Summary: In the case Chief Commissioner of Central Goods and Service Tax & Ors. vs. Safari Retreats Private Ltd. & Ors., the Supreme Court examined the eligibility of Input Tax Credit (ITC) on goods and services used for constructing immovable property, specifically a shopping mall leased out to tenants. Safari Retreats sought ITC on the mall’s construction costs, arguing that the rental income derived from it qualified for ITC. However, Section 17(5)(d) of the CGST Act limits ITC claims for the construction of immovable properties, barring ITC if such properties are intended for own use and not classified as “plant or machinery.” The Supreme Court upheld the constitutionality of Section 17(5), finding that the right to claim ITC is statutory, not constitutional. The Court also distinguished between “plant and machinery” and “plant or machinery” under Section 17(5)(d), asserting that “plant or machinery” should not be broadly interpreted to include buildings like malls unless they meet a “functionality test”—a building may qualify as a “plant” if specifically designed to meet technical business needs. The case was sent back to the Orissa High Court to determine if Safari’s mall met this standard. This ruling affects ITC claims, setting a precedent on how the construction of rental properties is treated under GST.

Chief Commissioner of Central Goods and Service Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. (Supreme Court of India); Civil Appeal No. 2948 of 2023; 03/10/2024

Brief facts of the case:

M/s Safari Retreats is a construction firm engaged in building a shopping mall with the intent to lease out space to various tenants. In the course of its business, the appellant procures multiple materials and services necessary for the construction. The appellant sought to claim Input Tax Credit (ITC) on the goods and services purchased, particularly in relation to rental income generated from leasing out the mall premises. However, the appellant faced restrictions based on Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, which outlines the limitations on ITC claims for the construction of immovable properties.

The appellant filed a writ petition in the High Court of Orissa, challenging the restriction on ITC claims. After the High Court delivered its judgment, the case was escalated to the Supreme Court of India.

The following questions were answered by the Honorable Supreme Court:

1. Constitutional validity of Section 17(5)

2. The expression “plant or machinery” used in Section 17(5)(d) can be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17.

3. 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”?

1. Constitutional validity of Section 17(5):

The appellant challenged the constitutional validity of clauses (c) and (d) of Section 17(5), as well as Section 16(4) of the CGST Act. The Supreme Court concluded that the challenge was unsubstantiated. The Court stated that while the right to avail ITC is statutory, it does not have a constitutional basis. Therefore, the provisions in question were deemed constitutionally valid.

2. The expression “plant or machinery” be given the same meaning as “plant and machinery” as defined under Chapter VI:

Abstract of Section 17(5)(c) and (d) of CGST Act,2017 and relevant explanations:

(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 own account including when such goods or services or both are used in the course or furtherance of business.

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

 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.

It is important to note that in clause (c), the expression “Plant and Machinery” is used, while in clause (d), the expression “Plant or Machinery” is used.

Based on the above clauses, the Honorable Supreme Court held that while dealing with a taxing provision, the principle of strict interpretation should be applied. Clause (d) of Section 17(5) is different from clause (c) in various aspects.

1. 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”.

2. 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.

The explanation to Section 17 defines “plant and machinery”. The explanation seeks to define the expression “plant and machinery” used in Chapter V and Chapter VI.

In Chapter VI, the expression “plant and machinery” appears in several places, but the expression “plant or machinery” is found only in Section 17(5)(d). If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have specifically used the expression “plant or machinery” in Section 17(5)(d).

The legislature has made this distinction consciously. Therefore, the expression “plant and machinery” and “plant or machinery” cannot be given the same meaning.

3. 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”?

3.1. The term “plant or machinery” is nowhere defined in the CGST Act, 2017. The Honorable Supreme Court has interpreted as below:

Where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means “that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it”.

3.2. The Court has laid down the functionality test. Further, it was held that whether a building is a plant is a question of fact. “Plant” will have to be interpreted by taking recourse to the functionality test.

The functionality test laid down by court is as follows:

This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance.

Therefore, as per the exception laid down in Section 17(5)(d) of CGST Act,2017 building if passes the functionality test will fall under the definition of “plant” of “plant or machinery”.

4. Authors View: Impact of Honorable Supreme Court judgment in interpretation of the clause (c) and (d) of the Section 17(5) of CGST Act, 2017.

4.1. Section 17(5)(c) of CGST Act, 2017.
In the judgement of the Honorable Supreme Court there was no discussion of Section 17(5)(c) as the same is clearly mentioned in the law. Therefore, it will be interpreted as same as earlier.

Extract of Section 17(5):

(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;

Explanation––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

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.

The term “works contract” is defined in Section 2(119) of the CGST Act, as:

“works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract

In simpler terms, works contract means construction on immovable property where the goods and services are bundled and supplied together.

4.2. Therefore, ITC in case of Section 17(5)(c) is eligible if any of the following two conditions are satisfied:

i. The inward supplies is used as a further supply of works contract; or

ii. The works contract service is used for construction of “plant and machinery” as defined in para 4.1.

4.3. Section 17(5)(d) of CGST Act, 2017:

In the judgement of the Honorable Supreme Court there was a brief discussion and interpretation on the words used in the Section 17(5)(d) the same is will be interpreted as below:

Extract of Section17(5)

(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.

4.3.1. The word “plant or machinery” is nowhere defined in the law but the Honorable Supreme Court has defined it through a functionality test as laid down below:

This Court held that if it is found on facts that a building has been so planned and constructed as to serve a taxpayer’s special technical requirements, it will qualify to be treated as a “plant” for the purposes of investment allowance.

If the functionality test is passed then it can be termed as “plant”.

4.3.2. The term “on his own account” has been defined as follows:

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.

4.4. Therefore, ITC in case of Section 17(5)(d) is eligible if the following two conditions are satisfied together:

i. The construction is for plant or machinery; and

ii. The purpose of construction should not be for on his own account.

4.5. To summarize, if works contract service is received for construction of immoveable property, then it will fall under clause (c) and if goods and service are received separately, for construction of immoveable property, then it will fall under clause (d) of Section 17(5) of CGST Act, 2017.

Q1. If a works contract service is received for the construction of an immovable property that qualifies as a plant by passing the functionality test, can input tax credit (ITC) be claimed?

As mentioned in para 4.1, if a works contract service is received for constructing an immovable property, it falls under Section 17(5)(c). ITC is only available if the conditions outlined in para 4.2 are met. Moreover, functionality test laid down is only for defining “plant” in clause (d) of Section 17(5) and the same cannot be inferred for clause (c) of Section 17(5).

This makes ITC entitlement dependent on the method of procuring inputs and input services. While the immovable property may technically fall under the definition of “plant,” which ideally should allow for ITC, the matter remains unresolved. The interpretation needs to be clarified over time in various legal forums, as there is currently no judgment on this specific case. Also, the Honorable Supreme Court has also remanded the case to Honorable High Court of Orissa for determining whether, in the facts of the case, the shopping mall is a “plant” in terms of clause (d) of Section 17(5).

Q2. Is GST applicable if a plant that meets the functionality test is later sold?

The immovable property qualifies under Section 17(5)(d) of the CGST Act, 2017, which is solely relevant for assessing ITC eligibility. Additionally, it falls under Entry 5 of Schedule III of the Act, classifying its sale as an “activity or transaction that is treated neither as a supply of goods nor a supply of services.” Consequently, GST is not applicable to this transaction.

Q3. If GST is not applicable on the sale of a plant, are there any other legal provisions that apply to such a transaction?

Section 18(6), along with Rule 40 of the CGST Act, 2017, considers the supply of capital goods on which input tax credit has been availed as a taxable supply. The tax payable is determined based on the greater of either the reduced input tax credit or the tax on the transaction value.

In this case, the transaction value is considered NIL since the transaction falls under Schedule III of the CGST Act, 2017. However, input tax reversal must be calculated by reducing the input tax on the goods by five percentage points for each quarter (or part thereof) from the date of the invoice issued for these goods.

Q4. Can input tax credit (ITC) be claimed for an office building if goods and services are received separately?

The office building qualifies as a “Plant” as defined in para 4.3.1; however, it meets the “on his own account” condition as specified in para 4.3.2. As a result, the conditions outlined in para 4.4 are not fully satisfied, and therefore, ITC for the office building is not eligible.

Q5. How is it determined that the construction will be used for “not on his own account” while claiming ITC?

The construction of immovable property may take a prolonged period. However, under the conditions outlined in Section 16 of the CGST Act, 2017, ITC can be claimed until the 30th of November of the next financial year from the financial year in which the ITC was received. Therefore, the entity must claim ITC as it is received, but the intention behind the use of the construction cannot be determined at the time of claiming ITC to confirm whether it meets the conditions outlined in para 4.4.

The law does not define “intention.” However, a company or LLP can pass a board resolution stating the purpose of the construction, which may help establish the entity’s good faith. For individuals or entities other than companies and LLPs, the intention cannot be clearly defined either.

Hence, it is advisable for all entities to claim ITC but refrain from utilizing it until a rental agreement is signed or rent is received.

Q6. If goods and services are received from the same person but under separate invoices and contracts, is ITC available?

When goods and services are received separately, it does not qualify as a works contract as per para 4.1. However, if goods and services are provided by the same person at the same time for the same immovable property, and separate invoices or contracts are used solely to avoid triggering Section 17(5)(c), it may not demonstrate good faith under the law. This could be open to legal interpretation.

It is advisable to have separate suppliers for goods and services to avoid any potential issues.

Q7. Can ITC be claimed for the construction of a residential property that will be subsequently rented out?

An immovable property constructed for the purpose of renting out qualifies as a “plant” under para 4.3.1 and does not meet the definition of “own his own account” as per para 4.3.2. Therefore, both conditions in para 4.4 are satisfied, making the Input Tax Credit (ITC) eligible for this immovable property.

However, as per Notification 12/2017 dated June 28, 2017, the renting of residential property is exempt from GST.

When a capital asset is used to provide exempt supplies, Rule 43 of the CGST Act, 2017 applies, requiring the reversal of the ITC claimed on such capital asset as per the provisions of Rule 43.

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