ITC On Buildings

The Supreme Court delivered a significant judgment in the case of Chief Commissioner of Central Goods and Services Tax vs M/s Safari Retreats Private Limited, which deals with the controversial issue of Input Tax Credit (ITC) on immovable properties under the CGST Act. This case specifically addresses the constitutional validity of clauses (c) and (d) of sub-section (5) of Section 17, which pertains to "blocked credit" and the availment of ITC in relation to immovable properties.

In this landmark judgment, the Court dismissed the challenge to the constitutional validity of the provisions and offered a nuanced interpretation, emphasizing the need to apply the functionality test to determine if a building can be considered a "plant" for ITC purposes. 

Let’s explore the 15 key takeaways from this judgment that have significant implications for businesses and professionals navigating GST law:

Key Observations of the Court

No Ambiguity in Interpretation: The court held that a plain interpretation of clauses (c) and (d) of Section 17(5) does not result in any ambiguity. Thus, modifying or reading down these provisions is unnecessary to resolve any perceived inconsistencies.

Exclusion Not Absolute: The Supreme Court notably clarified that these clauses do not entirely exclude every class of immovable property from the scope of ITC. For instance, under clause (c), if the construction pertains to "plant and machinery" as defined under the CGST Act, ITC can still be availed. Similarly, clause (d) permits ITC when the construction relates to "plant or machinery."

Functional Test for 'Plant': A critical part of the judgment was the court's interpretation of the term "plant." The court stressed that the word "plant" used in Section 17(5)(d) should not be limited to the narrow definition provided for "plant and machinery." Instead, the "functional test" should be applied—meaning the term should be interpreted based on its role in a business.

GST's Legislative Intent: The court reiterated that ITC is a creation of the legislature. Therefore, lawmakers have the authority to exclude specific categories of goods or services from ITC. The exclusion of works contracts by clause (c) is consistent with the objective of the CGST Act and does not undermine the overall GST framework.

Differentiation between ‘Plant’ and ‘Plant and Machinery’: The court distinguished significantly between the expressions "plant" and "plant and machinery." While the latter term excludes land, buildings, or civil structures, "plant or machinery" can cover immovable property, depending on the role it plays in a business.

Impact on Various Business Structures: The court further examined how this ruling affects different kinds of businesses and properties. For example, the judgment clarified that the classification of a mall, warehouse, or other building as a "plant" depends on the functionality it serves in the business. If the construction of the building is essential for supplying services, such as leasing or renting, the building could be treated as a "plant" for ITC purposes.

20 Key Takeaways:

Here are 20 key 

takeaways from the Supreme Court's judgment in Chief Commissioner of Central Goods and Services Tax vs M/s Safari Retreats Private Limited regarding blocked credit and ITC availment under the CGST Act:

1. Constitutional Validity Upheld: The Supreme Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act.

2. No Need to Read Down Provisions: The Court found no ambiguity in the provisions, dismissing the need to read them down or reinterpret them.

3. Not All Immovable Properties Excluded: The Court clarified that clauses (c) and (d) do not exclude all immovable properties from ITC eligibility; exceptions apply, particularly for “plant and machinery.”

4. Distinction Between "Plant and Machinery" and "Plant or Machinery": The Court stressed that “plant or machinery” in Section 17(5)(d) is distinct from “plant and machinery” as defined in the CGST Act, reflecting the legislature's intent.

5. Functionality Test Introduced: The Court applied the functionality test to determine whether a building qualifies as a “plant” for ITC purposes based on its role in business operations.

6. Wider Interpretation of "Plant": The term “plant” was interpreted in its ordinary commercial sense, which may include buildings if they serve an essential function in a business.

7. ITC for Plant or Machinery: Buildings that qualify as “plant or machinery” under Section 17(5)(d) may be eligible for ITC, provided they serve a business function.

8. Rental or Leasing is a Supply of Service: Renting or leasing immovable property is classified as a supply of service under GST, allowing ITC on related goods and services used in construction.

9. No Breaking of ITC Chain: The Court dismissed the Revenue's argument that the ITC chain breaks when a building is constructed, confirming ITC can be claimed if the building is used for business purposes.

10. Clarification on "Own Account": The Court clarified that construction on a taxable person’s own account refers to personal use, not business use (e.g., leasing or selling the building).

11. Applicability to Malls and Warehouses: The judgment sends the case back to the High Court to determine if the mall in question qualifies as a “plant” under the functionality test. The same applies to warehouses and other buildings, excluding hotels and cinema theatres.

12. Legislative Intent Respected: The Court emphasized that the legislature consciously used the term “plant or machinery” in Section 17(5)(d) and that it was not meant to be interchangeable with “plant and machinery.”

13. No Discriminatory Treatment: The Court rejected arguments that the distinction between "plant and machinery" and "plant or machinery" leads to discrimination, as the two clauses operate in distinct areas.

14. ITC for Buildings Serving Business Functions: The Court recognized that if a building, such as a mall or warehouse, serves essential business functions like leasing or renting, it may qualify for ITC.

15. High Court to Decide on Functionality: Each case must be tested on its merits to determine if a building qualifies as a “plant” under the functionality test, leaving the High Court to make this determination in the Safari Retreats case.

16. Revenue’s Argument on Chain Breaking Rejected: The Court found that the Revenue’s argument on breaking the ITC chain once a building is constructed was flawed, especially if the building is used for supply of services.

17. Works Contracts Excluded from ITC: The Court upheld the exclusion of works contracts from ITC, stating this does not defeat the object of the CGST Act.

18. Constitutional Validity of Section 16(4) Affirmed: The Court found no merit in arguments that Section 16(4), which sets a deadline for availing ITC, is discriminatory or arbitrary.

19. Focus on Schedule II and III: The judgment emphasized that Schedule II must be read alongside Schedule III, especially regarding the supply of goods and services related to immovable properties.

20. Case-by-Case Assessment: The Court concluded that each case must be individually assessed to determine ITC eligibility, applying the functionality test to see if the building serves as a “plant” for business use.

These key takeaways provide clarity on the interpretation of blocked credit provisions and ITC eligibility for immovable properties, with significant implications for businesses in the construction and real estate sectors.

Dismissal of the Constitutional Challenge

The court also dismissed the challenge to the constitutionality of Section 17(5), clearly relying on established legal principles. Citing the case of VKC Footsteps, the court emphasized that the legislature must be allowed leeway in dealing with complex fiscal issues like GST. The court also rejected the argument that the provisions lacked reasonable classification or that the distinctions made were unintelligible or unrelated to the objectives of the CGST Act.

Final Remarks

This Supreme Court ruling provides much-needed clarity on the applicability of ITC in relation to immovable property under the GST regime. By upholding the validity of Section 17(5)(c) and (d), the court has reinforced the legislative intent behind the blocked credit provisions while ensuring that businesses engaged in the construction of "plant" or "machinery" still have access to ITC in appropriate cases.

This decision not only sets a significant precedent but also highlights the importance of functional tests in determining the eligibility for ITC, particularly in the case of immovable properties used in business operations.

Conclusion

This Supreme Court judgment in Safari Retreats is a pivotal ruling that clarifies the scope of blocked credits under Section 17(5) of the CGST Act. It introduces the functionality test as a crucial tool for determining whether buildings and other immovable properties qualify for ITC. The judgment respects legislative intent while ensuring fairness in the application of GST laws. Taxpayers engaged in constructing properties for business use must now carefully assess their ITC eligibility in light of this ruling, which provides clarity on the application of the law to various types of immovable properties.