Safari Supreme Court Decision and ITC

Background

The latest Supreme Court decision in Safari Retreats(CIVIL APPEAL NO. 2948 OF 2023) has held that the credit shall be eligible to be availed on plant. Also that the functionality test has to be satisfied in order to avail credit. The matter was remanded back to High Court to determine if in facts of case shopping mall is a plant for being eligible to the credit.

We can recall the Safari Retreats at High Court of Orissa(2019-TIOL-1088-HC-ORISSA-GST). It was held that if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, then the assessee is eligible to an input credit of GST paid on inward supplies used for the construction of the such property.

In this article, the author has analyzed the implications latest Safari Supreme Court Decision.

Relevant ITC provisions under GST

We look into the relevant provisions as well, before discussing on implications of decision.

The registered taxable person can avail eligible credit on goods/services used in course of business, at same time there is a list of restricted or blocked credit set out as well.

Section 17(5) of GST Act sets out that the input tax credit shall not be available in respect of the following, namely:

Blocked credit u/s 17(5)(c)/(d)

Section 17(5)(c)sets out that credit is blocked on works contract services for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

Definition of Works contract: means a contract where material and labour go hand in hand, which is for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property, which involves the transfer of property in goods[as goods or any other form].

Immovable property: Can be understood from Solid & Correct Case as under:

In Commissioner of Central Excise vs. Solid and Correct Egg. Works 2010 (252) ELT 481 (SC) the Apex court while deciding whether setting up of an Asphalt Drum Mix Plant were immovable property or whether the assessee was engaged in making of components of such plant. Some of the components of such plants were embedded in the earth on a foundation of 1.5 dig deep.  It was held that the plants were not per se immovable and they become immovable when embedded in the earth. The attachment of the plant with nuts and bolts intended to provide stability and prevent vibration is not covered as attached to earth. The attachment can be easily detachable from the foundation and is not permanent. The plant moved after road construction or repair project is completed. The plants are not immovable property.

Apex court also states that the machines which are permanently fixed to the structures which are embedded in the earth, the machine thus becoming a part of the structure and were no longer be movable goods. It was in those peculiar circumstances that the installation and erection of machines at site were held to be by this Court, to be immovable property that ceased to remain moveable as they were at the time of their purchase. Once such a machine is fixed, embedded in a permanent structure, the movable character of the machine becomes extinct.

To summarise

• ITC is restricted when the works contract is used to construct immovable property.
• Credit can be availed on works contract service when it is used to make outward supply of works contract.
• Also the credit can be availed on works contract for constructing immovable property when it is plant and machinery.

Section 17(5)(d) restricts credit on goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

In order to construct building, inputs such as cement, steel, aluminum, wires, plywood, paint, are required. Similarly services such as consultancy service, architectural service, legal and professional service, engineering service design services are required for construction of building. GST would have been paid on such procurements by assessee.

Section 17(5) (d) provides that input tax credit shall not be available in respect of the goods and services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business.

For the purposes of clause(c)/ (d), the expression 'construction' includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

Explanation To Chapter V[covers ITC provisions] and VI: The expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods orservices or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(i) pipelines laid outside the factory premises.

To summarise section 17(5)(d)

1. On a literal reading of the above said restriction at 17(5)(d) on credit, the credit on goods/services for construction of immovable property on own account, such as building for self-use by assessee is not permissible.
2. Credit is not restricted when the goods/services used for construction of building not on own account.
3. Such credit is not restricted when the constructed building is not capitalized to immovable property block but written off to P and L A/c.
4. There is no restriction for availing ITC for constructing plant or machinery
5. The term "own account" is not defined in GST law.In Safari SC decision supra Construction is said to be on a taxable person's "own account" when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot said to be on a taxable person's "own account" if it is intended to be sold or given on lease or license.

Issues for consideration in Safari Retreats Apex court (CIVIL APPEAL NO. 2948 OF 2023)

(i) Whether the definition of "plant and machinery" in the explanation to Section 17 applies to the expression "plant or machinery" used in clause (d) of sub-section (5) of Section 17?

In the case of clause (c), if the construction is of "plant and machinery" as defined, the benefit of ITC willaccrue. Similarly, under clause (d), if the construction is of a "plant or machinery", ITC will be available. Thereis no scope to give any meaning to clause (c) of Section 17(5)other than its plain and natural meaning. The expression"plant and machinery" has been specifically defined in the explanation of Section 17.

The expression "plant or machinery" has a different connotation. It can be either a plant or machinery. Section 17(5)(d) deals with the construction of an immovable property. The very fact that the expression "immovable property other than "plant or machinery" is used shows that there could be a plant that is an immovable property.

(ii) What is the meaning of the word"plant"?

Court has laid down the functionality test. Court held that whether a building is a plant is a question of fact. This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee's special technical requirements, it will qualify to be treated as a plant.

The word 'plant' used in 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". 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.

(iii) Whether clauses (c) and (d) of Section 17(5) are Unconstitutional?

In this case, equals are not being treated as unequals. The test of vice of discrimination in taxing law is less rigorous. Ultimately, the legislature was dealing with a complex economic problem. By no stretch of the imagination, clauses (c) and (d) of Section 17(5) can be said to be discriminatory. No amount of verbose and lengthy arguments will help the assessees prove the discrimination. In the circumstances, it is not possible for usto accept the plea of clauses (c) and (d) of Section 17(5) being unconstitutional.

Challenge to Section 16(4): We fail to understand how sub-section (4) of Section 16 becomes discriminatory when the legislature says that a registered person shall not be entitled to take ITC in respect of any invoice or debit note for the supply of goods or services or both after the thirtieth day of November following the end of the financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

Note-Prior to October 2022 the ITC on invoices/debit notes pertaining to a financial year was to be availed for a year within the due date of furnishing the GSTR 3B for month of September of succeeding year.

In summary, Apex Court holds as follows:

• The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) is not established;
• The expression "plant or machinery" used in Section 17(5)(d) cannot be given the same meaning as the expression "plant and machinery" defined in the explanation to Section 17;
• 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) is a factual question to be determined keeping in mind the business of the registered person and the role that building plays in the said business. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease in respect of the building, then building could be held to be a plant.
• Functionality test will have to be applied to decide whether a building is a plant.
• Therefore, by using the functionality test, in each case, on facts, in the lightof what we have held earlier, it will have to be decided whether the construction of an immovable property is a "plant" for the purposes of clause (d) of Section 17(5).
• The writ petitions are remanded to the High Court of Orissa for limited purposes of deciding whether, in the facts ofthe case, the shopping mall is a "plant" in terms of clause (d) of Section 17(5). Appeals are partly allowed in above terms.
• Accordingly remands matter back, to decide the matter in light of the what is held above and for other cases, holds that matter needs to be decided considering factual matrix.

Impact of the Supreme Court judgement

In light of this decision, the credit on goods/services used in construction of building, which can be concluded to be "plant" which is essential for carrying out the supply of taxable goods/services may be availed.

Where it is a fact that a building has been so planned and constructed as to serve an assessee's special technical requirements, it may be said to qualify to be treated as a plant. There must be clear nexus established to show that the building is a plant which is essential/is integral to make the supply of goods/services.

Further once it is proved it is plant, ITC can be availed since it is excluded from section 17(5)(d).

Practical scenarios - ITC eligibility to taxpayers

• Credit on moveable goods: Credit of GST paid on purchase of movable goods[such as furniture, racks] can be availed to the extent used for making taxable supplies. There is no restriction under Section 17(5) for availing these credits. Credit availed on these goods would not be disputed.
• Goods fixed to the building but are capable of being moved with minor damages such as workstations:
• Goods, such as workstations, electrical fittings, which can be disassembled/dismantled and could be used in other premises without causing any damage to the property, are said to be movable goods. Similarly held in the case of Sirpur Paper Mills [1998 (97) E.L.T. 3 (S.C.)]. Hence, the ITC restriction under Section 17(5)(c) and (d) would not be applicable as these are applicable only for immovable property, not to moveables.
• Where such goods are capitalized to immovable property block, then there could be a dispute from the department stating that capitalizing to immovable property indicates that the same is immovable in nature and hence blocked. However, this view may not be correct provided taxpayer could establish that these goods are movable in nature by way of drawings, photos, videos, etc.
• Credit on plant and machinery: There is no restriction to avail credit on plant machinery, equipment such as Air Conditioner, transformers, UPS, lifts, HVAC system, and its supports/foundations which are used in making taxable supplies of goods/services
• Further, credit on such plant and machinery can be availed even if capitalized to an immovable property block.
• Credit on the goods/services used for construction/renovation of plant [not on own account]: Examples could be:

Tank used for storing and processing water used in manufacture of juices. Consider as plant. ITC on goods/services used for its construction is eligible.

Credit on the goods/services used for constructing the warehouse, planned, designed with special fittings, temperature control equipments, towards the supply of warehousing rental services for storage of sensitive goods.

Note: The credit on the works contract service may be disputed by dept citing it was not held to be eligible by Supreme Court when it is not the following:

• Not used to make further outward supply of works contract service
• Not falling under plant and machinery as defined

Way ahead

Taxpayers may examine to do the following:

Separate contracts being entered for supply of goods/services used for construction of building which can be considered as plant

1. Enter independent contracts for supply of goods and services for constructing plant. The two contracts should not be co-terminous with each other. In other words, these contracts should be independent of each other.

2. Have the evidence to establish by technical specifications, reports, drawings why it is essential tool to carry on business of making the outward supply of goods/services

3. Avail the ITC on these goods/services under cover of tax invoices relying on the decision of Safari of SC.

Works contract service used for construction of building considered as plant

1. When such works contract service not used to make onwards supply of works contract service: Due to lack of clarity coming forth in Safari SC decision on ITC on eligibility toworks contract service credit, avail it at GSTR 3B-Table 4A(5). Reverse as temporary reversal at Table 4B(2). Continue to carry in books as input tax recievable. Reavail once there is favourable decision of Courts of Higher judicature in this regard.

Conclusion

The latest decision in Safari from Supreme Courtcould be relied to avail credit on goods/services pertaining to construction of building and other immovablestructures, by satisfying the functionality test as"plant"used in business and critical to outward supplies, and which are capitalized to Immovable property block in books. Such credit maybe availed now for 2023-24[last date to avail such credit is before due date of filing Oct 2024 GSTR 3B return].

In this article paper writer has sought to clarify few of the aspects faced by the assessee in respect of availment of credit in light of latest decision.

The author can be reached at roopa@hnaindia.com