ITC allowed on inputs/services used for mall construction for letting out

Orissa High Court in the case of M/s. Safari Retreats Private Limited vs. Chief Commissioner of CGST held that Credit on inputs/services used for construction of malls for the purpose of letting out is allowable.

Brief Facts:

> The petitioner is engaged in the business of constructing shopping malls for the purpose of letting out to different tenants.

> The assessee had locally procured input materials and availed professional services for construction purpose and paid CGST and OGST on such purchases.

> The assessee approached revenue authorities for utilization of accumulated ITC of Rs 34 crores for discharging CGST and OGST levied on the rentals received by letting out of shopping mall.

> However, revenue authorities denied such credit in terms of Sec 17(5)(d), which states that ITC shall not be available in respect of goods and services or both received by a taxable person for construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business.

Submissions made by the Petitioner:

• The petitioner is statutorily entitled to ITC u/s 16 in respect of goods and services utilized in construction of shopping mall and utilize the same against GST leviable on rentals.
• The credit restriction imposed u/s 17(5)(d) contemplates a situation where the inputs consumed in the construction of an immovable property that are meant or intended to be sold post issuance of completion certificate. Since such sale does attract GST, the tax chain breaks, hence the credit restriction is justified. In this case, since the mall would be rent out on which GST will be levied, there is no distortion in tax chain.
• Section 17(5)(d) does not restrict ITC on inputs, where the buildings constructed are sold before issuance of completion certificate. Thus, it discriminates between the petitioner and other assessees who are engaged business of sale of immovable property, although both have a continuous business. Such discrimination shall be treated as violation of Article 14 of the Constitution.
• Denial of input tax credit in respect of inputs consumed in construction and corresponding levy on rentals received tantamounts to double-taxation which is against the principles of natural justice.
• Denial of credit is also violative of Article 19(1)(g) of the Constitution as it would impose an unreasonable restriction which would render buildings constructed for let-out uncompetitive by imposing burden of double-taxation.
• The shopping mall constructed was neither ‘intended for sale’ nor ‘on his own account’, but ‘intended for letting out’. Hence, such construction materials would not be subject to restriction imposed u/s 17(5)(d) of the CGST and OGST Act.
• The petitioner relied upon decision of the Apex Court Eicher Motors. Ltd vs. Union of India [(1999) 2 SCC 361] and Collector of Central Excise v. Dai Ichi Karkaria [(1999) 7 SCC 448) to hold that the credit of excise duty paid on inputs is admissible if the raw material is to be used in the production of excisable goods. That the right to avail credit is indefeasible.

Submissions made by the Revenue:

• With regard to violation of Article 14 & 19(1)(g) of the Constitution, the respondent relied upon IOCL vs. State of Bihar [TS–347-SC-2017-VAT]. The said case dealt with the petitioner’s claim for set off of VAT against Entry Tax. The Hon’ble SC held that Article 14 can be said to be breached when there is perversity or gross disparity resulting in clear and hostile discrimination practiced by the legislature without any rational jurisdiction of the same. The claim of set off is not a “matter of right” and the levy of Entry tax cannot be assailed as unconstitutional only because set off is not given.
• The revenue also relied on Cellular Operators Association of India and Others v. UOI [2018-TIOL-310-HC-DEL-ST] wherein the Hon’ble court rejected petitioner’s claim to allow credit of unutilized EC & SHEC and upheld Government’s power to restrict utilisation of balance cess.
• Section 17(5) prescribes certain restrictions on utilisation of ITC, it would mean that the legislature has decided in its wisdom the credit of taxes which would not be allowed and therefore such claim cannot be obtained through judicial review.

Conclusion drawn by HC:

• The Hon’ble Court observed that the narrow construction of interpretation putforward by the department is frustrating the very objective of the Act.
• No GST was payable if the petitioner had disposed of the property after the issuance of completion certificate instead of retaining the property for letting it out.
• The Hon’ble Court relied upon Eicher Motors (Supra) and held that the very purpose of credit is to give benefit to the assessee, since the petitioner is liable to pay GST on rental income, the corresponding credit should not be restricted u/s 17(5)(d). However, the provision cannot be held ultra-vires.