SUPREME COURT ON INPUT TAX CREDIT ON CONSTRUCTION RELATED ACTIVITIES

[Dr. Sanjiv Agarwal]

The Supreme Court has pronounced judgment in the case of CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS. VERSUS M/S SAFARI RETREATS PRIVATE LTD. & ORS. [2024 (10) TMI 286 - SUPREME COURT]

In the instant case, the petitioner had constructed a shopping mall in which huge quantities of materials were purchased like cement , sand , steel, aluminium , wires, plywood, paints lifts, escalators, air conditioning plants etc. and CGST and SGST were paid on such purchases.

The petitioner let out different units of the mall to different persons on rental basis and claimed benefit of input tax credit on GST paid by it on purchases of input materials and services which had been used in construction of shopping mall for set off, against GST payable on rent received from tenants. The authorities denied benefit of input tax credit in view of section 17(5)(d) of CGST Act, 2017. It had accumulated input credit of GST by purchase / supply of goods and services consumed and used in the construction of the shopping mall.

The Orissa High Court had read down section 17(5)(d) to give benefit of input tax credit to taxpayer on goods and services consumed in construction of shopping mall against GST payable on rentals received from tenants of shopping mall.  In M/S. SAFARI RETREATS PRIVATE LIMITED AND ANOTHER VERSUS CHIEF COMMISSIONER OF CENTRAL GOODS & SERVICE TAX & OTHERS - 2019 (5) TMI 1278 - ORISSA HIGH COURT, the assessee was carrying on business activity of constructing shopping malls for the purpose of letting out of the same to numerous tenants and lessees. The High Court held that “in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, in as much as keeping in mind the language used in EICHER MOTORS LTD. VERSUS UNION OF INDIA - 1999 (1) TMI 34 - SUPREME COURT, the very purpose of the credit is to give benefit to the assessee.

In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act. However, the Department filed Special Leave Petition (SLP) against the order before the Apex Court.

The Apex Court has held as follows:

(1) 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.

(2) The expression "plant or machinery" used in Section 17(5)(d) cannot be equated with the term "plant and machinery" as defined by the explanation to Section 17 of the CGST Act. These terms must be interpreted distinctly in the context of their specific use under the law.

(3) If the construction of a building was essential for carrying out the activity of supplying services , such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. Moreover, a "functionality test" is necessary to determine whether a building qualifies as a "plant" under clause (d) of Section 17(5). This test involves assessing the specific facts of each case in light of the building's purpose and utility in the registered person's business.

The apex court held that if the construction of the immovable property is critical to the business's operation, it may be considered a plant for the purposes of input tax credit under the CGST Act. The apex court also held that it cannot make any final adjudication on the question of whether the construction of immovable property carried out amounts to plant an each case will have to be decided on merit by applying the functionality test.

Hence, the writ petitions were remanded to the High Court of Orissa for deciding whether, the shopping mall is a ‘plant’ in terms of clause (d) of Section 17(5) of CGST Act, 2017.

In conclusion, writ petitions were rejected subject to interpretation of section 17(5)(d) of CGST Act 2017, approving its validity.