section 17. The Court observed that the word 'plant' used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of "plant and machinery", which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression "plant or machinery".
- It was held that to give a plain interpretation to clause (d) of Section 17(5), the word "plant" will have to be interpreted by taking recourse to the functionality test.
- The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression "plant or machinery" used in Section 17(5)(d) needs factual analysis on a case to case basis considering the business of the registered person and the role that building plays in the said business.
- It was held that functionality test will have to be applied to decide whether a building is a plant for the purpose of Section 17(5)(d).
WHAT ARE THE KEY HIGHLIGHTS OF THE SUPREME COURT RULING ON ITC?
1. ITC for Real Estate Sector: The Supreme Court (SC) ruled that the real estate sector can claim ITC on construction costs for commercial buildings used for renting or leasing purposes under the functionality and essentially test.
Earlier ITC was not allowed on such immovable property construction.
2. Clarification on 'Plant and Machinery' Category: The court clarified that if the construction of a building is essential for providing services like leasing or renting, the building may fall under the category of 'plant and machinery.'
This is based on Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017 which permits ITC claims on plant and machinery used in the business of supplying services.
The court read down the scope of Sections 17(5)(c) and (d) of the CGST Act, 2017 which prohibit ITC claims for construction materials used for immovable property, except for plant or machinery.
3. Case-Specific Determination: The SC emphasised that determining whether a building like a mall or warehouse qualifies as 'plant' under Section 17(5)(d) should be assessed on a case-by-case basis.
The business nature and the role of the building in the registered person's business are key factors in this determination.
WHAT IS FUNCTIONALITY AND ESSENTIALLY TESTS?
- Functionality Test: It will evaluate whether the building plays a role in the supply of services, akin to the function of plant and machinery in a factory.
- Essentially Test: The SC held that procurement of goods or services must be directly essential to business operations.
It means that only those goods and services that are directly needed for constructing or developing property can be claimed for tax benefits or input tax credit (ITC). E.g., cement, steel etc.
CONCLUSION
Provisions of Section 17(5)(d) allow ITC on construction of Plant and Machinery, means that a person can claim ITC on construction of building subject to condition that such building is used as Plant and Machinery and helps in furtherance of business of the assessee. Functionality test of each building/mall will be considered case to case basis to ascertain that such building/mall helps in furtherance of supply related to business and can be considered as Plant and Machinery under provisions of Section 17(5)(d) of the CGST Act,2017. Such as in the present case shops in mall are used not for sale but for earning rental income and can be considered as Plant and Machinery and ITC will be available.
DISCLAIMER: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
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