Supreme Court Decision on Safari Retreats: ITC Benefit allowed for Commercial Projects on a case-to-case basis!

The Hon'ble Supreme Court, in Chief Commissioner of Central Goods and Services & Ors. v. M/s. Safari Retreats Private Limited & Ors, affirmed the validity of Sections 17(5)(c) and 17(5)(d) of the CGST Act, 2017, dismissing the constitutional challenge. It clarified that "plant or machinery" in Section 17(5)(d) cannot be interpreted the same way as in the explanation to Section 17(5)(c) of the CGST Act. Further, the construction of a mall, warehouse, or building can be classified as a "plant" depending on the registered person's business and the building's role in that business. Buildings constructed for services like renting or leasing may qualify as a plant, subject to a functionality test. Thus, the Court remanded cases where the High Court had read down the provision and called for factual analysis in other cases.

Let’s understand the case in detail!

Facts of the case

• The assessee is engaged in the construction of a shopping mall for the purpose of letting out premises in the malls to different tenants.
• Vast quantities of material, inputs, and services are required for the construction of the malls in the form of cement, sand, steel, aluminum, wires, plywood, paint, lifts, escalators, air-conditioning plants, electrical equipment, transformers, building automation systems, etc., and also consultancy services, architectural services, legal and other professional services, engineering services and other services including the services of a special team of international designers specialized in the construction of Malls. GST was charged on all these goods and services.
• The assessee has accumulated input credit of GST amounting to more than Rs. 34 crores by the purchase/supply of goods and services consumed and used in the construction of the shopping mall.
• Letting out of units in the shopping mall attracts GST on the rent received.
• Therefore, the assessee is desirous of availing the Input Tax Credit (ITC) accumulated against the rental income received by it upon letting out the mall premises.
• Therefore, it approached the Orissa High Court. The High Court held that if the assessee is required to pay GST on the rental income from the mall, it is entitled to ITC on the GST paid on the construction of the mall.
• Aggrieved by this, the GST Commissioner filed a case in the Hon’ble Supreme Court. It challenged the Constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act, 2017.

Issues

• Whether the definition of "plant and machinery" in the explanation appended to Section 17(5)(c) of the CGST Act applies to the expression "plant or machinery" used in Section 17(5)(d) of the CGST Act?
• If it is held that the explanation does not apply to "plant or machinery", what is the meaning of the word "plant"?
• Whether Section 17(5)(c) and 17(5)(d) of the CGST Act read with Section 16(4) of the CGST Act are unconstitutional?

Analysis of the sections

Section 17(5) of the CGST Act, 2017 lists out the activities on which Input tax credit is not available i.e. blocked credit. Its clauses (c) and (d) are as follows:

“(c) Works contract services when supplied 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;

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

Explanation.--For clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.”

At the end of section 17, the following explanation is given:

“Explanation.--For this Chapter and Chapter 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 or services or both and includes such foundation and structural supports but excludes-

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

(ii) Telecommunication towers; and

(iii) Pipelines laid outside the factory premises.”

Thus, it is clear that in the case of works contract services supplied for the construction of immovable property, the benefit of ITC is not available. However, there are exceptions to clause (c). First is when goods or services, or both, are received by a taxable person for the construction of “plant and machinery”, as defined in the explanation to Section 17. The second exception is where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract.

Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in Clause (d) to the exclusion from ITC provided in the first part of Clause (d). The first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”. The second exception is where goods and services or both are received by a taxable person for the construction of an immovable property made not on his own account. 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.

The decision of the Supreme Court

• Hon’ble Supreme Court held that the impugned judgment of the High Court of Orissa is set aside and the matter remanded to the High Court to determine whether the shopping mall in question satisfies the functionality test to be considered a "plant" under clause (d) of Section 17(5) of the CGST Act. The writ petitions challenging the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are rejected.
• It stated that the expression "plant or machinery" cannot be given the same meaning as "plant and machinery" as defined in the explanation to Section 17. The legislature has consciously used a distinct expression, and it must be given a different meaning. The word "plant" in the expression "plant or machinery" should be interpreted based on the functionality test, i.e., whether the building is essential for carrying out the business activities of the registered person.
• The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation in Section 17.
• The question of 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 which has 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 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. Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16. Functionality tests 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 light of what we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for clause (d) of Section 17(5).

Conclusion

Hon’ble Supreme Court remitted the matters where the High Courts had diluted the provisions, emphasizing the need for a detailed factual inquiry in each case. It highlighted that the eligibility of buildings like malls, warehouses, or other constructions to be treated as "plants" depends on their functional role in the business activities of the registered person. The judgment underscores that a one-size-fits-all interpretation is inappropriate, and the classification will vary based on the specific business use and purpose of the structure in question.

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