Summary: In the case involving M/s Safari Retreats Pvt. Ltd., the Supreme Court addressed the denial of Input Tax Credit (ITC) on GST paid for constructing a shopping mall intended for leasing. Safari Retreats incurred over ₹34 crores in GST during construction and sought to offset this against GST collected from rental income. The tax authorities denied the ITC claim under Section 17(5)(d) of the CGST Act, which restricts ITC for goods and services used for constructing immovable property. The Orissa High Court initially ruled in favor of Safari Retreats, stating that ITC should be allowed as renting out property is a taxable activity, thus avoiding double taxation. However, on appeal, the Supreme Court upheld the constitutionality of Section 17(5)(d), acknowledging that while the law imposes reasonable restrictions on ITC, it recognizes the challenges faced by businesses. The Court remanded the case back to the Orissa High Court to determine if the mall could be classified as a “plant” under the law, which could qualify for ITC. Ultimately, the Supreme Court’s ruling maintains the validity of the provision while leaving open the potential for Safari Retreats to claim ITC, pending further factual determination. The outcome highlights the balance between legislative authority and taxpayer rights within the GST framework.
Combined Summary of the Safari Retreats Judgments from the Orissa High Court and the Supreme Court of India
1. Background of the Case:
M/s Safari Retreats Pvt. Ltd. constructed a shopping mall for the purpose of leasing it to tenants, thereby generating rental income. This rental income is subject to Goods and Services Tax (GST) under the CGST Act. During the construction of the mall, the company incurred significant costs on goods and services (input costs), amounting to over ₹34 crores in GST paid. Safari Retreats sought to claim Input Tax Credit (ITC) on this GST paid during construction to offset against the GST collected on the rental income.
However, the tax authorities denied the ITC claim, citing Section 17(5)(d) of the CGST Act, which blocks ITC on goods and services used for constructing immovable property, except for “plant or machinery.” This provision led to the dispute, and the case was filed in the Orissa High Court.
2. High Court of Orissa Judgment (April 17, 2019)
The main issue before the High Court was whether Section 17(5)(d) of the CGST Act, which restricts ITC on construction-related expenses, applies when the property is constructed for renting out, a taxable activity under GST.
Key Findings:
a. The High Court ruled in favour of the appellant Safari Retreats (P) Ltd., interpreting the law to allow ITC for businesses constructing properties for renting, where the tax chain continues (as rent is taxable).
b. Rationale: The Court emphasized that the purpose of the GST law is to avoid the cascading effect of taxes. If GST is paid on the construction of a property and further GST is paid on the rental income generated from that property, blocking ITC would lead to double taxation, which is contrary to the purpose of the GST regime.
c. The High Court read down Section 17(5)(d), ruling that the restriction on ITC should not apply when the property is used to generate taxable income (like renting). The court held that such a narrow interpretation would frustrate the very objective of GST and violate the constitutional principles of equality (Article 14) and the right to carry on business (Article 19(1)(g)).
d. The High Court did not declare the provision unconstitutional but suggested that it should be interpreted in a manner that aligns with the legislative intent of GST.
3. Appeal to the Hon’ble Supreme Court (2019):
The Revenue authorities challenged the High Court’s ruling, leading to an appeal in the Supreme Court.
Key Issues before the Supreme Court:
a. Constitutional Validity of Section 17(5)(d): The respondents (Safari Retreats) argued that the provision is arbitrary and violates Articles 14 and 19(1)(g) by denying ITC for property constructed for renting, while allowing ITC for properties sold before the issuance of a completion certificate.
b. Interpretation of ITC Block: The assessees contended that Section 17(5)(d) should be read down to allow ITC for properties used to generate taxable income, as denying the credit would lead to a cascading effect of taxation.
Supreme Court’s Key Findings:
a. ITC as a Statutory Right:
The Court acknowledged that ITC is a statutory right granted by the GST law and can be restricted by the legislature. However, such restrictions must have a rational basis and be in line with the objectives of the GST regime—primarily to eliminate the cascading effect of taxation.
b. Purpose of GST:
The Court emphasized that the core purpose of GST is to create a seamless flow of credit along the supply chain to prevent taxes from being levied on top of other taxes. Denying ITC on construction goods and services for properties intended for renting could lead to a cascading tax burden, which defeats the purpose of the GST regime.
c. Nature of Rental Income:
The Court noted that the rental income from leasing out mall spaces is considered a “supply of services” under GST. Since GST is payable on rental income, the denial of ITC on the construction of the mall contradicts the principle that ITC should be available for all taxable supplies.
d. Previous High Court Decision:
The Orissa High Court had ruled in favor of Safari Retreats, stating that Section 17(5)(d) should be read down to allow ITC for properties constructed for renting, as denying the credit would frustrate the very objective of GST. The High Court relied on the principle that ITC is meant to benefit businesses and should not be restricted in a manner that leads to a cascading tax effect.
e. Validity upheld:
The Supreme Court upheld the validity of Section 17(5)(d) but recognized the practical challenges faced by businesses like Safari Retreats. The Court acknowledged that the denial of ITC on construction of immovable property for renting purposes does create hardships for taxpayers.
f. Functionality Test:
The Supreme Court raised the possibility of applying a functionality test to determine if certain buildings (like shopping malls) could be classified as “plant” under the law, thus qualifying for ITC. The Court, however, did not make a final determination on this point and remanded the case back to the Orissa High Court for further factual determination. The High Court was asked to decide if the mall in question could be classified as a “plant” based on its functionality, which could exempt it from the ITC block under Section 17(5)(d).
g. The Court concluded that the legislature had the right to impose restrictions on ITC, and the provision was not unconstitutional. The Court did, however, hint that the legislature might consider revising the law to address the challenges and inconsistencies.
4. Final Decision and Remand (3rd October 2024):
a. Upholding Section 17(5)(d):
The Court did not declare Section 17(5)(d) unconstitutional. It recognized that the legislature has the power to impose reasonable restrictions on the availability of ITC and that the denial of ITC on construction of immovable property is a policy decision.
b. Denial of ITC to Continue:
The Court held that ITC could continue to be denied for goods and services used in the construction of immovable property meant for renting, as per the provisions of Section 17(5)(d). The classification made in the GST law between goods and immovable property was deemed constitutionally valid.
c. Reading Down Not Necessary:
Unlike the Orissa High Court, the Supreme Court did not opt to read down Section 17(5)(d). Instead, it acknowledged that while the provision might lead to certain difficulties, it falls within the legislative domain to frame such tax policies. If there are practical challenges or issues of equity, the legislature must address them, not the courts.
The Supreme Court did not make a final ruling on whether the mall constructed by Safari Retreats qualifies as a “plant” and thus is entitled to ITC. Instead, the matter was remanded to the Orissa High Court to decide whether the mall satisfies the functionality test and qualifies as a “plant” under the law. If it qualifies, Safari Retreats may be eligible for ITC on its construction costs.
Conclusion:
- The Orissa High Court interpreted the law favorably for Safari Retreats, allowing ITC for the construction of properties used for renting, while the Supreme Court upheld the constitutionality of Section 17(5)(d) but remanded the case for further fact-finding on whether the property could be classified as a “plant.”
- The final decision on Safari Retreats’ eligibility for ITC will depend on the Orissa High Court’s determination of whether the mall qualifies as a “plant” under the functionality test.
The overall result is that while the legal provision remains valid, the specific circumstances of the case will determine whether Safari Retreats can claim ITC, and the case is not fully resolved yet.
Disclaimer:
The views and interpretations expressed in this article are my personal opinions and should not be construed as legal advice. Readers are encouraged to consult with a qualified professional for specific guidance on the legal matters discussed.
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