Input Tax Credit eligibility based on Functionality Test: A Detailed Analysis

A. Introduction

Section 17(5)(c) and (d) of the CGST Act, often called the “blocked credit” provisions, have led to a lot of debate because they restrict what businesses can claim input tax credit (ITC) for expenses related to immovable property like buildings and Civil structures integrated to Plant and machinery. These rules are sometimes seen as going against the main GST principle of seamless ITC across the supply chain. The core question is about when a building or a part of a structure can be treated as a “Plant” Or Part of the Plant & Machinery for the ITC eligibility.

Blocked Credit: The Basic Rule

Generally, ITC is denied on GST paid for any construction of immovable property (like buildings) when the property is for own use – even if it’s for business. Only plant and machinery are specifically exempted (ITC allowed) under the law. If something is treated as normal construction, ITC is blocked. If it counts as “plant,” ITC may be available.

What is a “Plant”? The Functionality Test

Over time, courts have developed the functionality test to decide if a structure is a plant (eligible for ITC) or just a building (not eligible).

• If a building or part of it is essential and functionally integrated to a business process—beyond just providing shelter—it can be treated as a “plant” for GST.
• Example: A cold storage facility used for preserving produce, where the structure itself performs the business function, may qualify as a “plant” rather than just “immovable property.”
• Normal office buildings, showrooms, or warehouses that only provide space usually don’t qualify.

The Safari Retreats Case (2025)

In the landmark Safari Retreats case, the Supreme Court clarified:

• Buildings constructed for renting or leasing, if they are central to providing taxable services (like a shopping mall for commercial letting), may be qualified as a “plant” and ITC could be claimed.
• The functionality test has to be applied. It isn’t automatic; every case depends on the facts – what the building is used for and how central it is to business purposes.

B. Section 17(5)(c) & (d) Before the 2025 Amendment

At the heart of the controversy are clauses (c) and (d) of section 17(5). In their unamended form, these provisions barred ITC in respect of:

• works contract services used in construction of immovable property (other than plant and machinery), except in cases of further supply of works contract service [clause (c)]; and
• goods or services received for construction of an immovable property (other than plant or machinery) on one’s own account [clause (d)].

In unamended section 17, there is a small but important difference in wording. Clause (c) uses the phrase “plant and machinery”, while clause (d) uses “plant or machinery.”

Now, the law gives a clear definition for “plant and machinery” through the Explanation. This mainly covers machinery that is permanently fixed to the ground along with its civil structure support. But the term “plant or machinery” as used in section 17(5)(d) is not defined anywhere.

This means the legislature deliberately used two different phrases. For clause (d), since “plant” is not defined in law, we have to understand it in its normal commercial sense (the way businesses and industry generally use the term). Courts and case law have also confirmed this interpretation later.

C. The Functionality Test: An Interpretative Device

The functionality test derives from long-standing jurisprudence in customs, central excise, and income tax law. The essence of the test lies in asking: does the structure serve a mere passive sheltering function, or does it form an active, indispensable tool of trade, engineered and integrated in such a way that without it, the business process itself cannot operate?

Several dimensions:

• Adaptation for business use: if a structure is specifically designed to a business’s technical requirements (for instance, aquaculture ponds, effluent treatment tanks, or solar power plants), it leans toward “plant.”
• Integration with business processes: the closer the nexus between the structure and actual revenue-generating activity, the stronger the case for categorising it as plant.
• Functional role versus passive shelter: the structure must actively participate in production or service provision, not merely serve as a container for other activity.
• Economic/practical feasibility of movement: courts have recognized that immovability is not merely physical impossibility but also economic impracticality.
• Preservation of functional integrity upon removal: if dismantling negates essential function, it loses its identity as “goods.”

D. Judicial Evolution of the Functionality Test

T.T.G. Industries Ltd. v. Collector of Central Excise (2004) 167 ELT 501 (SC)

The Supreme Court held that if a plant assembled at site cannot be moved without dismantling and loses its functional integrity when shifted, it is not excisable goods. The functional capacity, not mere fixity to earth, became the decisive element.

Shirpur Paper Mills Ltd. v. Collector of Central Excise (1998) 97 ELT 3 (SC)

The Court clarified that machinery assembled in a factory was moveable if it could be dismantled and sold without loss of operation. Merely fastening to earth for stability does not render an asset immovable. Functionality in operation remains critical.

Triveni Engineering & Industries Ltd. v. CCE (2000) 120 ELT 273 (SC)

Large industrial turbines installed and made inseparable from the building were held immovable. The removal rendered them non-functional. Once again, the preservation of functionality became decisive.

Camlin Ltd. v. CCE (2000) 117 ELT 273 (CEGAT-Mum)

Here, aluminium ferrules, designed exclusively for pencils, were classified with pencils on account of their indispensable functional role. This illustrated a broader interpretative approach-classification based on functional use within business.

State of U.P. v. Kores (India) Ltd. (1977) 1 SCR 837

The Court recognized that carbon paper could not be equated with mere paper. The judgement drew upon functional distinctiveness as a legitimate classification benchmark.

Taken together, these precedents established that taxation law cannot remain confined to literal physical attributes-it must accommodate functional realities.

E. Application of Functionality Test under GST: Circulars & Rulings

• CBIC Circular No. 219/13/2024 dated 26.06.2024: clarified ITC availability on ducts and manholes forming part of an Optical Fiber Cable network, because they were indispensable to transmission and not excluded under the Act. Their functional role in enabling telecommunications outweighed their civil construction attributes.
•  M/s Bharti Airtel Ltd. [2024 (12) TMI 998, Delhi HC]: mobile towers, being movable and dismantlable, were held movable property despite being expressly excluded from “plant and machinery.” The Court refused to treat them as immovable merely due to exclusion, underscoring that exclusion in definition does not automatically import immovability
• M/s KEI Industries Ltd. [AAAR Gujarat, 2025]: The AAAR held that structural supports in the form of concrete towers for high-voltage cable manufacturing qualified within the exception, being part of plant and machinery. Once tied functionally to the process, ITC restrictions under 17(5) ceased.
• M/s Nitta Gelatin India Ltd. [2025 (7) TMI 1181, AAR Kerala]: Freshwater tanks and effluent ponds were held to be “plant,” not mere buildings, despite being constructed out of civil material. Their indispensable process-integration determined classification.
• M/s Grand Centre Mall [2025 (7) TMI 1180, AAR Kerala]: Rooftop solar power plant used entirely for mall operations was also classified as plant due to its operational functional integration with the business processes.

F. Safari Retreats and its Aftermath

The Supreme Court in Safari Retreat Pvt. Ltd. (2025) revisited the debate in the context of malls constructed for leasing activity. The Court refrained from a bright-line legal conclusion and remanded the matter, but crucially laid down:

• The question whether a mall, warehouse, or similar building is a plant must be answered as a factual enquiry, guided by the functionality test.
• If the building is essential for the taxable activity of letting out, and functions as the very apparatus of business, it may qualify as “plant.”
• “On own account” should not automatically cover all business-use structures; it should be limited to assets built for self-consumption without taxable outward supply.

The Safari judgement aligned GST law with long-standing functional jurisprudence and opened room for ITC where buildings are central to the taxable output activity.

G. Legislative Response: Finance Act, 2025

Section 124 of the Finance Act, 2025 substituted clause (d) with retrospective effect from July 1, 2017, clarifying that “plant or machinery” should always be read as “plant and machinery.”

This move, however, raises complex constitutional concerns: explanations operating retrospectively to overturn judicial interpretation are generally disfavored. Multiple precedents (Sree Sankaracharya University of Sanskrit (2023); Indian Medical Association (2024)) caution that retrospective burdens lacking justification violate rule of law, unless they merely remove genuine ambiguity. Safari Retreat itself noted the interpretative difference between the expressions and declined to read them interchangeably.

H. Comparative Jurisprudence: Income Tax and English Law

Indian courts under income tax law have already evolved expansive definitions of “plant” through cases like:

• CIT v. Taj Mahal Hotel (1971) 3 SCC 550: hotels’ sanitary installations were plant.
• CIT v. Victory Aqua Farm Ltd. (2016) 16 SCC 553: ponds constructed for aquaculture treated as plant.
• CIT v. Karnataka Power Corporation (2002) 9 SCC 571: Powerhouse structures including ducts and tail race channels considered plant as integral to power generation.

Even English courts, in Barclay, Curle & Co. (1969) 1 All ER 732 (HL), recognized a dry dock as a plant, since the structure itself functioned as an apparatus for business. Lord Wilberforce candidly remarked that the term “plant” is artificial but must be applied purposively.

I. Practical Guidance for Businesses

In practice, the key inquiry is not whether civil construction was used, but whether the resultant structure forms an active business apparatus essential to taxable supply. Practitioners should:

• Capitalize appropriately under “plant and machinery,” while maintaining detailed functional justifications.
• Document business integration, indispensability, and specialized adaptation during tax planning.
• Distinguish between genuine passive buildings and structures forming a tool of trade.
• Scrutinize legislative amendments, as retrospective curtailments of credit may face constitutional challenges in higher courts.

J. Conclusion

The law on ITC in relation to immovable property stands at a fascinating intersection of statutory text, functional interpretation, and constitutional balance. The functionality test, though judicially evolved, remains the most equitable method to reconcile legislative restrictions with economic realities of modern industries.

In light of Safari Retreats, as well as jurisprudence under excise and income tax law, it is clear that each case turns on facts-what function does the structure perform in the business, and is it indispensable to the taxable activity?

Where businesses can substantiate the functional indispensability of structures-be it a warehouse, effluent pond, rooftop solar system, or ductwork-the courts and tribunals have shown openness to recognize them as plant, thereby preserving the input credit chain and avoiding distortion in tax neutrality. The continued contest between restrictive statutory language and functional economic interpretation will likely advance further in the years to come.