The Hon'ble Supreme Court of India in Chief Commissioner of Central Goods and Service Tax & Ors. v. M/s Safari Retreats Private Ltd. & Ors. [Civil Appeal No. 2948 of 2023, October 3, 2024] held that the constitutional validity challenge to clauses (c) and (d) of Section 17(5) and Section 16(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) is not established. The Court interpreted the expression "plant or machinery" in Section 17(5)(d) differently from "plant and machinery" defined in the explanation to Section 17. It held that whether a building qualifies as a "plant" under Section 17(5)(d) is a factual question to be determined based on the functionality test, considering the business of the registered person and the role the building plays in that business.
Facts of the Case:
The main case involved M/s Safari Retreats Private Ltd., engaged in constructing a shopping mall to let out premises to different tenants. The company had accumulated input tax credit (ITC) of GST amounting to over Rs. 34 crores on goods and services used in the mall's construction. It sought to avail this ITC against the rental income received from letting out the mall premises, which attracts GST as a supply of service.
When approached, the concerned authorities advised the company to deposit GST on rent without deducting ITC due to the exception in Section 17(5)(d) of the CGST Act. Consequently, the company filed a writ petition before the High Court of Orissa seeking:
1. A declaration that Section 17(5)(d) of the CGST Act does not apply to the construction of immovable property intended for letting out on rent.
2. Alternatively, if Section 17(5)(d) is held applicable, a declaration that it violates Articles 14 and 19(1)(g) of the Constitution of India.
3. A writ of mandamus directing the appellants to grant ITC benefits to the respondents.
The High Court, in its judgment dated April 17, 2019, held that Section 17(5)(d) should be read down based on the Supreme Court's decision in Eicher Motors Limited & Anr. v. Union of India & Ors. The High Court ruled that if the assessee is required to pay GST on rental income from the mall, it is entitled to ITC on the GST paid for the mall's construction.
Several other writ petitions were also filed challenging the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act. The petitioners contended that due to the restrictions imposed by these provisions, they were unable to avail credit on GST paid on goods and services used in constructing factory premises, buildings, etc., against the GST received for renting/leasing/letting out the premises.
Aggrieved by this decision, the Chief Commissioner of Central Goods and Service Tax and others filed an appeal before the Supreme Court, leading to the present case. Additionally, several other writ petitions challenging the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act were also brought before the Supreme Court and were heard together with this appeal.
The Supreme Court, thus, was tasked with examining the correctness of the High Court's interpretation, the constitutional validity of the challenged provisions, and the broader implications of these provisions on the GST regime, particularly concerning the construction and leasing of immovable property.
The main issues raised in these petitions included:
1. Challenging the constitutional validity of Section 17(5)(c) and (d) of the CGST Act.
2. Challenging the bar imposed by Section 16(4) of the CGST Act.
Held by the Court:
The Hon'ble Supreme Court of India in Chief Commissioner of Central Goods and Service Tax & Ors. v. M/s Safari Retreats Private Ltd. & Ors. [Civil Appeal No. 2948 of 2023, October 3, 2024] held that
The Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act. These provisions restrict the availability of ITC for certain goods and services used in the construction of immovable property. The Court's reasoning for this decision was multi-faceted:
The Court emphasized the principle that in matters of economic policy and taxation, the legislature enjoys a wide latitude. Citing the case of R.K Garg v. Union of India and Ors. (1981) 4 SCC 675, the Court reiterated that the legislature has greater freedom in the matter of classification for taxation purposes. This principle acknowledges the complex nature of economic decisions and the need for flexibility in fiscal policy-making.
The Court found that the classification made by Section 17(5)(c) and (d) satisfies the test of reasonable classification under Article 14 of the Constitution. Referring to Twyford Tea Co. Ltd. and Anr. v. State of Kerala and Anr. (1970) 1 SCC 189, the Court held that the differentiation between immovable property and other goods for GST purposes constitutes an intelligible differentia with a rational nexus to the object of the legislation.
The Court applied a less rigorous test of discrimination for tax laws, as established in Union of India and Ors. v. Nitdip Textile Processors Pvt. Ltd. and Anr. (2012) 1 SCC 226. This approach recognizes the complex nature of fiscal adjustments and allows for greater flexibility in tax legislation.
A crucial aspect of the Court's reasoning was its view on the nature of ITC. Relying on ALD Automotive Pvt. Ltd. v. Commercial Tax Officer (2019) 13 SCC 225, the Court reaffirmed that ITC is a statutory right, not a fundamental or constitutional right. This classification is significant because it allows the legislature greater latitude in defining the scope and limitations of ITC.
The Court showed considerable deference to legislative wisdom in complex economic matters, citing Government of Andhra Pradesh and Ors. v. P. Laxmi Devi (2008) 4 SCC 720. This approach recognizes that the legislature, with its access to expert opinions and data, is better equipped to make intricate economic policy decisions.
One of the most significant aspects of the judgment was the Court's interpretation of the phrase "plant or machinery" in Section 17(5)(d) of the CGST Act. The Court held that this phrase cannot be given the same meaning as "plant and machinery" defined in the explanation to Section 17. This interpretation has far-reaching implications for the application of ITC rules. The Court's reasoning included:
The Court noted that the legislature intentionally used different expressions - "plant and machinery" in several places and "plant or machinery" only in Section 17(5)(d). This deliberate choice of words was seen as indicative of a distinct legislative intent.
The Court rejected the argument that the use of "or" instead of "and" in Section 17(5)(d) was a drafting error. It noted that if it were a mistake, the legislature could have corrected it in the five years since the High Court's judgment on this issue.
The Court advocated for a functional interpretation of the term "plant" in the context of Section 17(5)(d). Drawing from cases like CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad (1971) 3 SCC 550 and Commissioner of Income Tax, Karnataka v. Karnataka Power Corporation (2002) 9 SCC 571, the Court established that a building could be considered a "plant" if it satisfies certain functional criteria.
The Court introduced a functionality test to determine whether a building qualifies as a "plant" under Section 17(5)(d). This test considers:
a) The business of the registered person
b) The role the building plays in that business
c) Whether the construction was essential for carrying out the activity of supplying services
This approach allows for a case-by-case determination, recognizing that different buildings may serve different purposes in various businesses. The Court drew inspiration from cases like CIT, Trivandrum v. Anand Theatres (2000) 5 SCC 393 and Commissioner of Income Tax v. Victory Aqua Farm Ltd. (2016) 16 SCC 553, where special structures were considered "plants" based on their function in the business.
The Court's interpretation has significant implications for the availability of ITC. It clarifies that if a building qualifies as a plant under the functionality test, ITC can be availed against the supply of services such as renting or leasing the building or premises. This is subject to meeting other terms and conditions of the CGST Act and Rules.
The Court explained that under the CGST Act, renting or leasing immovable property is deemed to be a supply of service and can be taxed as output supply. Therefore, if the building in which the premises are situated qualifies as a plant, ITC can be allowed on goods and services used in setting up the immovable property.
a) Section 16 - Eligibility and Conditions for Taking Input Tax Credit:
The Court emphasized that Section 16(1) allows a registered person to take credit of input tax charged on any supply of goods or services used in the course of business. However, this is subject to conditions and restrictions prescribed by the Act and Rules.
b) Section 17(5) - Blocked Credits:
The Court noted that Section 17(5) begins with a non-obstante clause, giving it overriding effect over Sections 16(1) and 18(1). It carves out exceptions to the general rule of ITC availability.
c) Section 17(5)(c) and (d):
The Court analyzed these clauses in detail:
- Clause (c) applies to works contract services supplied for constructing immovable property, with exceptions for plant and machinery and input services for further supply of works contract service.
- Clause (d) applies to goods or services received by a taxable person for construction of immovable property on his own account, with exceptions for plant or machinery.
The Court emphasized that these clauses operate in different fields and should be interpreted accordingly.
The Court reiterated the limited scope of judicial review in tax matters, citing cases like Assistant Commissioner of Urban Land Tax and Ors. v. Buckingham and Carnatic Co. Ltd., Etc. (1969) 2 SCC 55 and Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors. (2017) 12 SCC 1. It emphasized that courts should be circumspect in examining the reasonableness of a taxing statute and should not interfere with economic and fiscal regulatory measures of the State unless there is a clear violation of constitutional principles.
The Court discussed principles of interpreting tax statutes, referring to cases like Commissioner of Customs (Import), Mumbai v. Dileep Kumar & Company & Ors. (2018) 9 SCC 1 and Sneh Enterprises v. Commissioner of Customs, New Delhi (2006) 7 SCC 714. It emphasized that while tax statutes should be interpreted strictly, if two interpretations are possible, the one favoring the assessee should be adopted. However, the Court also noted that this principle should not be stretched to the point of creating additional fiscal burdens on a person or reading words into the statute.
The Court rejected the approach of reading down Section 17(5)(d) that was adopted by the High Court. While acknowledging the principle from cases like Indian Social Action Forum (INSAF) v. Union of India (2021) 15 SCC 60 that reading down can be used to preserve constitutionality, the Court found no ambiguity or unconstitutionality in the provision that would necessitate such an approach.
The Court addressed the argument that Section 17(5)(c) and (d) were vague due to undefined terms. Referring to Shreya Singhal v. Union of India (2015) 5 SCC 1, the Court acknowledged that excessively vague provisions can be struck down. However, it found that the provisions in question were not vague to the point of unconstitutionality.
The Court discussed the nature of transactions under GST, referencing Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. (2006) 3 SCC 1. It emphasized that the GST regime focuses on the supply of goods and services, and the classification of a transaction should be based on its dominant nature.
Specific Directions:
a) Remand of Main Case:
The Court set aside the impugned judgment of the High Court of Orissa and remanded the case back for a factual determination of whether the shopping mall in question qualifies as a "plant" under Section 17(5)(d) based on the functionality test outlined in the judgment.
b) Other Writ Petitions:
For other writ petitions challenging similar provisions, the Court directed that each case must be decided on its merits by applying the functionality test established in this judgment. The petitioners were given the freedom to raise these issues in appropriate proceedings.
Relevant Sections:
1. Section 17(5) of the CGST Act:
"(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
...
(c) 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;
(d) 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."
2. Section 16(4) of the CGST Act:
"(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier."
3. Section 54(3) of the CGST Act (referred to in the judgment):
"(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
(i) zero rated supplies made without payment of tax;
(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:
Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies."
Pari Materia / Cases Referred:
1. Eicher Motors Limited & Anr. v. Union of India & Ors. (1999) 2 SCC 361
2. R.K Garg v. Union of India and Ors. (1981) 4 SCC 675
3. Twyford Tea Co. Ltd. and Anr. v. State of Kerala and Anr. (1970) 1 SCC 189
4. Union of India and Ors. v. Nitdip Textile Processors Pvt. Ltd. and Anr. (2012) 1 SCC 226
5. ALD Automotive Pvt. Ltd. v. Commercial Tax Officer (2019) 13 SCC 225
6. Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. (2006) 3 SCC 1
7. Shreya Singhal v. Union of India (2015) 5 SCC 1
8. Union of India v. Bharti Airtel Limited & Ors. (2021) SCC OnLine SC 1006
9. Federation of Hotel & Restaurant Association of India, etc. v. Union of India and Ors. (1989) 3 SCC 634
10. Government of Andhra Pradesh and Ors. v. P. Laxmi Devi (2008) 4 SCC 720
11. Assistant Commissioner of Urban Land Tax and Ors. v. Buckingham and Carnatic Co. Ltd., Etc. (1969) 2 SCC 55
12. Jindal Stainless Ltd. and Anr. v. State of Haryana and Ors. (2017) 12 SCC 1
13. State of Tamil Nadu and Anr. v. National South Indian River Interlinking Agriculturist Association (2021) 15 SCC 534
14. Sanjeev Coke Manufacturing Company v. M/s Bharat Coking Coal Ltd. & Anr. (1983) 1 SCC 147
15. Indian Social Action Forum (INSAF) v. Union of India (2021) 15 SCC 60
16. Delhi Transport Corporation v. DTC Mazdoor Congress & Ors. (1991) Supp (1) SCC 600
17. Indcon Structurals (P) Ltd. v. Commissioner of Central Excise, Chennai (2006) 4 SCC 786
18. CIT, Andhra Pradesh v. Taj Mahal Hotel, Secunderabad (1971) 3 SCC 550
19. CIT, Trivandrum v. Anand Theatres (2000) 5 SCC 393
20. Commissioner of Income Tax, Karnataka v. Karnataka Power Corporation (2002) 9 SCC 571
21. Commissioner of Income Tax v. Victory Aqua Farm Ltd. (2016) 16 SCC 553
22. Commissioner of Customs (Import), Mumbai v. Dileep Kumar & Company & Ors. (2018) 9 SCC 1
23. Sneh Enterprises v. Commissioner of Customs, New Delhi (2006) 7 SCC 714
24. Commissioner of Income Tax, West Bengal 1, Calcutta v. M/s Vegetables Products Ltd. (1973) 1 S
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