Civil Appeal No. 2948 of 2023 (dated October 3, 2024), presents a critical interpretation of Section 17(5)(d) of the CGST Act. This section typically bars the claiming of Input Tax Credit (ITC) for the construction of immovable property, barring plant and machinery. However, the Court expanded the interpretation by suggesting that a building could potentially be classified as a “plant” if its construction is essential to business activities such as leasing or renting.

The Supreme Court did not conclusively decide whether the shopping mall in question qualifies as a “plant.” Instead, it sent the case back to the Orissa High Court for further fact-finding to apply the “functionality test” to determine whether the mall can be considered a plant under Section 17(5)(d). This decision sets a broader precedent, potentially applying to other structures like warehouses, excluding hotels and cinemas, which will now need to be assessed on a case-by-case basis.

The Court upheld the constitutional validity of Sections 17(c), 17(d), and 16(4) of the CGST Act, which govern the eligibility and time limits for ITC claims. Nonetheless, it left room for further determinations on whether certain buildings qualify as plants and can thus be eligible for ITC.

Case Background

The taxpayer (Safari Retreats) involved in this case is engaged in constructing a shopping mall. The taxpayer incurred GST on goods and services during construction, leading to the accumulation of ITC. The taxpayer argued that since the mall generates GST on rental income from leasing, they should be entitled to claim ITC for the GST paid on construction inputs. However, authorities advised the taxpayer to deposit GST on the rental income without claiming ITC, citing Section 17(5)(d), which disallows ITC for goods or services used in constructing immovable property.

The taxpayer argued that denying ITC on construction costs while simultaneously taxing the rental income violates their fundamental rights under Articles 14 (equality before the law) and 19(1)(g) (right to practice any profession or business).

Orissa High Court Ruling

The Orissa High Court ruled in favor of the taxpayer, holding that Section 17(5)(d) should be interpreted to allow ITC when the construction of immovable property is for the purpose of renting out. The Court referenced Eicher Motors Ltd. v. Union of India (1999) to emphasize that ITC is intended to benefit the taxpayer and that restricting ITC while taxing rental income defeats the GST regime’s purpose.

Challenges by Other Petitioners

Various petitioners challenged the constitutional validity of Section 17(5)(c) and (d), which restrict ITC claims for commercial buildings, even when they generate taxable income. They argued that these provisions result in double taxation: paying GST on construction inputs and rental income without offsetting through ITC.

Revenue’s Arguments

The revenue authorities justified the denial of ITC under Section 17(5) by distinguishing between immovable and movable properties and the unique taxable events under GST. They maintained that ITC is a statutory right, not a constitutional one, and that there was no discrimination within the GST framework. Additionally, they argued that allowing ITC for the construction of rental properties like malls could create fiscal imbalances when the property is later sold tax-free.

Supreme Court Rulings

1. Functionality Test and ‘Plant’ Interpretation:

• The Court affirmed that determining whether a building qualifies as a “plant” requires a fact-specific inquiry into its functional use.
• It rejected a narrow interpretation of “plant” in Section 17(5)(d), suggesting that a building could be classified as a “plant” if it is essential to business operations like renting or leasing. This would allow ITC claims for construction expenses.
• The Court noted that renting or leasing buildings is recognized as a supply of service under Schedule II of the CGST Act. Hence, if a building is deemed a “plant,” ITC could be permitted for goods and services used in its construction, as long as it serves a functional purpose in the business.

1. Constitutional Validity of Section 17(5)(c) and (d):

• The Court upheld the constitutionality of Section 17(5)(c) and (d), finding that these provisions have an intelligible classification with a rational connection to the legislative objective. It rejected claims that these provisions violate Article 14, asserting that taxing provisions are not unconstitutional merely because they could be seen as less than ideal.

1. Constitutional Validity of Section 16(4):

• The Court also dismissed challenges to the time limit imposed by Section 16(4) for claiming ITC, concluding that it does not introduce any arbitrary or discriminatory elements. The Court emphasized that the provision’s drafting does not make it unconstitutional, even if it could be clearer.

Conclusion

The Supreme Court’s decision is significant for industries where buildings are used to supply taxable services, like real estate and hospitality. By potentially classifying buildings as “plants,” the Court opened the possibility for ITC claims on GST paid during construction, provided the building serves a functional business purpose, like renting or leasing. The outcome of the remanded decision could set a precedent for future ITC claims related to rental properties.

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