OCTOBER 08, 2024

By R K Singh

SUPREME Court's judgement dated 3.10.2024 in the case of Safari Retreats [2024-TIOL-101-SC-GST] is pyrrhic victory for either side as explained below.

2. Para 32 of the judgment enlightens that "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. However, construction cannot be said to be on taxable person's "own account" if it is intended to be sold or given on lease or license.

3. In para 45 of the said judgement, it is stated that only a plant will not be covered by the definition of "plant and machinery" unless there is an element of machinery or vice versa. In para 46 it is stated that plant or machinery can either be a plant or machinery.

Goods and services used for construction of plant and machinery will not be eligible for ITC because of s. 17(5)(d)

4. S. 17(5)(d) of CGST Act disallows ITC on goods and services used for construction of immovable property (except plant or machinery) on tax payer's own account. As plant or machinery is not covered under the definition of "plant and machinery" and s.17(5)(d) does not carve out an exception for "plant and machinery", it axiomatically follows that ITC on goods and services (including works contract service because it is also a service) used for construction of "plant and machinery" is disallowed in terms of s. 17(5)(d) so long as the said plant and machinery is constructed on tax payer's own account. It needs to be specifically pointed out that (notwithstanding that it sounds implausible at the first blush), a careful and conjoint perusal of s.17(5) (c) and s.17(5)(d) (in the light of the said judgement) leads to the inescapable conclusion that even though as per s. 17(5)(c) ITC on works contract service is not disallowed if it is used for construction of "plant and machinery", it is rendered inadmissible vide s.17(5)(d) if the "plant and machinery" is constructed on the taxpayer's own account. It hardly needs to be mentioned that if one provision denies ITC and another provision (not supported by a non obstante clause) does not disallow it, ITC shall stand denied.

Devastating for the trade

5. This is devastating for the trade because, in the wake of the said judgement, ITC on goods and services (including works contract service) used for construction of "plant and machinery" on taxable person's own account will stand disallowed.

Pyrrhic victory

6. The above analysis shows that had the ASG's detailed and reasoned submission that "plant or machinery" should be read as "plant and machinery" been accepted by the respondents, the devastating situation described in paragraph 5 above would not have come to pass. Thus in the wake of the said judgement, while the respondents may have won (and the government sort of correspondingly lose) as far as the admissibility of ITC on goods and services (i) used for construction of immovable plant or machinery and/or (ii) used for construction of immovable property (other than plant and machinery) intended to be sold or given on lease or licence is concerned, an unintended consequence/ implication of the said judgement is that no ITC on goods and services ( including works contract service) used for construction of immovable "plant and machinery" will be admissible if the same is constructed on tax payer's own account, thereby resulting in unexpected loss to the trade and corresponding gain to the government. Such a consequence/ implication (pretty clearly unintended) is too drastic to be allowed to continue to prevail and, therefore, the government may have to soon step in to neutralise the same. One is left wondering whether the trade over all would not have been better off if it had accepted the ASG's submission that "plant or machinery" should be read as "plant and machinery".

7. This is a textbook example of pyrrhic victory.

PS: This article could have been a lot longer if as per the usual practice, the relevant paras of the said judgement and the legal provisions were reproduced in full and familiar judicial precedents were paraded copiously reproducing therefrom. But I was able to avoid doing so because I had no limitation of time.

[The author is former Member CESTAT and Sr. Partner, TLC Legal Advocates. The views expressed are strictly personal.]