Chief Commissioner Of Central Goods And ... vs M/S Safari Retreats Private Limited on 3 October, 2024

Judgment Summary

Title: Chief Commissioner Of Central Goods And ... vs M/S Safari Retreats Private Limited on 3 October, 2024
Court: Supreme Court of India
Bench: Abhay S. Oka, J., Sanjay Karol, J.

1. Outcome

• Constitutional Validity Upheld: The Supreme Court upheld the constitutional validity of Section 17(5)(c), Section 17(5)(d), and Section 16(4) of the Central Goods and Services Tax (CGST) Act, 2017. The challenge on grounds of violating Articles 14, 19(1)(g), and 300A of the Constitution was rejected.
• Interpretation of "Plant or Machinery": The Court held that the expression "plant or machinery" in Section 17(5)(d) is different from "plant and machinery" used elsewhere in the Act. The restrictive definition of "plant and machinery" in the Explanation to Section 17 (which excludes buildings and civil structures) does not apply to Section 17(5)(d).
• "Functionality Test" to Determine 'Plant': Whether a building (like a mall or warehouse) can be considered a 'plant' under Section 17(5)(d) is a question of fact to be determined by applying the "functionality test." If a building is an essential apparatus for carrying on the assessee's business (e.g., renting out space), it can qualify as a 'plant', thereby allowing Input Tax Credit (ITC).
• Case Remanded: The judgment of the Orissa High Court (which had read down the provision) was set aside. The case was remanded back to the High Court for a factual determination of whether the shopping mall in question qualifies as a 'plant' based on the functionality test.

2. Core Issue

The central issue was whether a registered person is entitled to claim Input Tax Credit (ITC) on GST paid for goods and services used in the construction of an immovable property (like a shopping mall, factory, or commercial building) when that property is subsequently used to make outward taxable supplies, such as renting or leasing.

This involved a two-fold examination:
1. The constitutional validity of Sections 17(5)(c) and 17(5)(d) of the CGST Act, which block such ITC.
2. The correct interpretation of the exception for "plant or machinery" within Section 17(5)(d).

3. Key Facts

• The respondent, M/S Safari Retreats Private Limited, constructed a shopping mall.
• It paid GST on various inputs, including goods (cement, steel, lifts, etc.) and services (architectural, engineering, legal, etc.), accumulating a significant amount of ITC.
• The respondent then let out the premises in the mall to tenants, which is a taxable supply of service (renting), and was liable to pay GST on the rental income.
• The GST authorities denied the respondent the benefit of setting off the accumulated ITC against its output tax liability on rental income, citing the block under Section 17(5)(d) of the CGST Act.
• The respondent challenged this denial before the Orissa High Court, which read down the provision and allowed the ITC. The Revenue appealed this decision to the Supreme Court.

4. Arguments

Assessees' (Respondents') Arguments:

• Unconstitutionality: Section 17(5) is arbitrary and violates Article 14 as it treats unequals (assessees who rent out property and continue the tax chain) as equals (assessees who sell the property post-completion, breaking the tax chain). Denying ITC defeats the primary objective of GST, which is to eliminate the cascading effect of taxes.
• Statutory Interpretation:
  • The legislature deliberately used the term "plant or machinery" in Section 17(5)(d), which is distinct from "plant and machinery" defined in the Explanation to Section 17.
  • Therefore, the restrictive definition which excludes buildings does not apply to Section 17(5)(d).
  • Based on the "functionality test" established in Income Tax law, a building like a shopping mall, which is the very apparatus with which the business of renting is carried on, should be treated as a 'plant'.
  • If the mall is a 'plant', it falls within the exception of Section 17(5)(d), and ITC should be available.

Revenue's (Appellants') Arguments:

• Constitutionality: ITC is a statutory concession, not a vested right. The legislature has wide latitude in fiscal matters. The classification is based on an intelligible differentia—the creation of immovable property, the sale of which is outside GST, thus breaking the tax chain.
• Statutory Interpretation:
  • The use of "or" in "plant or machinery" is a legislative error and should be read as "and". The intention was to treat both clauses (c) and (d) of Section 17(5) uniformly.
  • The definition in the Explanation to Section 17 should apply to both clauses.
  • A shopping mall is an immovable property, not a plant. Precedents from the Income Tax Act are not applicable to the distinct scheme of GST.
  • Allowing ITC would lead to revenue loss, as the assessee could utilize the full ITC against rental income and then sell the property after a few years without any GST liability.

5. Court’s Reasoning

• On Constitutional Validity: The Court held that the legislature has wide discretion in economic and tax legislation. ITC is a statutory benefit, not a right. The classification of blocking credit for the construction of immovable property is not arbitrary. It is based on a reasonable differentia (immovable property being a distinct class) and has a nexus with the legislative scheme, particularly since the sale of immovable property post-completion is not a taxable supply under GST. The challenge to Section 16(4) was also dismissed as it is a reasonable procedural time limit.
• On "Plant or Machinery": The Court sided with the assessees on this point. It reasoned that the legislature's use of "plant or machinery" in clause (d) was deliberate and conscious, especially since "plant and machinery" is used in ten other places in the relevant chapters. This distinction must be given effect. Therefore, the restrictive definition in the Explanation to Section 17, which excludes buildings, does not apply to "plant or machinery" in Section 17(5)(d).
• On the Meaning of 'Plant': With no definition in the CGST Act, the Court turned to established legal principles, including the "functionality test." It held that whether a building is a 'plant' is a question of fact. If the building serves as an essential tool or apparatus for the business, rather than merely being the setting, it can be classified as a 'plant'. The Court distinguished its earlier judgment in Anand Theatres (which held hotel buildings are not plants) and relied on Karnataka Power Corporation to hold that the functionality test is the correct approach for buildings that are not hotels or cinemas.
• Conclusion on ITC: If, on facts, a building like a mall is determined to be a 'plant' using the functionality test, then the ITC on goods and services used for its construction would not be blocked by Section 17(5)(d) and would be available to the assessee.

6. Statutory References

• Central Goods and Services Tax Act, 2017:
  • Section 16: Eligibility and conditions for taking Input Tax Credit.
  • Section 16(4): Time limit for availing ITC.
  • Section 17(5)(c): Blocks ITC on works contract services for construction of an immovable property (other than plant and machinery).
  • Section 17(5)(d): Blocks ITC on goods or services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account.
  • Section 7 & Schedule II: Defines scope of supply and classifies renting of immovable property and certain constructions as a supply of service.
• Constitution of India:
  • Article 14: Right to equality.
  • Article 19(1)(g): Right to practice any profession, or to carry on any occupation, trade or business.
  • Article 300A: Right to property.

7. Precedents Cited

• Eicher Motors Limited & Anr. v. Union of India (1999): On the purpose of credit being a benefit to the assessee.
• Union of India & Ors v. VKC Footsteps India Pvt. Ltd. (2022): On the wide latitude available to the legislature in fiscal matters and the nature of ITC as a statutory benefit.
• ALD Automotive Pvt. Ltd. v. Commercial Tax Officer (2019): Established that ITC is a concession and not a vested right.
• CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad (1971): Interpreted 'plant' broadly under the Income Tax Act to include assets that are tools of the trade.
• CIT, Trivandrum v. Anand Theatres (2000): Held that hotel/cinema buildings are not 'plant' as they are the setting for the business, not the tool itself.
• Commissioner of Income Tax, Karnataka v. Karnataka Power Corporation (2002): A larger bench decision that limited the scope of Anand Theatres and established the "functionality test"—if a building is specially constructed for a technical purpose, it can be a 'plant'. This was a key precedent relied upon by the Court.