The Supreme Court in the case of Chief Commissioner of Central Goods and Service Tax & Ors. v/s M/s Safari Retreats Private Ltd. & Ors. Vide CIVIL APPEAL NO. 2948 OF 2023 dated 03.10.2024, marked a significant interpretation of Section 17(5)(d) of the CGST Act. This section generally disallows claiming Input Tax Credit (ITC) for the construction of immovable property, except for plant and machinery. However, the Court introduced a broader interpretation by allowing the possibility that a building could qualify as a “plant” if its construction is essential to the business of leasing or renting.

The Court did not make a final determination on whether the shopping mall in question qualifies as a plant. Instead, it remanded the case back to the Orissa High Court for a fact-finding enquiry to apply the functionality test and determine whether the mall is a plant under the terms of Section 17(5)(d). This remand applies not just to malls but also to other structures like warehouses, with the exception of hotels and cinema theatres. Each case will need to be evaluated individually based on its facts and merits.

Further, the Court has upheld the validity of the CGST provisions in question i.e. Section 17© and (d) and Section 16(4), but has left the door open for further factual determinations regarding whether certain buildings can qualify as plants and thus be eligible for ITC under the CGST Act.

Facts of the Case:  The Assessee in the primary appeal is engaged in the construction of a shopping mall. The goods and services used in this construction were taxable under the CGST Act, leading to the accumulation of Input Tax Credit (ITC). It was contended that its rental income from letting out the mall also attracts GST, and therefore, it should be entitled to ITC for the GST paid on the goods and services used in the mall’s construction. When they approached the authorities for clarification, they were advised to deposit GST on the rental income without deducting ITC, citing Section 17(5)(d) of the CGST Act, which restricts ITC for goods or services used in the construction of immovable property.

It was argued that denying ITC on construction-related expenses while simultaneously levying GST on the rent they collect from leasing the constructed property is unconstitutional and violates their fundamental rights under Articles 14 (equality before the law) and 19(1)(g) (right to practice any profession, or to carry on any occupation, trade, or business).

Orissa High Court Rulings:  The Orissa High Court had ruled in favor of the assessee, stating that Section 17(5)(d) should be read down to allow ITC when the construction of immovable property is intended for renting out. The High Court referred to the Supreme Court’s decision in Eicher Motors Ltd. v. Union of India (1999), emphasizing that the purpose of ITC is to benefit the taxpayer. The High Court held that restricting ITC for construction while taxing the rental income frustrates the objective of the GST regime.

Challenges by Other Petitioners:

Multiple writ petitions have been filed, challenging the constitutional validity of clauses (c) and (d) of Section 17(5), and in some cases, Section 16(4), which imposes a time limit on availing ITC. The petitioners argue that:

• Section 17(5)(c) and (d) restrict their ability to claim ITC on GST paid on inputs used for the construction of commercial buildings like malls, offices, and factories, even when those properties generate taxable income through rent.
• This creates a situation where the taxpayer bears the burden of double taxation—paying GST on construction inputs and GST on the rental income—without being able to offset the tax burden through ITC.

Revenue's Submission:  The submission focused on justifying the denial of ITC under Section 17(5) based on the distinction between immovable and movable properties and the unique taxable events under GST. They emphasized that ITC is a statutory right, not a constitutional one, and asserted that no undue discrimination exists within the GST framework. Further, they argued that allowing ITC in cases of renting immovable property like malls would lead to fiscal imbalances when the property is sold tax-free later.

Rulings of the Supreme Court: The key points from recent Supreme Court ruling are as under:

A. Functionality Test and ‘Plant’ Interpretation:

• The Court reiterated that whether a building qualifies as a “plant” is a question of fact, dependent on the special technical requirements for which the building was constructed.
• The Court rejected a narrow interpretation of the term “plant” as used in the bracketed portion of Section 17(5)(d), which typically excludes land, buildings, or civil structures. Instead, it extended the possibility that a building could qualify as a “plant” if it serves a functional purpose crucial to the business activity, such as renting or leasing. A building that functions as a plant can be excluded from the disallowance of ITC under Section 17(5)(d), as it would fall under the exception for plant or machinery.
• The Court pointed to Schedule II of the CGST Act, which recognizes the renting or leasing of buildings as a supply of service. Therefore, if a building qualifies as a “plant,” the ITC could be allowed for goods and services used in constructing the immovable property if the activity relates to renting or leasing. The key is that the supply of service continues, and the chain remains unbroken unless the building is constructed for the recipient’s own use.
• The Court clarified that clause (c) of Section 17(5) (which deals with works contract services) operates in a different context than clause (d) (which deals with services for the construction of immovable property on one’s own account).
• The Court emphasized that the potential different treatment of “plant and machinery” versus “plant or machinery” does not create unfairness due to the inherent differences in the clauses’ applications.

B. Constitutional validity of Section 17(5) (clauses c and d) of the CGST Act: The petitioners argued that these provisions violated Article 14 of the Constitution of India by not meeting the test of reasonable classification, which mandates that classification must have an intelligible differentia and a rational nexus with the object of the legislation.

The Supreme Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act, rejecting challenges based on Article 14. It found that the provisions involved an intelligible classification with a rational nexus to the legislative objective, and that there was no discrimination in the treatment of ITC claims related to immovable property. Claims under Articles 19(1)(g) and 300A were also dismissed. The Court reinforced the principle that taxing provisions do not become unconstitutional simply because they could be seen as less than ideal.

C. Constitutional validity of Section 16(4) of the CGST Act:

• The Court rejected the argument that Section 16(4), which imposes a time limit for claiming Input Tax Credit (ITC), is discriminatory. It noted that the change in wording from “due date of furnishing the return under Section 39 for the month of September” to “thirtieth day of November” did not introduce any arbitrary element.
• The Court found no basis for the claim that the time limit for claiming ITC is arbitrary or discriminatory. Just because a provision could be drafted better or more clearly does not make it unconstitutional.

This decision has important implications, particularly for industries where buildings are used for taxable supply of services, such as real estate and hospitality. By recognizing that a building essential to the business operation may serve as a “plant,” the Court opened the door for claiming ITC on GST paid during construction, where it directly contributes to service provision. The outcome of the remitted High Court decision could set a precedent for how ITC claims on rental properties are treated going forward.

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To read the complete Orissa High Court Rulings 2019 Taxo.online 245