LEGAL ISSUE: Interpretation of Input Tax Credit (ITC) restrictions on immovable property under Section 17(5) of the Central Goods and Services Tax Act, 2017.

CASE TYPE: Tax Law, specifically Goods and Services Tax (GST).

Case Name: Chief Commissioner of Central Goods and Service Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors.

Judgment Date: October 3, 2024

Introduction

Date of the Judgment: October 3, 2024

Citation: 2024 INSC 756

Judges: Abhay S. Oka, J. and Sanjay Karol, J.

Can businesses claim input tax credit (ITC) on goods and services used to construct immovable properties like shopping malls and warehouses? The Supreme Court of India recently addressed this complex question, focusing on the interpretation of Section 17(5) of the Central Goods and Services Tax Act, 2017 (CGST Act). This judgment clarifies the conditions under which ITC can be availed for such constructions, particularly concerning the definition of “plant or machinery.” The bench consisted of Justice Abhay S. Oka and Justice Sanjay Karol.

Case Background

M/s Safari Retreats Private Ltd., the first respondent in Civil Appeal Nos. 2948 and 2949 of 2023, is involved in constructing shopping malls for leasing to tenants. They accumulated a significant input tax credit (ITC) of over ₹34 crores from the purchase of goods and services used in construction, including cement, steel, and consultancy services. Simultaneously, the rental income from these malls attracts GST. Safari Retreats sought to use their accumulated ITC against this rental income. However, tax authorities advised them that Section 17(5)(d) of the CGST Act restricts such ITC claims. This led Safari Retreats to file a writ petition in the High Court of Orissa, challenging the constitutional validity of Section 17(5)(d).

Several other writ petitions were also filed, challenging Sections 17(5)(c) and 17(5)(d) of the CGST Act. These petitioners, involved in constructing factories and commercial buildings, were also denied ITC on goods and services used in construction, while being taxed on rental or leasing income. They sought declarations that these provisions are unconstitutional and requested the benefit of ITC.

Timeline

Date Event
N/A M/s Safari Retreats Private Ltd. begins construction of shopping malls.
N/A Safari Retreats accumulates input tax credit (ITC) of over ₹34 crores.
N/A Safari Retreats is advised by authorities to deposit GST on rent without deducting ITC due to Section 17(5)(d).
N/A Other petitioners construct factory premises and commercial buildings, facing similar ITC denials.
N/A Multiple writ petitions are filed challenging the validity of Sections 17(5)(c) and 17(5)(d) of the CGST Act.
April 17, 2019 High Court of Orissa issues judgment in favor of Safari Retreats, reading down Section 17(5)(d).
October 3, 2024 Supreme Court issues its judgment, partially allowing appeals and remanding the case to the High Court.

Course of Proceedings

The High Court of Orissa, in its judgment dated April 17, 2019, ruled in favor of the assessees, relying on the Supreme Court’s decision in Eicher Motors Limited & Anr. v. Union of India & Ors. [(1999) 2 SCC 361]. The High Court held that Section 17(5)(d) should be read down to allow ITC, as the purpose of ITC is to benefit the assessee. The court reasoned that if an assessee is required to pay GST on rental income, they should be entitled to ITC on the GST paid during the construction of the property. This narrow interpretation by the Department was deemed to frustrate the very object of the CGST Act.

The Revenue appealed this decision to the Supreme Court (Civil Appeal No. 2949 of 2023), while other petitioners filed writ petitions directly in the Supreme Court, challenging the constitutional validity of Sections 17(5)(c) and 17(5)(d) of the CGST Act.

Legal Framework

The core of this case revolves around the interpretation of several key sections of the CGST Act:

  • Section 9, CGST Act: This is the charging section that levies the Central Goods and Services Tax on all intra-state supplies of goods or services or both. It also allows for reverse charge mechanisms, where the recipient of goods or services pays the tax instead of the supplier.
  • Section 16, CGST Act: This section outlines the eligibility and conditions for availing Input Tax Credit (ITC). It states that every registered person is entitled to take credit of input tax charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of their business. However, this is subject to conditions and restrictions. Sub-section (3) disallows ITC on the tax component of capital goods and plant and machinery if depreciation is claimed on the same under the Income Tax Act, 1961. Sub-section (4) sets a time limit for availing ITC.

    “16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

    “16. (3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961 (43 of 1961), the input tax credit on the said tax component shall not be allowed.”

    “16. (4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier”
  • Section 17, CGST Act: This section deals with the apportionment of credit and blocked credits. Sub-section (5) lists specific instances where ITC is not available, including:

    • Section 17(5)(c), CGST Act: 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.

      “17. (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— (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;”
    • Section 17(5)(d), CGST Act: 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.

      “17. (5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:— (d) 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.”

    The explanation to Section 17 defines “plant and machinery” for the purposes of Chapters V and VI of the CGST Act.

    “Explanation. —For the purposes of 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.”

Arguments

The assessees argued that clauses (c) and (d) of Section 17(5) violate Articles 14, 19(1)(g), and 300A of the Constitution of India. Their main arguments included:

  • Violation of Article 14: Section 17(5)(d) treats businesses constructing immovable properties for rental purposes the same as those constructing for sale, denying them ITC. This is despite the fact that the former generate a continuous taxable supply (rental income), while the latter do not after the sale.
  • No Intelligible Differentia: The classification based on the creation of immovable property is artificial, as works contracts for immovable properties are treated as a supply of services under the CGST Act. The assessees argued that the “dominant intention test” should apply, as laid down in Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. [(2006) 3 SCC 1].
  • Break in Credit Chain: There is no break in the credit chain for assessees who rent out properties, unlike those who sell them. All parties in the supply chain are liable to output GST, so denial of credit is not justified.
  • Nexus with the Object of the CGST Act: Denying ITC perpetuates the cascading effect of tax, which the CGST Act aims to eliminate. For example, a manufacturer building a factory pays GST on construction but cannot claim ITC, leading to tax on tax.
  • Vagueness: The terms “on its own account” and “plant or machinery” in Section 17(5)(c) and (d) are vague, leading to uncertainty. The distinction between “plant and machinery” and “plant or machinery” is also unclear.
  • Statutory Right to ITC: ITC is a statutory right under Section 16, and the denial of ITC on rentals collected by the assessee violates Article 300A of the Constitution. Reliance was placed on Union of India v. Bharti Airtel Limited & Ors. [(2021) SCC OnLine SC 1006].
  • Reading Down: The assessees argued that Section 17(5) should be read down to allow ITC for suppliers who procure taxable works contract services and provide taxable supplies on the output side. They relied on Indian Social Action Forum (INSAF) v. Union of India [(2021) 15 SCC 60] and Delhi Transport Corporation v. DTC Mazdoor Congress & Ors. [(1991) Supp (1) SCC 600].
  • Interpretation of “Plant or Machinery”: The assessees contended that “plant or machinery” in Section 17(5)(d) is different from “plant and machinery” in Section 17(5)(c). They argued that malls, hotels, and warehouses are “plants” and thus exempted from the ITC restrictions. They relied on Indcon Structurals (P) Ltd. v. Commissioner of Central Excise, Chennai [(2006) 4 SCC 786] and CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad [(1971) 3 SCC 550].
  • Renting as Supply of Service: Services of renting/leasing/letting out are considered a supply of service, and thus, ITC accrued on construction should be available against these services.

The Revenue, represented by the Additional Solicitor General, argued:

  • Intelligible Differentia: The classification is based on the creation of immovable property, which is an intelligible differentia with a rational nexus to the object of GST.
  • Statutory Right, Not Fundamental: ITC is a statutory right, not a fundamental or constitutional one. The court cannot issue a mandamus to grant ITC if it is not provided in the statute. Reliance was placed on ALD Automotive Pvt. Ltd. v. Commercial Tax Officer [(2019) 13 SCC 225].
  • Wide Latitude: Parliament has wide latitude in matters of tax legislation, and the test of discrimination is less rigorous. Reliance was placed on Hari Krishna Bhargav v. Union of India & Anr [(1966) 2 SCR 22] and Joseph Shine v. Union of India [(2019) 3 SCC 39].
  • “Plant or Machinery”: The expression “plant or machinery” should be read as “plant and machinery.” The use of “or” is a mistake by the legislature.
  • Immovable Property: Tax on goods cannot be extended to immovable property. Malls, hotels, and office buildings are immovable properties and thus excluded from GST.
  • No GST on Shopping Malls: Since no GST is payable on shopping malls when sold after completion, there is no need to grant ITC.
  • Tax on Works Contracts: Tax on works contracts is also a tax on movable goods, either as goods or during their transfer before becoming immovable property.

Submissions Table

Main Submissions Assessees’ Submissions Revenue’s Submissions
Constitutional Validity
  • Section 17(5)(d) violates Articles 14, 19(1)(g), and 300A.
  • Treats unequal businesses as equal.
  • No intelligible differentia for classification.
  • Denial of ITC leads to cascading effect of tax.
  • ITC is a statutory right under Section 16.
  • Classification based on creation of immovable property is valid.
  • ITC is a statutory right, not a fundamental one.
  • Parliament has wide latitude in tax matters.
  • No manifest arbitrariness in the provisions.
Interpretation of Section 17(5)(d)
  • “Plant or machinery” is different from “plant and machinery.”
  • Malls, hotels, warehouses are “plants.”
  • Functionality test should apply to define “plant.”
  • ITC should be available for further output supply.
  • “Plant or machinery” should be read as “plant and machinery.”
  • Explanation to Section 17 applies to both clauses.
  • Immovable properties are excluded from GST.
  • No ITC needed as there is no GST on sale of immovable property.
Reading Down and Interpretation
  • Section 17(5) should be read down to allow ITC for taxable supplies.
  • “On its own account” should mean personal use, not business use.
  • No need to read down the provisions.
  • Plain interpretation of the provision is sufficient.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

  1. Whether the definition of “plant and machinery” in the explanation appended to Section 17 of the CGST Act applies to the expression “plant or machinery” used in clause (d) of sub-section (5) of Section 17?
  2. If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”?
  3. Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?

Treatment of the Issue by the Court

Issue Court’s Decision Brief Reasons
Applicability of the definition of “plant and machinery” to “plant or machinery” The definition does not apply. The legislature intentionally used different expressions. The explanation to Section 17 defines “plant and machinery,” but “plant or machinery” is not defined.
Meaning of the word “plant” The word “plant” should be interpreted using a functionality test. The word “plant” is not defined in the CGST Act. It should be given its ordinary commercial meaning. A building can be a plant if it is essential for carrying out business.
Constitutional validity of Section 17(5)(c), 17(5)(d) and 16(4) The provisions are constitutionally valid. The classification is based on intelligible differentia with a rational nexus to the object of GST. ITC is a statutory right, and the legislature can carve out exceptions.

Authorities

The Supreme Court considered the following cases and legal provisions:

Authority Legal Point How it was used
Eicher Motors Limited & Anr. v. Union of India & Ors. [(1999) 2 SCC 361] – Supreme Court of India Purpose of ITC The High Court relied on this case to read down Section 17(5)(d), stating that the purpose of ITC is to benefit the assessee.
Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. [(2006) 3 SCC 1] – Supreme Court of India Dominant intention test The assessees argued that this test should apply to determine if a transaction is a supply of goods or services.
Shreya Singhal v. Union of India [(2015) 5 SCC 1] – Supreme Court of India Vagueness of a provision The assessees relied on this case to argue that Section 17(5)(c) and (d) are vague due to the absence of definitions.
Union of India v. Bharti Airtel Limited & Ors. [(2021) SCC OnLine SC 1006] – Supreme Court of India Right to avail ITC The assessees relied on this case to argue that the denial of ITC violates the right to avail ITC.
Federation of Hotel & Restaurant Association of India, etc. v. Union of India and Ors. [(1989) 3 SCC 634] – Supreme Court of India Wide latitude to legislature in taxation The assessees argued that “wide latitude” does not mean “wild latitude” and that there are exceptions to the wide latitude doctrine.
R.K Garg v. Union of India and Ors. [(1981) 4 SCC 675] – Supreme Court of India Twin test of reasonable classification The assessees relied on this case to explain the twin test of reasonable classification.
Twyford Tea Co. Ltd. and Anr. v. State of Kerala and Anr. [(1970) 1 SCC 189] – Supreme Court of India Twin test of reasonable classification The assessees relied on this case to explain the twin test of reasonable classification.
Union of India and Ors. v. Nitdip Textile Processors Pvt. Ltd. and Anr. [(2012) 1 SCC 226] – Supreme Court of India Twin test of reasonable classification The assessees relied on this case to explain the twin test of reasonable classification.
Government of Andhra Pradesh and Ors. v. P. Laxmi Devi [(2008) 4 SCC 720] – Supreme Court of India Wide latitude doctrine The assessees relied on this case to explain the wide latitude doctrine in relation to economic legislations.
Assistant Commissioner of Urban Land Tax and Ors. v. Buckingham and Carnatic Co. Ltd., Etc. [(1969) 2 SCC 55] – Supreme Court of India Wide latitude doctrine The assessees relied on this case to explain the wide latitude doctrine in relation to economic legislations.
Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors. [(2017) 12 SCC 1] – Supreme Court of India Wide latitude doctrine The assessees relied on this case to explain the wide latitude doctrine in relation to economic legislations.
State of Tamil Nadu and Anr. v. National South Indian River Interlinking Agriculturist Association [(2021) 15 SCC 534] – Supreme Court of India Wide latitude doctrine The assessees relied on this case to explain the wide latitude doctrine in relation to economic legislations.
Sanjeev Coke Manufacturing Company v. M/s Bharat Coking Coal Ltd. & Anr. [(1983) 1 SCC 147] – Supreme Court of India Plain reading of the provision The assessees relied on this case to state that the true import of the legislative provision is to be understood from the plain reading of the provision.
Union of India & Anr v. Mohit Minerals Pvt. Ltd. [(2022) 10 SCC 700] – Supreme Court of India Cascading effect of taxes The assessees relied on this case to explain that the cascading effect of taxes can be removed only by introducing a system for allowance of ITC.
Indian Social Action Forum (INSAF) v. Union of India [(2021) 15 SCC 60] – Supreme Court of India Principles of reading down The assessees relied on this case to invoke the principles of reading down.
Delhi Transport Corporation v. DTC Mazdoor Congress & Ors. [(1991) Supp (1) SCC 600] – Supreme Court of India Principles of reading down The assessees relied on this case to invoke the principles of reading down.
Indcon Structurals (P) Ltd. v. Commissioner of Central Excise, Chennai [(2006) 4 SCC 786] – Supreme Court of India Interpretation of words in taxing statutes The assessees relied on this case to explain that words should be understood as per the trade understanding, commercial and technical practice and usage.
CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad [(1971) 3 SCC 550] – Supreme Court of India Meaning of “plant” The assessees relied on this case to explain that the word “plant” means land, building, machinery, apparatus and fixtures employed in carrying on trade and other industrial business.
CIT, Trivandrum v. Anand Theatres [(2000) 5 SCC 393] – Supreme Court of India Building as a plant The assessees relied on this case to explain that when a building is specially designed and constructed with some special features to attract the customers, the building could be treated as a plant.
Commissioner of Income Tax, Karnataka v. Karnataka Power Corporation [(2002) 9 SCC 571] – Supreme Court of India Building as a plant The assessees relied on this case to explain that an electricity power generating station building would have to be treated as a plant.
Commissioner of Income Tax v. Victory Aqua Farm Ltd. [(2016) 16 SCC 553] – Supreme Court of India Building as a plant The assessees relied on this case to explain that ponds specially designed for doing business of aquaculture of prawns should be treated as plants.
Commissioner of Customs (Import), Mumbai v. Dileep Kumar & Company & Ors. [(2018) 9 SCC 1] – Supreme Court of India Strict interpretation of taxation statutes The assessees relied on this case to explain that a taxation Statute calls for strict interpretation.
Sneh Enterprises v. Commissioner of Customs, New Delhi [(2006) 7 SCC 714] – Supreme Court of India Interpretation of taxation statutes The assessees relied on this case to explain that when two interpretations of a provision in a taxing Statute are possible, the Court would ordinarily interpret the provisions in favor of the assessee and against the revenue.
Commissioner of Income Tax, West Bengal 1, Calcutta v. M/s Vegetables Products Ltd. [(1973) 1 SCC 442] – Supreme Court of India Interpretation of taxation statutes The assessees relied on this case to explain that when two interpretations of a provision in a taxing Statute are possible, the Court would ordinarily interpret the provisions in favor of the assessee and against the revenue.
R.S. Raghunath v. State of Karnataka & Anr. [(1992) 1 SCC 335] – Supreme Court of India Non-obstante clause The assessees relied on this case to state that the non-obstante clause in Section 17(5) cannot cut down the construction or restrict the scope of operation of Section 16(1).
Union of India & Ors v. VKC Footsteps India Pvt. Ltd. [(2022) 2 SCC 603] – Supreme Court of India Implications of statutory entitlement to ITC The assessees submitted that this case was not relevant as the Court did not consider the implications of statutory entitlement to ITC.
ALD Automotive Pvt. Ltd. v. Commercial Tax Officer, now upgraded as Assistant Commissioner (CT) & Ors. [(2019) 13 SCC 225] – Supreme Court of India ITC as a statutory right The revenue relied on this case to argue that ITC is a statutory right and not a fundamental right.
Hari Krishna Bhargav v. Union of India & Anr [(1966) 2 SCR 22] – Supreme Court of India Challenge to taxing statutes The revenue relied on this case to state that a taxing statute is not open to challenge on the ground that the tax is harsh or excessive.
Joseph Shine v. Union of India [(2019) 3 SCC 39] – Supreme Court of India Test of discrimination The revenue relied on this case to state that even assuming that clauses (c) and (d) are discriminatory, they are not manifestly discriminatory.
Indore Development Authority v. Manoharlal & Ors. [(2020) 8 SCC 129] – Supreme Court of India Reading “and” as “or” The revenue relied on this case to argue that it is not uncommon to read “and” as “or” or “or” as “and.”
State of Bombay v. R.M.D. Chamarbaugwala & Anr. [(1957) SCC OnLine SC 12] – Supreme Court of India Reading “and” as “or” The revenue relied on this case to argue that it is not uncommon to read “and” as “or” or “or” as “and.”
Unionof India v. Ind-Swift Laboratories Ltd. [(2011) 4 SCC 635] – Supreme Court of India Reading “and” as “or” The revenue relied on this case to argue that it is not uncommon to read “and” as “or” or “or” as “and.”
Section 9, CGST Act Charging Section The Court considered this section to understand the levy of GST.
Section 16, CGST Act Eligibility and conditions for availing ITC The Court considered this section to understand the eligibility and conditions for availing ITC.
Section 17, CGST Act Apportionment of credit and blocked credits The Court considered this section to understand the restrictions on ITC.

Judgment

The Supreme Court delivered the following key holdings:

  • Definition of “Plant and Machinery”: The definition of “plant and machinery” in the explanation to Section 17 of the CGST Act does not apply to the expression “plant or machinery” used in Section 17(5)(d). The legislature intentionally used different expressions.
  • Meaning of “Plant”: The word “plant” should be given its ordinary commercial meaning and interpreted using a functionality test. A building can be considered a plant if it is essential for carrying out business.
  • Constitutional Validity: Clauses (c) and (d) of Section 17(5), and Section 16(4) of the CGST Act are constitutionally valid. The classification is based on intelligible differentia, and ITC is a statutory right, not a fundamental one.
  • Reading Down: The Court did not read down the provisions of Section 17(5)(c) and (d).

Final Order:

The Supreme Court partially allowed the appeals and set aside the judgment of the High Court of Orissa. The matter was remanded to the High Court to consider the case in light of the Supreme Court’s observations and findings. The Court clarified that the High Court should determine whether the buildings in question qualify as “plant” based on the functionality test. The other writ petitions were disposed of in terms of the judgment.

Decision Flowchart

Start: Does the definition of “plant and machinery” apply to “plant or machinery” in Section 17(5)(d)?
↓
No: The definition does not apply.
↓
What is the meaning of “plant”? Apply the functionality test.
↓
Are the buildings essential for business operations? If yes, they can be considered a “plant”.
↓
Are Sections 17(5)(c), 17(5)(d) and 16(4) constitutional?
↓
Yes: The provisions are constitutionally valid.
↓
Remand to High Court for application of functionality test.

Implications

The Supreme Court’s judgment has significant implications for businesses, particularly in the real estate and construction sectors:

  • Functionality Test: Businesses can now argue that their buildings are “plants” if they are essential for their business operations, potentially allowing them to claim ITC on construction costs.
  • No Automatic ITC: The judgment does not automatically allow ITC on all immovable properties. Businesses will need to demonstrate that their buildings qualify as “plants” based on the functionality test.
  • Litigation: The decision is likely to lead to further litigation as businesses seek to apply the functionality test to their specific circumstances.
  • Clarification Needed: The judgment clarifies the distinction between “plant and machinery” and “plant or machinery,” but it also introduces a new layer of complexity with the functionality test, which will require further clarification.
  • Impact on Real Estate: Real estate developers may need to reassess their business models and tax planning in light of this judgment.

Conclusion

The Supreme Court’s judgment in the case of Chief Commissioner of Central Goods and Service Tax & Ors. vs. M/s Safari Retreats Private Ltd. & Ors. clarifies the scope of ITC on immovable property under the CGST Act. While upholding the constitutional validity of Section 17(5), the Court introduced a functionality test for determining whether a building qualifies as a “plant,” thereby opening up possibilities for businesses to claim ITC on construction costs in certain circumstances. This decision will have far-reaching implications for the real estate and construction sectors and is likely to lead to further litigation and interpretation. The remand to the High Court for applying the functionality test underscores the need for a case-by-case analysis, emphasizing that each situation must be evaluated based on its specific facts and circumstances.

Source: Supreme Court Interprets Section 17