In the landmark case of Chief Commissioner of Central Goods and Service Tax & Ors. v. M/s Safari Retreats Private Ltd. & Ors., Civil Appeal No. 2948 of 2023, the issue before the Hon’ble Supreme Court of India was of interpretation and application of Section 17(5)(c) and (d), which restricts the availability of Input Tax Credit (ITC) on goods and services used for the construction of immovable property, except they fall within specific exceptions.
This long awaited judgment has significant ramifications for businesses involved in construction activities, particularly those constructing immovable properties for the purpose of leasing or renting, such as shopping malls, office complexes, and hotels. The core issue is whether businesses like Safari Retreats, engaged in constructing immovable property to generate taxable rental income, should be allowed to claim ITC on goods and services used in the construction of such properties.
Factual Background
M/s Safari Retreats Private Ltd. ("Respondent") engaged in the construction of a shopping mall, intended to lease units in the mall to various tenants. In the course of constructing the mall, Safari Retreats accumulated significant amounts of ITC on goods and services consumed during construction, including cement, steel, aluminium, air-conditioning plants, escalators, lifts, and consultancy services, all of which were taxed under the CGST Act.
Upon attempting to claim ITC for the GST paid on these goods and services, the Respondent was restricted by the tax authorities that Section 17(5)(d) of the CGST Act barred the specific ITC. Section 17(5)(d) prohibits ITC for goods and services used for the construction of immovable property, unless the property is in the nature of "plant or machinery." The authorities are of the view that the shopping mall, being immovable property, fell under this exclusion, and thus ITC could not be availed for construction costs.
Aggrieved by this position, Safari Retreats filed a writ petition before the Orissa High Court, challenging the constitutional validity of Section 17(5)(d) on the grounds that it violated Article 14 and Article 19(1)(g) of the Constitution of India, which guarantee equality before the law and the right to practice any profession or business, respectively.
High Court's Ruling
The Orissa High Court, in its decision dated April 17, 2019, ruled in favour of Safari Retreats. It held that Section 17(5)(d) of the CGST Act should be "read down" to permit the availment of ITC in cases where the immovable property is used for the furtherance of business, such as leasing or renting out. The Court reasoned that denying ITC to businesses generating taxable rental income from immovable property would against the very purpose of the GST law, which aims to eliminate the cascading effect of taxes and promote seamless credit flow.
The High Court opined that if businesses like Safari Retreats were liable to pay GST on the rental income generated from the mall, they should, in principle, be entitled to claim ITC on the goods and services used in constructing the mall. The Court relied on the decision of the Supreme Court in Eicher Motors Ltd. v. Union of India (1999) 2 SCC 361, which emphasized that the purpose of ITC is to benefit the assessee by reducing the tax burden on business expenditures.
Supreme Court's Consideration
The matter referred to the Apex Court, where the central issue for consideration was the scope and constitutionality of Section 17(5)(c) and (d) of the CGST Act. The Hon’ble Apex Court was required to determine whether the statutory exclusion of ITC on goods and services used for the construction of immovable property should apply to businesses like Safari Retreats, which subsequently use the property to provide taxable supplies such as leasing.
Submissions of the Parties
- Assessees' Arguments:
The assessees, including Safari Retreats, submitted that Section 17(5)(d) violated Article 14 as it classified assessees who construct immovable property for renting on the same footing as those who construct immovable property for sale. The assessees contended that the two classes are different/unequal and should be treated differently, as the business of renting immovable property involves taxable supplies, whereas the sale of immovable property does not attract GST once the completion certificate is issued.
They further argued that the exclusion of ITC on goods and services used for construction was irrational and arbitrary, as it perpetuated the cascading effect of taxes, contrary to the very objective of the GST law. It was submitted that when immovable property is used for taxable purposes (such as renting or leasing), denying ITC results in an unjust tax burden on businesses, which is then passed on to consumers.
- Revenue's Arguments:
The Revenue, represented by the Chief Commissioner of Central Goods and Service Tax, argued that the exclusion under Section 17(5)(d) was justified, as it is based on a rational classification between movable and immovable property. The Revenue contended that the denial of ITC was consistent with the legislative intent to block credit on immovable property, which is inherently different from movable goods or services.
Moreover, the Revenue emphasized that ITC is a statutory right, not a fundamental or constitutional right, and therefore the legislature was well within its powers to impose reasonable restrictions on its availment. The Revenue also argued that plant or machinery is distinctly carved out from immovable property, and the legislature intentionally differentiated between the two to prevent unwarranted ITC claims on immovable property.
Supreme Court’s Judgment
Functionality Test & Breaking of Chain
- Distinct Clauses: Clauses (c) and (d) of Section 17(5) cover substantially different areas, and the argument based on discrimination is not valid. As clauses (c) and (d) operate in substantially different areas, the argument of ASG relying on discrimination cannot be accepted.
- Functionality Test for Malls: The High Court has not determined whether the mall qualifies as a "plant." This question is factual and must be assessed based on the business activity and the role of the building. 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 to Section 17; the classification of a mall or other buildings as a plant depends on the business and its role in service supply.
- Taxing Statute Interpretation: The Court cannot dictate changes to taxing statutes even if certain provisions seem unnecessary or unmodified. A provision does not become unconstitutional just because of its perceived need for alteration.
- No Violation of Article 14: The Court found that the classification under Section 17(5)(d) was based on intelligible differentia and had a rational nexus with the object of the GST law. It held that businesses engaged in constructing immovable property for sale and those engaged in constructing for leasing are subject to different tax treatments, and the exclusion of ITC in such cases does not violate Article 14.
- The judgment reinforces the principle that ITC is a statutory privilege, and any limitations imposed by the legislature must be respected, provided they meet the constitutional threshold of reasonableness and non-arbitrariness.
The writ petitions are remanded to the High Court of Orissa for limited purposes of deciding whether, in the facts of the case, the shopping mall is a “plant” in terms of clause (d) of Section 17(5). Appeals are partly allowed in above terms. Now, the possibility for ITC to be granted if the mall could be accepted as essential for the business operations providing taxable output services and classified as a "plant" under the functionality test.
The construction activities of immovable properties like malls, warehouses and office premises meant for providing output taxable services in that case will be eligible to avail ITC on goods or services used in the said purposes.