ITC benefit allowed on commercial property construction

The Hon’ble Supreme Court in the case of Chief Commissioner of Central Goods and Services & Ors. v. M/s. Safari Retreats Private Limited & Ors. [Civil Appeal No. 2948 of 2023 dated October 03, 2024] upheld the validity of Section 17(5)(c) and 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”), rejecting the constitutional challenge. It clarified that “plant or machinery” in Section 17(5)(d) cannot be interpreted the same way as in the explanation to Section 17(5)(c) of the CGST Act. Further, construction of a mall, warehouse, or building can be classified as a “plant” depends on the registered person’s business and the building’s role in that business. Buildings constructed for services like renting or leasing may qualify as a plant, subject to a functionality test. Thus, the Court remanded cases where the High Court had read down the provision and called for factual analysis in other cases.

Facts:

M/s Safari Retreats Private Limited (“the Respondent”) was 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 were required for the construction of the malls in the form of cement, sand, steel, aluminium, wires, plywood, paint, lifts, escalators, air-conditioning plants, electrical equipment, transformers, building automation systems etc., and also consultancy services, architectural services, legal and other professional services, engineering services and other services including the services of a special team of international designers specialised in the construction of Malls. These goods and services were taxable under the CGST Act.

The Respondent had accumulated input credit of GST amounting to more than Rs. 34 crores by the purchase/supply of goods and services consumed and used in the construction of the shopping mall.

The Respondent, at the same time, was letting out of units in the shopping mall attracts CGST based on the rent received by the Respondent since it amounts to the supply of service under the CGST Act. The Respondent wanted to avail ITC accumulated against rental income received from such rental income received by it upon letting out the mall premises.

However, the Authority advised the Respondent to deposit GST on rent without deducting ITC because of the exception carved out by Section 17(5)(d) of the CGST Act.

Consequently, the Respondent filed a writ petition before the Hon’ble High Court of Orissa and accordingly an Order dated April 17, 2019 (“the Impugned Order”) was passed against the Chief Commissioner of CGST & Ors. (“the Appellants”).

Hence, aggrieved by the Impugned Order, the present Special Leave Petition (“SLP”) was filed before the Hon’ble Apex Court by the Appellants.

Issues:

• Whether the definition of “plant and machinery” in the explanation appended to Section 17(5)(c) of the CGST Act applies to the expression “plant or machinery” used in Section 17(5)(d) of the CGST Act?
• If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”?
• Whether Section 17(5)(c) and 17(5)(d) of the CGST Act read with Section 16(4) of the CGST Act are unconstitutional?

Held:

The Hon’ble Supreme Court in the Civil Appeal No. 2948 of 2023 held as under:

• Observed that, Section 17(5)(c) and 17(5)(d) of the CGST Act applies when works contract services are supplied for constructing immovable property. The definition of “works contract” under Section 2(119) is extensive. Thus, in the case of works contract services supplied for the construction of immovable property, the benefit of ITC is not available. However, there are exceptions to Section 17(5)(c):
  • i. When goods or services, or both, are received by a taxable person for the construction of “plant and machinery”, as defined in the explanation .
  • ii. Where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract.
• Section 17(5)(d) of the CGST Act is different from Section 17(5)(c) of the CGST Act in various aspects. Section 17(5)(d) of the CGST Act seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d):

…

The Hon’ble Supreme Court in theCivil Appeal No. 2948 of 2023 held as under:

• Observed that, Section 17(5)(c) and 17(5)(d) of the CGST Act applies when works contract services are supplied for constructing immovable property. The definition of “works contract” under Section 2(119) is extensive. Thus, in the case of works contract services supplied for the construction of immovable property, the benefit of ITC is not available. However, there are exceptions to Section 17(5)(c):
  • i. When goods or services, or both, are received by a taxable person for the construction of “plant and machinery”, as defined in the explanation .
  • ii. Where the works contract service supplied for the construction of immovable property is an input service for further supply of the works contract.
• Section 17(5)(d) of the CGST Act is different from Section 17(5)(c) of the CGST Act in various aspects. Section 17(5)(d) of the CGST Act seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d):
  • i. where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”.
  • ii. 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.

• Section 17(5) incorporates an explanation which provides that the word “construction” used in clauses (c) and (d) includes reconstruction, renovation, additions, alterations or repairs, to the extent of capitalisation, to the immovable property. Thus, a very wide meaning has been assigned to the expression “construction” by the said explanation.
• There is hardly a similarity between clauses (c) and (d) of Section 17(5) except for the fact that both clauses apply as an exception to sub-section (1) of Section 16. Perhaps the only other similarity is that both apply to the construction of an immovable property. Clause (c) uses the expression “plant and machinery”, which is specifically defined in the explanation. Clause (d) uses an expression of “plant or machinery”, which is not specifically defined.
• The explanation defines the meaning of the expression “plant and machinery”. However, as stated earlier, the expression “plant or machinery” has not been defined under the CGST Act. It is pertinent to note that clauses (c) and (d) do not altogether exclude every class of immovable property from the applicability of ITC. In the case of clause (c), if the construction is of “plant and machinery” as defined, the benefit of ITC will accrue. Similarly, under clause (d), if the construction is of a “plant or machinery”, ITC will be available.
• In view of clause (a) of sub-section (1) of Section 7, a supply of services such as sale, transfer, licence, rental or lease made for consideration is a supply. Whether the activities or transactions covered by sub-section (1) of Section 7 constitute a supply has to be considered in light of Schedule II. Schedule II has a title: “Activities or transactions to be treated as supply of goods or supply of services”. The activities/transactions incorporated in Schedule II are treated as a supply of service. As far as lands and buildings are concerned, clauses (2) and (5) of Schedule II are relevant.
• Clause 5(b) of Schedule II has to be read with the provisions of Schedule III, which has a title: “Activities or transactions which shall be treated neither as a supply of goods nor a supply of services”.
• If there is a complex, building or civil structure constructed which is intended for sale to a buyer, wholly or partly, construction becomes a supply of service only if consideration for sale is received before the issuance of a completion certificate or after its first occupation, whichever is earlier. Thus, if the consideration for sale is paid after the competition certificate is issued or its first occupation, whichever is earlier, the sale transaction will not amount to the supply of service. However, no such distinction has been made in the case of lease, tenancy, or licence concerning land or letting of buildings. Even if the entire consideration for lease, tenancy or a licence to occupy land or a lease of a building is paid after the issuance of the completion certificate or its first occupation, whichever is earlier, it continues to be a supply of service.
• The Constitutional validity of Section 17(5)(c) and 17(5)(d) read with section 16(4) of the CGST Act was upheld. The legislature has the power to make reasonable classifications for the purpose of taxation, and the provisions in questions do not violate the principle of equality under Article 14 of the Constitution.
• Relied on, the case of ALD Automotive Pvt. Ltd. v. Commercial Tax Officer [(2019) 13 SCC 225] wherein the Hon’ble Supreme Court held that denial of ITC was justified on the ground that it is not a fundamental or constitutional right, rather, ITC is a statutory right and in absence of the right under the statute, the Court cannot issue a mandamus to grant ITC.
• Opined that, the expression ‘Plant or machinery’ cannot be given the same meaning as ‘plant and machinery’ as defined in the explanation to Section 17 of the CGST Act. The legislature has consciously used a distinct expression, and it must be given a different meaning. The word ‘Plant’ in the expression “plant or machinery” should be interpreted based on functionality test i.e. whether the building is essential for carrying out the business activities of the registered person.
• Observed that, the explanation to Section 17(5)(c) of the CGST Act defines ‘plant and machinery’ used in Chapter V which discussed provisions of ITC and Chapter VI which discusses Registration of GST, wherein, the expression ‘plant and machinery’ appears in several places, but the expression ‘plant or machinery’ is found only in Section 17(5)(d) of the CGST Act. If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have used the expression “plant or machinery” in Section 17(5)(d) of the CGST Act. The Legislature has made this distinction consciously. Therefore, the expression ‘plant and machinery’ and ‘plant or machinery’ cannot be given the same meaning.
• Noted that, the expression “plant or machinery” has a different connotation. It can be either a plant or machinery. Section 17(5)(d) of the CGST Act deals with the construction of an immovable property. The very fact that the expression “immovable property” is used shows that there could be a plant that is an immovable property. As the word ‘plant’ has not been defined under the CGST Act or the rules framed thereunder, its ordinary meaning in commercial terms will have to be attached to it.
• Observed that, the question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) of the CGST Act is a factual question which has to be determined keeping in mind the business of the registered person and the role that the building plays in the said business. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by Clause (2) and clause (5) of Schedule II of the CGST Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by Section 17(5)(d) of the CGST Act subject to Section 16(1) of the CGST Act. The Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what it was held earlier, it will have to be decided whether the construction of an immovable property is a ‘plant’ for the purposes of Section 17)5)(d) of the CGST Act.
• Relied on, the case of CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad [(1971) 3 SCC 550], the Hon’ble Supreme Court held that the word “plant” means land, building, machinery, apparatus and fixtures employed in carrying on trade and other industrial business.Applying the principles of the interpretation of taxing statutes, there is no scope to give any meaning to Section 17(5)(c) of the CGST Act other than its plain and natural meaning. The expression ‘plant and machinery’ has been specifically defined in explanation 17 of the CGST Act. Nothing can be added or subtracted from Section 17(5)(c) of the CGST Act. ITC is a creation of legislature. Therefore, it can exclude specific categories of goods or services from ITC. Exclusion of the category of works contracts by clause 17(5)(c) of the CGST Act will not, per se, defeat the object of the CGST Act,
• Held that, set aside the Impugned Order and remanded the Petition to the Hon’ble High Court to decide whether, the shopping mall is a “plant” in terms of clause (d) of Section 17(5) of the CGST Act. The Court did not take the final decision 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.

Our Comments:

Section 17 of the CGST Act governs “Apportionment of credit and blocked credits”. Section 17(5) of the CGST Act provides a list of transactions where credit is not allowed. Section 17(5)(c) of the CGST states that works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service and Section 17(5)(c) of the CGST Act states that goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

For the same purpose, explanation is also provided where “construction” is defined for the purpose of Section 17(5)(c) and (d) of the CGST Act. It states that the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Furthermore, Section 17(5)(c) of the CGST Act provides explanation for Chapter V an VI, where the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

The constitutional validity of Section 17(5)(c) and 17(5)(d) read with Section 16(4) of the CGST Act is in favor of the Revenue Department.

The ITC is not a fundamental or constitutional right, it is a statutory right. It is also a vested right, if it qualifies certain conditions.

Eligibility and conditions are specified under Section 16 of the CGST Act, which is reproduced below:

16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.

Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted;

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall bepaid by him along with interest payable under section 50, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him to the supplierof the amount towards the value of supply of goods or services or both along with tax payable thereon.”

Meaning of “Plant and Machinery” is defined in Explanation to Section 17(5)(C) of the CGST Act. However, the meaning of “Plant or Machinery” is not defined under the GST Act.

Construction of immovable property, if it is qualified as a ‘Plant’ then credit is allowed.

Open Issues:

1. Definition of “Plant”: The term “plant” used in Section 17(5)(d) is not defined in the CGST Act, and its ordinary commercial meaning must be interpreted on a case-by-case basis. This leaves open the issue of whether specific types of immovable property, such as shopping malls, warehouses, or other buildings, can qualify as “plant” under the functionality test.
2. Functionality Test: The application of the functionality test is critical in determining whether a building or structure is classified as “plant.” The specific criteria for this test, and how it will be applied in various factual scenarios, remain open. Each case must be judged on its own merits, considering the business activity and the role of the immovable property in the business.
3. Impact on Future Construction Projects: The ruling may impact future construction projects, particularly those that involve immovable property intended for business use, such as malls or office complexes. How businesses can claim ITC in these situations remains subject to case-by-case analysis.

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