NOVEMBER 14, 2024

By S Jaikumar, Advocate, Swamy Associates

IF one wonders about the coinage of a novel name "Safari Retreats", you have an alternate answer with the recent Apex Court's decision - 2024-TIOL-101-SC-GST. The judgement is nothing short of a legal safari, on the complex GST jungles, which is partly a treat and partly a retreat!!!

Laws, more particularly the tax laws, is such a complex labyrinth, where we all would end up, exactly where we started. It's just a relay race where the baton reaches the finishing line, which is nothing but the starting line. First the law makers draft a law, with hair-splitting language. Then it would crawl in the corridors of the Courts begging for salvation (a.k.a interpretation). Most of the times the judiciary successfully untangle the string-hoppers, but at times leave them as sticky noodles. The moment the judgement is out, the baton is taken by the tax-professionals. Burning their mid-night oils, the tax-pundits immediately dissect, analyse and interpret such judgements with their proprietary wisdom. This, in-turn, becomes the recipe for the Revenue to cook with extra spice (show cause notices) and serve gastronomical dishes (astronomical demands). Such orders are again challenged in the Courts, thus ending the relay race, with a sole victim – the taxpayer. Without much ado, now let's get into our obligation.

As the case details have been written and read more than any election manifesto, let's keep it brief. The factual matrix of this case concerns the construction of a shopping mall for the purpose of letting out the premises for tenancy. During such construction the assessee has accumulated Input Tax Credit (ITC) on procurement of various goods and services used for such construction. Since the outward supply of the assessee, namely, 'renting/leasing' of the mall was liable to GST, the assessee intended to avail such ITC and the department religiously denied the ITC citing Section 17 (5) (d) of the GST Act. The assessee assailed the denial by way of a Writ Petition in the Hon'ble High Court of Orissa. Reading down the said Section to serve the object, the High Court allowed the WP and held that if GST is payable on outward supply of renting, ITC on goods and services procured for construction shall be allowed.

As any trade-friendly, beneficial, and purposive interpretation would always grieve the Revenue, the above decision was duly challenged which led to this decision.

Despite multiple failed attempts, like Vikram aur Bethal, the assessee-fraternity has always tried to persuade the Courts on few principles, namely, ITC is an indefeasible right, etc. Likewise, in this case also, there was another failed attempt to question the vires of Section 17(5)d) of the GST Act, which was put to rest with the observation that ITC is a creation of legislature, and it can exclude specific categories of goods or services from ITC.

Here we pause, as we are truly at a loss to understand the reasoning and rationale to carve out exceptions, by blocking ITC on any inputs or inputs services, least to mention the construction services, which are rudimentary and used in furtherance of business, when the same is permitted in other prominent VAT driven jurisdictions??? By this, are we not violating the basic spirit of the GST, which is to neutralise cascading effect? How much the exchequer is going to lose by allowing ITC on most of the blocked credits like food or insurance, car rentals or club memberships? Are we not promoting a huge litigation landscape because of this meanness to disallow ITC? Is it not a classic case of penny wise - pound foolish?

Coming back to the crux, the Court had then gone ahead to address interpretation of clauses (c) and (d) of Section 17 (5) of the GST Act. To us, the soul of this decision is about three aspects, namely:

1. The interpretation of the conjunctions "or" & "and" as appearing in S 17(5)(c) & S 17(5)(d);

2. The inclusions under the term 'Plant'; and

3. Prescription of 'functionality test'.

While appreciating and adopting the argument advanced by Sr. Adv. Shri. Arvind P Datar that there is a crucial distinction between S 17(5)(c) & S 17(5)(d) w.r.t usage of the conjunctions, namely, "Plant and Machinery" {S 17(5)(c)} & "Plant or Machinery" {S 17(5)(d)}, the Apex Court did not dwell much, rather divorced, the basis of the Orissa High Court decision, namely, "reading down" principle.

In this Safari, the Apex Court had also travelled across the lengths and breaths of the deeper woods to hunt answers for the questions framed, mainly, w..r.t the definition and applicability of the term 'Plant'. While doing so, the Court had also placed reliance on few important judgements, namely, Taj Mahal Hotel - 2002-TIOL-642-SC-IT, Anand Theatres- 2002-TIOL-910-SC-IT, Victory Aqua Farm Ltd - (2016) 16 SCC 553 = 2015-TIOL-206-SC-IT and Karnataka Power Corporation- 2002-TIOL-567-SC-CUS-LB.

Out of the above, while the other judgements expanded the scope of "plant" to include the buildings and civil structures, the Anand Theatres judgement alone held that the buildings constructed for running hotels and theatres cannot be considered as "plant".

In the present decision, the Court had tacitly agreed to the Anand Theatres ratio but had distinguished with the facts on hand, by observing as under:

51. We may note here that the decision in the case of Anand Theatres  19  is by a Bench of two Hon'ble Judges. Thus, the decision of a larger Bench in the case of Karnataka Power Corporation limits the applicability of the decision in the case of Anand Theatres  to hotels or cinema theatres. Therefore, the decision in the case of Anand Theatres  cannot be applied while considering the question of whether a mall or warehouse or a building other than a hotel or a cinema theatre can be said to be a "plant".

With due respects, to us, this endorsement of "Anand Theatres" ratio is indeed a "retreat". When the Court has considered a mall or a warehouse or a building as a "plant", WHY NOT THEATERS AND HOTELS? We feel, instead of endorsing Anand Theatres ratio for theatres and hotels, the Court should have overruled Anand Theatres, that too, when the judgement-has traversed on the caravan of well-laid down principles governing the interpretation of the taxation statutes.

In this connection, it is also very pertinent and important to note the fact that, "plant" is not a term defined under the GST Act. It's also a fact that, in almost all of the above judgements, the Courts had defined "plant" under the Income Tax law.

In para 25 of the judgement, the Court has set out the tone and tenor, which reads as:

"When a word used in a taxing statute is to be construed and has not been specifically defined, it should not be interpreted in accordance with its definition in another statute that does not deal with a cognate subject. It should be understood in its commercial sense. Unless defined in the statute itself, the words and expressions in a taxing statute have to be construed in the sense in which the persons dealing with them understand, that is, as per the trade understanding, commercial and technical practice and usage"

Thus, we are of the view that, for the term "plant", the Court could have resorted to the "commercial term" instead of resorting to Anand Theatres ratio and need not have excluded "theatres" and "hotels" from "plant", more particularly when such judgements are not from cognate law but were rendered on a direct tax law for depreciation allowance. We feel, instead, the Court could have harped on the most important third limb of the decision alone, namely, the" functionality test" as the soul for the ITC entitlement.

Another major feedstock for the next bout of litigations, is the Court's observation of the term "own-account" under S 17(5)(d). In this connection, para 32 of the judgement is relevant:

"There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d). 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". 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. 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 said to be on a taxable person's "own account" if it is intended to be sold or given on lease or license."

From the above, it could be inferred that, there would be a restriction of ITC, if goods and services used for construction "on own account". The judgement has amplified the term 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 setting in which business is carried out.

However, its amply clarified that the construction cannot be said to be on "own account" if it is intended to be sold or given on lease or license.

From the above, we infer that, while ITC is eligible if the construction of immovable property is directly used for supply which generates direct income like activities relating to leasing, renting, warehousing etc, the same may find a slippery slope, if such immovable property is used as a shelter for housing goods / services and facilities which would indirectly participate in a furtherance of a business income.

In other words, the construction of factory sheds, water tanks / storages / reservoirs which are integrally connected to manufacture (like in integrated steel plants), in-house testing facilities, raw material/ finished goods storage sheds, etc, which may not get qualified as per the Explanation of "plant and machinery" under S17(5), would be left in lurch.

To a logical as well as a lawful mind, these constructions are no different from those of malls / warehouses, which are held to be eligible as per this judgement, as both would answer the "functionality test" of being used in an activity resulting in a GST Revenue. If a mall generates a GST income on rental, so does the manufacturing plant and its appurtenances on the supply of goods produced.

Last but not the least, as per the guiding principle set out in the said para 25 of this decision,

"Equity and taxation are strangers, but if construction results in equity rather than injustice, such construction should be preferred"

To us, if malls and warehouses would pass the "functionality test", the other civil constructions jotted above, would also summarily pass the test and any attempt to outcast them would not be "inequity" but "injustice".

Before Parting…

In case if the ratio is interpreted to allow ITC only for renting / leasing and not for manufacturing or other supply-related constructions, soon we maybe witnessing a template, where all such civil constructions would be outsourced to a third-party entity, who would subsequently rent it back to the manufacturers, on payment of GST for such rental / lease, using the ITC availed on such constructions, at their hands. And if such eco-system evolves and alleged to be a circumvention, the reason would only be such mean interpretations.

[The views expressed are strictly personal.]