Chief Commissioner of CGST vs M/s Safari Retreats Private Ltd. [CIVIL APPEAL NO. 2948 OF 2023]
The Supreme Court of India has recently delivered a pivotal ruling regarding the interpretation of Section 17(5) of the Central Goods and Services Tax (CGST) Act, which may profoundly impact the manner in which businesses claim Input Tax Credit (ITC) on immovable properties such as shopping malls, commercial complexes, and office buildings.
This judgment has the potential to transform the compliance framework for entities engaged in the construction of properties intended for leasing, renting, or commercial activities. It is essential to examine the essence of this ruling, its ramifications, and the ways in which businesses can capitalize on this new interpretation to achieve possible tax advantages.
Section 17(5) of the CGST Act imposes restrictions on the eligibility for ITC concerning goods and services utilized in the construction of immovable properties, with a notable exception for “plant and machinery.” The rationale behind this provision is to prevent the misuse of ITC for personal construction or for activities that do not yield taxable supplies.
In situations where a business develops a property intended for commercial purposes, such as leasing a shopping mall or office spaces, the issue of whether input tax credit (ITC) on construction costs should be permitted emerges. This matter was prominently addressed in the case of Safari Retreats Pvt. Ltd. v. Chief Commissioner of Central Goods and Service Tax & Ors., where the petitioner, M/s Safari Retreats Pvt. Ltd., encountered limitations in claiming ITC for the construction of a shopping mall designated for commercial leasing.
The Supreme Court’s ruling centers on a pivotal interpretative aspect—the functionality test. The Court has effectively expanded the definition of what may be regarded as a “plant,” thereby potentially enabling certain immovable properties to be eligible for Input Tax Credit (ITC) based on their operational use within a business.
The functionality test is a criterion that assesses the significance of a property to the operations of a business. If the property is crucial in facilitating taxable supplies (for instance, a shopping center built for leasing purposes), it may be categorized as a “plant.”
This test aids in determining whether a property serves a purpose beyond being a mere passive asset and is functionally essential for the business, thus making it eligible for ITC under Section 17(5).
Generally, Input Tax Credit (ITC) is permitted for taxes incurred on business-related purchases; however, certain credits, referred to as “blocked credits,” are specifically prohibited. One such limitation concerns ITC on goods or services utilized for the construction of immovable property, as specified in Section 17(5)(d) of the CGST Act, 2017, which states:
“(d) Goods or services or both received by a taxable person for the construction of an immovable property (other than plant or machinery) on his own account, including when such goods or services are used in the course or furtherance of business.”
The prevailing interpretation had been that ITC on goods and services employed in the construction of immovable property is permissible only if the property is intended for sale or transfer. If the property is held and leased out, ITC is not accessible, despite the applicability of GST on the lease payments. This provision was recently contested in the Orissa High Court in the case of Safari Retreats Pvt Ltd v. Chief Commissioner of CGST, where the court issued a significant ruling.
In the above case, the petitioner, whose primary business involved the construction of shopping malls for leasing purposes, procured various materials and services, including cement, steel, and architectural services, for which Goods and Services Tax (GST) was paid. The petitioner aimed to claim Input Tax Credit (ITC) on these inputs to offset the GST liability on lease rentals.
However, the revenue authorities instructed the petitioner to remit GST on the lease rentals without utilizing ITC, referencing the limitations set forth in Section 17(5)(d) of the Central Goods and Services Tax Act, 2017, and cautioning against potential penalties for claiming ITC.
The petitioner argued that Section 17(5)(d) of the CGST Act, 2017, should be construed in a manner favourable to the taxpayer, especially in ongoing transactions such as leasing malls, where GST is applicable to both inputs and rental income. It was contended that the refusal of ITC undermines the fundamental purpose of GST, which is designed to prevent the cascading effect of taxes.
The denial of Input Tax Credit (ITC) may be justified in instances where immovable property is sold after the issuance of a completion certificate, thereby disrupting the tax chain. However, this rationale does not extend to properties constructed for the purpose of leasing. In such scenarios, the refusal of ITC is arbitrary and discriminatory, infringing upon Article 14 of the Constitution. This denial leads to double taxation applying to both the inputs utilized in construction and the rental income generated thereby contravening the fundamental right to conduct business as enshrined in Article 19(1)(g) of the Constitution of India.
The revenue authorities contended that leasing a shopping mall does not constitute construction “on one’s own account,” thereby invoking the limitations set forth in Section 17(5)(d). They further argued that ITC is not an inherent right and may be restricted under legislative provisions, such as Section 16(1) of the CGST Act, which empowers the government to impose conditions on ITC claims.
The Odisha High Court ruled in favor of the petitioner, asserting that the Central Goods and Services Tax Act is designed to establish a uniform tax framework, and a restrictive interpretation of ITC limitations would undermine this objective.
The Hono’ble Supreme Court suggested that Section 17(5)(d) should be interpreted in a manner that permits ITC when GST is paid on rental income, as denying this would impose an unjust burden on taxpayers.
The Court noted that the narrow interpretation of Section 17(5)(d) proposed by the Department obstructs the fundamental aim of the Act, as the petitioner is compelled to pay a substantial amount without justification. Furthermore, the petitioner would have been liable for GST had the property been sold after the completion certificate was issued, while no GST would be owed if the property were sold prior to that certificate. In this case, the petitioner retains the property, not for personal use, but for leasing, which falls under GST regulations, yet is still burdened with a significant GST liability that he should not incur.
In the light of the above, by setting aside the impugned judgment in Civil Appeal Nos. 2948 and 2949 of 2023, the writ petitions were remanded to the High Court of Orissa 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). Appeals were partly allowed in above terms.
While deciding these cases, the Supreme Court held that it cannot make any final adjudication on the question of whether the construction of immovable property carried out by the petitioners in Writ Petitions amounts to plant, and each case will have to be decided on its merit by applying the functionality test in terms of this judgment. The issue must be decided in appropriate proceedings in which adjudication can be made on facts. The petitioners are free to adopt appropriate proceedings or raise the issue in appropriate proceedings.
Chief Commissioner of CGST vs M/s Safari Retreats Private Ltd
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