INPUT TAX CREDIT – IMPACT OF SAFARI JUDGMENT OF SUPREME COURT

[Dr. Sanjiv Agarwal]

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.

In CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS. VERSUS M/S SAFARI RETREATS PRIVATE LTD. & ORS. - 2024 (10) TMI 286 - SUPREME COURT;  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.

The Apex Court observed that explantion to Section 17 seeks to define the expression “plant and machinery” used in Chapter V and Chapter VI. In Chapter VI, the expression “plant and machinery” appears in several places, but the expression “plant or machinery” is found only in Section 17(5)(d). If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have specifically used the expression “plant or machinery” in Section 17(5)(d). The legislature has made this distinction consciously. Therefore, the expression “plant and machinery” and “plant or machinery” cannot be given the same meaning. It may also be noted here that the expression ‘plant or machinery’ is used in dealing with a peculiar case of goods or services being received by a taxable person for the construction of an immovable property on his own account, even when such goods or services or both are used in the course of furtherance of business. Therefore, if the expression “plant or machinery” is given the same meaning as the expression “plant and machinery” as per the definition contained in the explanation to Section 17, we will be doing violence to the words used in the statute. While interpreting taxing statutes, it is not a function of the Court to supply the deficiencies.

When the legislature uses the expression “plant and machinery,” only a plant will not be covered by the definition unless there is an element of machinery or vice versa. This expression cannot be read as “plant or machinery”. That is so clear from the explanation in Section 17, which says that plant and machinery means apparatus, equipment and machinery fixed to the earth by foundation or structural support that are used for making outward supply of goods or services or both. The expression includes such foundation and structural support fixed to the earth. However, the definition excludes land, buildings or any other civil structure.

However, 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 “plants or machinery” is used shows that there could be a plant that is an immovable property. As the word ‘plant’ has not been defined under the CGST Act or the rules framed thereunder, its ordinary meaning in commercial terms will have to be attached to it.

On the issue of functionality test, the Apex Court obseved that whether a building is a plant is a question of fact. It 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 for the purposes of investment allowance. 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”. We have discussed the provisions of the CGST Act earlier. 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. Based on such test, if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant.Each case will have to be tested on merits as the question whether an immovable property or a building is a plant is a factual question to be decided. On the question of constitutional validity, the Apex Court relied upon various pronouncements and observed that there are other binding decisions which hold that the laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. In the present case, the legislature was dealing with a complex issue. Therefore, greater freedom and greater play in the joints has to be allowed to the legislature. The provisions should meet the test of reasonable classification in terms of Article 14 of the constitution. To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. Immovable property and immovable goods for the purpose of GST constitute a class by themselves. Clauses (c) and (d) of Section 17(5) apply only to this class of cases. The right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute. It cannot be disputed that the legislature can always carve out exceptions to the entitlement of ITC under Section 16 of the CGST Act. In the instant 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.

Therefore, the court upheld the constitutional validity of clauses (c) and (d) of Section 17(5), [its plain interpretation does not lead to any ambiguity, the question of reading down the provisions does not arise.

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.

The Apex Court concluded 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.
4. Commercial building constructed for supplying services such on renting / leasing can be treated as plant and input tax credit under GST will be allowable.
5. Shopping mall is a plant.
6. If a property qualifies as a plant, then ITC on goods or services used in its construction can be taken.
7. Since plant has not been defined, its ordinary meaning in commercial terms has to be taken into account.
8. The functionality test must be applied to assess whether the building is a plant for section 17(5)(d) of CGST Act, 2017.
9. Apex Court remanded the matter back to Orissa High Court for factual determination of whether the shopping mall constructed could be classified as plant u/s 17(5)(d) of CGST Act, 2017.

Notes:

1. The Union Government has since filed a review petition before Supreme Court vide Diary No. 1188/2025 dated 07.01.2025 against the judgment dated 03.10.2024.
2. Finance Act, 2025 has amended Section 17 with retrospective effect w.e.f. 01.07.2017 so as to nullify the consequential effect of the Supreme Court judgment.