Introduction:
The Finance Bill, 2025, provided a retrospective amendment of the provision of the Income Tax Act. The amendment was triggered by a ruling of the Hon’ble Supreme Court in the case of Safari Retreats Private Limited vs. Chief Commissioner of CGST, whereby the Hon’ble court applied the narrow rule of construction to
The question for consideration before the court resulted from a construction of a shopping mall by Safari Retreats, that claimed ITC for the goods and services used in the course of construction of the mall, therefore the question leading to the hon’ble supreme court was with regard to the eligibility of Income Tax Credit (ITC) for immovable properties under section 17(5) of the CGST Act, specifically property used in a commercial nature such as shopping malls let on lease, rent or otherwise. Section 17(5) reads as follows:
(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.
Case Background:
Under Section 17(5)(d) of the CGST Act, developers were not allowed to claim ITC on the GST paid for goods and services used in constructing immovable property meant for their own consumption, even if the GST paid was in relation to be used in the course of business resulting into an additional financial burden. In the first round of proceedings, Writ Petitions were filed before the Hon’ble Odisha High Court challenging the constitutional validity of Section 17(5)(c) and 17(5)(d) of the CGST Act.
The Hon’ble Odisha High Court took a view favouring the assessee, applying a narrow interpretation of section 17(5) of the act to hold ITC in relation to goods or services for the construction of a mall cannot be denied within the ambit of section 17(5) of the Act. The reasoning of the Hon’ble court was in furtherance of the very objective of the GST Act, i.e to prevent cascading effect of tax at multiple stages. The judgment was challenged by the revenue department before the supreme court which led to the pronouncement of verdict on 3rd October, 2024.
The revenue contended that providing ITC benefit would defeat the legislative intent and the claim of ITC was deliberately blocked to prevent double benefits, and further the revenue contended that in catena of cases the word “or” has been interpreted as “and” and vice versa to further the legislative intent.
Though the Hon’ble supreme court rejected the challenge to the vires of the provisions section 17(5)(c) and section 17(5)(d) of the CGST Act. The court partially dismissed the appeal, and sided the assessee insofar as interpretation of the term “ Plant or Machinery” is concerned. The court observed that the minor dissimilarity between the section 17(5)(c) and 17(5)(d), being the insertion of “or” instead of “and” between plant and machinery, is a conscious effort by the legislation to interpret section 17(5)(d) narrowly. The court further applied the concept of functionality test, to determine whether a mall can be termed as a plant with section 17(5) of the Act.
Ratio Decadent:
The basic premise of the functionality test, which is often not used in the realm of indirect taxes, stems from the predominant function for which the goods and services are utilised. However, it is pertinent to note that, even under the erstwhile indirect taxation regime the functionality test was never applied to assess credit availability. However, the functionality test has been used in various income tax matters in order to understand plant and machinery, the hon’ble supreme court took the same rationale applying the test for indirect taxes. To understand the functionality test better, if the dominant function of the immovable property is in relation to the core aspect of the business, then input tax credit on the same cannot be denied by the apartment. Therefore the functionality test needed to applied on a case to case basis to determine whether the immovable property goes to the very core of a business in question
The rationale given by the court with regard to the constitutional validity held that the input tax credit cannot be claimed as a matter of right. Benefits that arise from ‘credit’ is merely a benefit given through the creation of a legislation . The Supreme Court stated that tax credit was a ‘creation of legislature’ and cannot be deemed as a fundamental or constitutional right in any manner.
Though this judgment was celebrated to have an overarching impact on the entire real estate not just restricted to construction malls, as stated earlier since the functionality test needs to be tested on case to case basis, and judgment though was anticipated to be helpful to other industry players involved in constructing ports, jetties, warehouses, and other infrastructure projects, now has no applicability pursuant to the finance act 2025 amending section 17(5) of the act, essentially overruling the judgment of the hon’ble supreme court without disturbing the rationale of the judgment.
Conclusion:
The Finance Bill, 2025, amended clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act. To eliminate any ambiguity in interpretation for the purpose of obtaining input tax credit in such cases, clause 119 of the Finance Bill, 2025, aims to amend clause (d) of sub-section (5) of section 17 of the Central Goods and Services Tax Act by replacing the phrase “plant or machinery” with the phrase “plant and machinery.” This amendment clarifies that ITC will remain restricted on the construction of immovable properties, even if they are used for taxable supplies like leasing, renting etc. The amendment is a retrospective amendment essentially invalidating the judgment with effect from 1st July, 2017. The amendment leads to further uncertainty and possibility of litigation for companies already claimed ITC post the judgment, the amendment will also be an additional burden on commercial entity involved in leasing or renting activities.
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