OCTOBER 07, 2024

By Mr Ashwarya Sharma, Co-Founder and Legal Head, RB Law Corp Pvt. Ltd.

SUPREME Court in M/s Safari Retreats Private Ltd. & Ors. (2024-TIOL-101-SC-GST) delivered a landmark judgement clearing the air on availment of ITC on civil structures having wide ranging impact on inter-alia hospitality, construction, entertainment, and similar industries who are engaged in providing services to its customers utilizing their building, civil structure, or plant (if you may functionally call it).

First things first, what exactly is the controversy which led to the judgement?

The journey started from the decision of the Odisha High Court in M/s Safari Retreats Pvt Ltd (2019-TIOL-1088-HC-ORISSA-GST) wherein the taxpayer; a mall owner landed on the door of the High Court to allow it to claim the benefit of input tax credit ('ITC') which was accumulated on purchase of goods and/or services received by it for construction of its mall which was to further let out to its customers.

The High Court while allowing the writ petition in favor of the taxpayer held:

"19. The very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation.

Therefore, the contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16 (1) (2) where restriction has been put forward by the legislation for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, in as much as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.

20. In that view, of the matter, in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in (1999) 2 SCC 361 = 2002-TIOL-149-SC-CX-LB (supra), the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act."

The High Court allowed the benefit of ITC reading down the provision of section 17(5)(d) of the CGST Act, however it declined to declare the provision as unconstitutional. It is also important to note that there was no challenge to section 17(5)(c) of the CGST Act before the High Court and neither there was any discussion on the meaning of the 'plant and machinery' or 'plant or machinery' which has consumed much of the time before the Supreme Court.

Aggrieved, the revenue filed SLP before the Supreme Court.

The gist of major arguments taken by the revenue before the Supreme Court are:

- Classification of taxpayers qua usage of immovable properties is justified under section 17(5) (c) and (d) of the CGST Act and there exists intelligible differentia which has rational nexus with the object of GST;

- Immovable property is itself the intelligible differentia based on which classification has been done. Such classification has a rational nexus since there is a break in the tax chain on creation of immoveable property, therefore, ITC is being denied;

- ITC neither a fundamental nor a constitutional right but only a statutory right which can be restricted by the legislature;

- Legislature has wide latitude in taxing matters to adopt appropriate classification and even to create discrimination as long as it is not hostile discrimination;

- The expression "plant or machinery" must be read as "plant and machinery" as it is not uncommon to read "and" as "or" or "or" as "and". Accordingly, the definition in explanation to Section 17(5) applies to both clause (c) and (d) of section 17(5);

- As there is no GST payable on shopping malls per-se there is no need to grant ITC

The gist of major arguments taken by the taxpayer before the Supreme Court are:

- Section 17(5) (c) and (d) are violative of Articles 14, 19(1)(g) and 300A of the Constitution;

- There is no intelligible differentia on the basis of which such classification of restricting ITC is done and creation of an immovable property cannot be the differentia;

- There is no break in the credit chain starting from the subcontractor to the main contractor and the petitioners, since all three entities are liable to GST, therefore, denial of credit cannot be justified;

- Denying credit perpetuates the cascading effect of tax, contrary to the very object of the CGST Act;

- Section 17(5)(c) and (d) suffer from vagueness due to the absence of definitions of "on its own account" and "plant or machinery";

- The expression "plant and machinery" used in Section 17(5)(c) is different from the expression "plant or machinery" used in Section 17(5)(d)

The Hon'ble Court framed the below questions for its 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"? and

3. Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?

After hearing the counter arguments, the Supreme Court analyzed and held that:

- The expression "plant and machinery" used in clause (c) is different from the expression "plant or machinery" used in clause (d) of section 17(5) of the CGST Act;

- Clause (c) uses the expression "plant and machinery", which is specifically defined in the explanation, but clause (d) uses the expression "plant or machinery", which is not specifically defined;

- The contention of the revenue that usage of the word 'or' between 'plant/machinery' in clause (d) instead of 'and' is a drafting mistake and both the terms used in clause (c) and clause (d) are same was expressly rejected;

- While interpreting taxing statutes, it is not the function of the Court to supply deficiencies;

- The expression "plant or machinery" is intentionally incorporated in clause (d) to distinguish it from the expression "plant and machinery" used in clause (c);

- The word 'plant' used in Section 17(5)(d) cannot be given a restricted meaning and in a given case, a building can also be treated as a plant;

- The word "plant" will have to be interpreted by taking recourse to the functionality test laid down by the Supreme Court in various decision including in Solid and Correct Engineering Works & Ors (2010-TIOL-25-SC-CX);

- In the main appeal, the High Court has not decided whether the mall in question will satisfy the functionality test of being a plant. Therefore, the matter is remanded back to decide whether, the mall in question satisfies the functionality test so that it can be termed as a plant or not;

- Section 17(5)(c) and (d) are constitutionally valid

Thus, if a taxpayer can demonstrate before the adjudicating or appellate authorities that the functional nature of its building or civil structure is akin to a 'plant' without which it cannot operate its business and the very nature of its business requires the existence of the building or civil structure without which the substratum of the transaction itself would be lost, then all such buildings or civil structures should be covered in the scope of the term 'plant' and ITC would be eligible.

Be that as it may, the million-dollar question is would the department accept this judgement or seek an amendment in the law, retrospective that is!

[The views expressed are strictly personal.]