Building satisfy the functionality test of being a ‘plant’, is an exception carved out by Section 17(5)(d) and ITC can be availed: Supreme Court
Summary: In the case of Chief Commissioner of Central Goods and Service Tax & Ors. v/s M/s. Safari Retreats Private Ltd. & Ors., the Supreme Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5) of the CGST Act, 2017. The Court clarified that the expression “plant and machinery” in Section 17(5)(d) should not be equated with its defined meaning in the Act. Specifically, Section 17(5)(d) generally prohibits claiming Input Tax Credit (ITC) for constructing immovable property, with exceptions for “plant or machinery.” The Court established a broader interpretation that allows a building to be considered a “plant” if it is essential for providing services, such as leasing. The judgment emphasizes a “functionality test” to determine if a building qualifies as a plant, based on its role in the business. Thus, if a building is crucial for the supply of services, it may be classified as a plant, making ITC available. The Court also noted that while Section 17(5)(c) pertains to specifically defined “plant and machinery,” Section 17(5)(d) introduces the more general term “plant or machinery,” which invites broader interpretations. This decision indicates that the classification of a building as a plant is case-specific, dependent on its construction and functionality, and cannot be universally adjudicated without factual context.
The Hon’ble Supreme Court in Chief Commissioner of Central Goods and Service Tax & Ors. v/s M/s. Safari Retreats Private Ltd. & Ors. in Civil Appeal No. 2948 of 2023, Judgment dated 03.10.2024 upheld the constitutional validity of clause (c) and clause (d) of Section 17(5) and Section 16(4) of the CGST Act, 2017 and also marked a significant interpretation that the expression “plant and machinery” used in Section 17((5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17.
Section 17(5)(d) disallows claiming ITC for the construction of immovable property, except for “plant or machinery”. However, the Hon’ble Court introduced a broader interpretation of ‘plant or machinery’ which is used as exception to Section 17(5)(d) by allowing the possibility that a building could qualify as a “plant”.
The Hon’ble Court held 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) is a factual question which has to be determined keeping in mind the business of the registered person and the role that 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 clauses (2) and (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 clause (d) of Section 17(5) to sub-section (1) of Section 16.
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 we have held earlier, it will have to be decided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5).
Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) 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 first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”. The second exception is 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.
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 to Section 17 defines the meaning of the expression “plant and machinery”. However, 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.
It is well settled principles on the interpretation of taxing statutes (as discussed in this judgment), there is no scope to give any meaning to clause (c) of Section 17(5) other than its plain and natural meaning. The expression “plant and machinery” has been specifically defined in the explanation of Section 17. Works contract service has been defined under the CGST Act. The Hon’ble Court taken view that we cannot add anything to clause (c) or subtract anything from clause (c). ITC is a creation of legislature. Therefore, it can exclude specific categories of goods or services from ITC.
The Hon’ble Court held that the expression “plant or machinery” has a different connotation. It can be either a plant or machinery. Section 17(5)(d) deals with the construction of an immovable property. The very fact that the expression “immovable property other than “plants or machinery” 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.
Further this Court has laid down the functionality test. This Court held that whether a building is a plant is a question of fact. This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. The word ‘plant’ used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of “plant and machinery”, which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression “plant or machinery”. We have discussed the provisions of the CGST Act earlier. To give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test.
Under the CGST Act, as observed earlier, renting or leasing immovable property is deemed to be a supply of service, and it can be taxed as output supply. Therefore, if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant.
The Hon’ble Court also held that while deciding these cases, we 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.
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