Introduction
In the landmark case of Chief Commissioner of Central Goods and Service Tax & Ors. v. Safari Retreats Private Ltd & Ors.[i], the Supreme Court of India addressed the constitutional validity of s. 17(5)(d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). This provision restricts the availability of Input Tax Credit (‘ITC’) on goods and services used in the construction of immovable property, creating exceptions to ss. 16(1) and 18(1), which generally allow ITC benefits. The dispute revolved around whether businesses constructing commercial properties for lease or rental should be entitled to claim ITC on the Goods and Services Tax (‘GST’) paid for construction-related goods and services.
For GST purposes, the Court classified immovable property distinctly from immovable goods, ruling that clauses (c) and (d) of s. 17(5) are constitutionally valid and apply exclusively to immovable properties. The judgment further held that assessing whether construction qualifies as a ‘plant’ requires a case-by-case functionality test.
This carefully reasoned judgment is pivotal for the Indian tax jurisprudence, especially regarding ITC claims for immovable commercial properties built for leasing. By revisiting established judicial norms for interpreting tax laws, the Court has effectively struck a balance between promoting business activities and maintaining the integrity of the GST framework while reinforcing judicial restraint in fiscal policies, which are fundamentally within the legislative domain.
Brief Facts
Safari Retreats Private Ltd. was constructing shopping malls for lease. During construction, the company's GST liabilities exceeded Rs. 34 crores on inputs such as steel, cement, and professional services. They sought to offset this GST liability on rental income against the ITC accumulated from construction.
The issue arose when Safari Retreats was informed that s. 17(5)(d) of the CGST Act disallows ITC claims on goods and services used to construct immovable property, even if the property generates taxable rental income. The company challenged this provision before the Orissa High Court, arguing that this restriction violated as. 14 and 19(1)(g) of the Constitution of India, which guarantees equality and the right to trade. Safari Retreats contended that this denial of ITC led to double taxation by taxing the construction inputs and rental income.
The High Court ruled in favour of Safari Retreats, ’reading down’ s. 17(5)(d) to allow ITC in cases where immovable property is used to provide taxable output services, such as renting. This decision relied on the Supreme Court’s ruling in Eicher Motors Ltd. v. Union of India[ii], suggesting that a narrow interpretation of s.17(5)(d) would frustrate the very object of the statute. The Revenue appealed this decision to the Supreme Court, asserting that the restriction on ITC was justified and necessary to prevent GST misuse. Several writ petitions concerning similar subject matter were filed and, hence, taken up together by the Supreme Court.
Issues Raised
The Supreme Court identified three primary issues based on the challenges raised:
Whether the definition of ‘plant and machinery’ in the explanation to s. 17 of the CGST Act applies to ‘plant or machinery’ in s. 17(5)(d)?
If not, what constitutes a ‘plant’ under the CGST Act?
Are clauses (c) and (d) of s. 17(5), as well as s. 16(4) of the CGST Act unconstitutional?
Held
Partly ruling in favour of Safari Retreats, the Supreme Court remanded the matter to the High Court to determine whether the shopping mall qualified as a ’plant’ under s. 17(5)(d) of the CGST Act. The Court found that under s. 17(5)(c), ITC on works contracts for immovable property construction is allowed only for ‘plant and machinery’, specifically defined in the CGST Act. However, s. 17(5)(d) restricts ITC for construction on a taxpayer’s ‘own account’, exempting cases where construction is for a third party or for constructing ‘plant or machinery’, which the CGST Act does not expressly define.
The Court held that the term ‘plant or machinery’ in s. 17(5)(d) should not be interpreted as identical to ‘plant and machinery’ explained in s. 17 of the CGST Act. It was observed that this distinction was deliberate, and the Court cautioned against filling statutory gaps. The Court held that courts must not modify the words the legislature consciously chose while interpreting taxing statutes. Hence, it was concluded that as the CGST Act does not define ‘plant,’ its ordinary meaning in commercial terms will apply. Thus, the Supreme Court upheld the principle of strict interpretation of taxing statutes, emphasizing that ITC eligibility should not be implied where not expressly stated by law.
The Court further held that the question of whether a construction qualifies as a ‘plant’ or ‘immovable property’ must be determined on a case-by-case basis using the functionality test. It clarified that under the CGST Act, renting or leasing immovable property is treated as a supply of service, taxable as output supply. Therefore, if the property meets the definition of a ‘plant,’ ITC on goods and services used to establish it may be permitted.
Discussing the precedents, the Court referred to CIT v. Anand Theatres[iii], limiting its application to cases involving hotels or cinema theatres, as distinguished by a larger bench in CIT v. Karnataka Power Corporation[iv]. It was held that this distinction does not apply to malls, warehouses, or other buildings under the current statute.
On the question of the constitutional validity of s. 17(5)(d) of the CGST Act, the Court found the challenge invalid and, therefore, upheld s. 17(5)(d) as constitutionally valid. The Court reminded that the ‘test of the vice of discrimination’ in tax jurisprudence is less rigorous and stringent. It was ruled that the provision’s lack of clarity does not make it arbitrary and thus did not require any reading down.
Our Analysis
The judgment reinforces that tax laws must facilitate business operations without promoting tax cascading effects. It also highlights the need for tax authorities to adopt a purposive interpretation of statutory provisions, especially within complex tax regimes like GST. The Court acknowledged that the purpose of ITC is to eliminate cascading tax effects and ensure tax neutrality for businesses. Requiring businesses to pay GST on rental income while denying credit for GST paid on construction-related inputs would undermine the core objective of the GST regime.
Moreover, the Court agreed that s. 17(5)(d) should not be interpreted narrowly to block ITC where the immovable property is used to provide taxable services. It recognized that denying ITC in such cases would place an unjustified tax burden on businesses, contradicting the seamless credit system envisioned under GST. However, the Court refrained from encroaching on fiscal policy decisions, noting that this area remains the prerogative of the legislature. Citing the principle that a legislature need not tax everything to tax something, the Supreme Court emphasized legislative supremacy in creating and enforcing tax provisions. It also reminded tax authorities of the need for executive pragmatism in administering tax policy and cautioned the judiciary against overstepping in areas where even the legislature treads carefully.
This decision is significant as it resolves a crucial issue for the real estate sector, particularly for developers and landlords leasing commercial properties. By allowing ITC on goods and services used in constructing immovable properties intended for rental, the Supreme Court has clarified the scope of s. 17(5)(d) of the CGST Act. This interpretation prevents double taxation and provides much-needed relief to the real estate sector, which has struggled with the financial burden of GST on construction inputs without ITC. Additionally, the decision sets a precedent for interpreting tax provisions in a manner that promotes business efficiency and aligns with the broader objectives of the GST regime.
However, the judgment leaves some questions unanswered regarding the application of s. 17(5)(d) of the CGST Act. The classification of a building as ‘plant’ or ‘immovable property’ under the provision will depend on the specifics of each case, guided by the functionality test outlined by the Court. Therefore, while shopping malls have been clarified as immovable property eligible for ITC when leased, other cases will be determined over time as the application of these definitions evolves under the CGST Act.
End Notes
[i] 2024 SCC OnLine SC 2691.
[ii] (1999) 2 SCC 361.
[iii] (2000) 5 SCC 393.
[iv] (2002) 9 SCC 571.
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.