OCTOBER 09, 2024

By TIOL Edit Team

EVERYONE makes mistakes; it's about the way you respond to it that's really important - Steve Smith

This piece is about the latest Supreme Court ruling on s.17(5)(d) of the CGST Act, 2017, in the matter of the Civil Appeal filed by the department.

First respondent is engaged in the construction of a shopping mall for the purpose of letting out premises in the malls to different tenants.

Vast quantities of material, inputs and services are required for the construction of the malls.

It is the case of the first respondent that it has accumulated input credit of more than Rs.34 crores by the purchase/supply of goods and services consumed and used in the construction of the shopping mall. At the same time, the first respondent's letting out of units in the shopping mall attracts CGST based on the rent received since it amounts to supply of service under the CGST Act. Therefore, the first respondent was desirous of availing the Input Tax Credit (ITC) accumulated against the rental income received by it upon letting out the mall premises.

When the first respondent approached the authorities concerned, it was advised to deposit GST on rent without deducting ITC because of the exception carved out by Section 17(5)(d) of the Act, 2017.

The High Court [2019-TIOL-1088-HC-ORISSA-GST] held that if the assessee is required to pay GST on the rental income received by letting out of units in the mall, it is entitled to ITC on the GST paid on the construction of the mall. It was held that the narrow interpretation given by the Department to Section 17(5)(d) would frustrate the very object of the Act.

Aggrieved, Revenue filed an appeal before the Supreme Court [2019-TIOL-489-SC-GST].

The matter was decided, well almost, by the Supreme Court recently, on 3rd October.

See [2024-TIOL-101-SC-GST].

Understandably, social media platforms went into a hyperactive mode critically examining the judgment and explaining its implication on an assessee.

We too carried an article on the 4th where the learned author opines that the judgment seems to be a flawed one.

More articles on the subject would be carried in the coming days.

Some noteworthy observations made by the apex court are -

++ Submissions made for the assessees and the intervenors are repetitive. There are a large number of decisions relied upon, whether relevant or irrelevant. Brevity is the hallmark of good advocacy. The Judges and lawyers are humans. Sometimes, bulky compilations and submissions can be counterproductive. [para 6]

++ By no stretch of the imagination, clauses (c) and (d) of Section 17(5) can be said to be discriminatory. No amount of verbose and lengthy arguments will help the assessees prove the discrimination. In the circumstances, it is not possible for us to accept the plea of clauses (c) and (d) of Section 17(5) being unconstitutional. [para 60]

++ Now, we come to the challenge to sub-section (4) of Section 16 of the CGST Act, … It is not shown how the provision is arbitrary and discriminatory. The fact that the provisions could have been drafted in a better manner or more articulately is not sufficient to attract arbitrariness. [para 63]

Some interesting submissions made by the Revenue too need mention -

1. As there is no GST payable on shopping malls, there is no need to grant ITC; that if a shopping mall is sold as an immovable property immediately after the completion certificate is issued, no GST is payable at the time of sale of the immovable property. Therefore, ITC credit cannot be used.

2. If the mall is used to render renting service for five years and then is sold after five years, no GST will be payable on the sale. However, if ITC is allowed as contended during these five years, ITC will be exhausted against GST payable on rental income. Thereafter, the mall would be sold without paying any tax, which would cause a substantial monetary loss [to Revenue].

3. Supply of a constructed building complex or a civil structure before the issuance of the completion certificate can be construed as a supply of services and will be liable to GST. The dividing line is the issuance of a completion certificate. A supply prior to the issuance of the commencement certificate is treated as a supply of service, whereas a sale made after the issuance of the completion certificate is not treated as a supply of service. [para 16(d)]

Be that as it may, the Supreme Court found that there was a flaw in the law inasmuch as sections 17(5)(c) and s.17(5)(d) were not properly worded since whereas s.17(5)(c) employed the expression "plant and machinery", s.17(5)(d) used the expression "plant or machinery" and the Explanation only defined the expression "plant and machinery" to exclude from its ambit "land, building or any other civil structures".

The ASG accepted it as a drafting mistake.

Paragraph 43 records this as below -

His submission is that the use of the word "or" in clause (d) is a mistake of the legislature. Learned ASG himself accepted that the expression "plant and machinery" appears at ten different places in Chapters V (Input Tax Credit) and VI (Tax Invoice, Credit and Debit Notes) of the CGST Act. According to him, the expression "plant or machinery" appears only in clause (d) of Section 17(5).

And, therefore, the Supreme Court remarked -

"…The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression "plant or machinery" in clause (d) as distinguished from the expression "plant and machinery", which has been used in several places. As the expression "plant or machinery" appears to be intentionally incorporated, it is not possible to accept the contention of the learned ASG that the word "or" in clause (d) should be read as "and". If the said contention is accepted, there will not be any difference between the expressions "plant and machinery" and "plant or machinery". This will defeat the legislative intent." [para 43]

And held,

55. Under the CGST Act, as observed earlier, renting or leasing immovable property is deemed to be a supply of service, and it can be taxed as output supply. Therefore, if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant.

56. …Each mall is different. Therefore, in each case, fact-finding enquiry is contemplated. Thus, in the facts of the case, we will have to send the case back to the High Court to decide whether, on facts, the mall in question satisfies the functionality test so that it can be termed as a plant within the meaning of bracketed portion in Section 17(5)(d). The same applies to warehouses or other buildings except hotels and cinema theatres. A developer may construct a mall predominantly to sell the premises therein after obtaining an occupation certificate. Therefore, it will be out of the purview of clause 5(b) of Schedule II. Each case will have to be tested on merits as the question whether an immovable property or a building is a plant is a factual question to be decided.

In conclusion, the Writ petitions were remanded to the High Court 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).

One thing is clear - The department would not like to be a perennial loser. Although the ASG admitted that it is a drafting mistake in not mentioning ‘plant and machinery' in s.17(5)(d), it needs no rocket science to understand that the law book would, at the first opportunity, be amended retrospectively, and the substituted expression ‘plant and machinery' makes an appearance.