Admits everyone appreciating a positive order from the Apex Court and celebrating in the tax lobby, lighting lamps as if it is another Diwali, here comes a grotesque critique that may hamper all the celebrations!
The order pronounced in the case of Safari Retreats is an unusual judgement wherein justice may have missed the target here are my cents as to why and how;
- Misunderstood marriage of the levy and ITC: – In all the tax laws, erstwhile and present, an intricate and delicate connection remains between a levy and ITC.
Say, VAT was levied on the sale of goods, and ITC was available on purchasing goods. Excise was levied on manufacturing of goods, Cenvat was available for goods/services used for manufacturing of goods, and so on for service tax.
Similarly, under GST, levy is on supply made in the course or furtherance of business so ITC is also available for goods/services used in the course or furtherance of business.
The same intricate connection may say that if tax is levied on activities in relation to immovable property say, renting, leasing, etc. then, ITC shall also be available for goods/services used to construct such immovable property.
This argument also somewhere loosely found its place in the petitioner’s pleading wherein they argued that if construction before an occupation certificate is taxable and ITC is allowed, similar should be the fate for renting and leasing services.
However, the Court distinguished the status quo of both the output services by holding that the nature of service in construction is linked with the Occupation certificate whereas no such linkage is found in renting, which to one’s mind may not be logical since once the activities are service, any distinguishment fades away.
Moreover, one must remember that the legal principle pronounced by the High Court was largely rotated around the idea that if construction can be taxed and ITC can be allowed, and as renting is also taxable, related ITC should also be allowed. Thus, the Apex Court could have done real justice by commenting on this principle and the eligibility of ITC on this argument.
- Notorious definition of plant: – While we all know that or & and can be read interchangeably per the intent of the legislature and it has been suitably ignored by the Apex Court, however, the legal principle being pronounced in this judgment is emerging from the Apex court’s case of Karnataka Power.
It is pertinent to note that in Karnataka Power, the Apex Court had held that only when there is no difference left between a building and equipment, a building can qualify as a plant. Thus, the functionality test of Karnataka Power demonstrates that there has to be an absolute link between building and equipment.
One must remember that in buildings such as malls, warehouses, etc., there is no such absolute link.
Thus, the Apex Court has suitably ignored the essence of Karnataka Power’s case i.e. degree of the link which is pronounced in Karnataka Power’s case for a building to be qualified as a plant is missing hence, a huge consideration is needed before applying the principle pronounced in Safari Retreats case.
Furthermore, in none of the judgments, Apex Court held that a mall or a hotel is a building. In the case of Taj, the question was of the sanitary fittings and not the hotel itself. In Anand Theaters, Apex Court refrained from considering the theatre as a plant. This necessitates that one must apply this case in their facts with utmost caution.
- Whose account: – Apex Court has held that construction is said to be on a taxable person’s “own account” when
- it is made for his personal use and not for service or
- 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.
Whilst the Apex Court tried to link the word “own account” with the setting test, they could not provide criteria as to what would fulfill the setting test.
- Specific exclusion for building: – The Apex Court failed to interpret the schema of Section 17. When one looks closely, the explanation to Section 17, notwithstanding the whole hoopla or/and, excludes building from the definition of plant and machinery. The Apex Court should have considered the fact that specific exclusion implies an inclusion in the first instance. Such an aspect appears to be missing.
- Groundwork for taxation of development rights/leasing rights: – Don’t we all fear the usage of our own words against us in the future? Well, the ld. ASG should have. For the sole reason that in this case he, on behalf of the State, has argued that taxation on goods and services cannot be extended to immovable property. Well, we wouldn’t be surprised if businesses nock the doors of the Supreme Court arguing development rights and long-term leasing are benefits arising out of land and immovable properties thence, should be excluded from GST.
- Redundancy is legitimate: – It was a time when kings were pronounced illegitimate and it used to change emperors. However, the Apex Court has now started a wave of diversity by giving legitimacy to redundancy which is subjected to strict interpretation but still!
- What is ITC: – I had spent much of the 2020s contemplating what is ITC. Some say property some say prerogative of Government. Now, the Apex court has said that it is a creation of legislature. But, to the best of my memory, the statement of objects and reasons appended to the One Hundred and First Constitutional Amendment Bill provides that GST is intended to be a value added tax, which happens only through ITC. In light of this, isn’t the Apex Court narrowing down the ambit of ITC?
- Mistake not corrected is a mistake intended? – Apex court held that the usage of “and” in the explanation is not a mistake corrected thus, it is a mistake intended. To my mind, that is not a correct principle to lay down. Merely because a mistake is not corrected, the judiciary cannot be deprived of its function to give a harmonious interpretation of the words used in the legislature.
In light of the above deficiencies, one needs to apply absolute caution before relying on this judgment. Despite the chances of a review or a retrospective amendment, we have ended up with more uncertainty in tax laws than one should imagine and until some other judgment clarifies this uncertainty, we are left with the ghost of more departmental inquiries and more complications.
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(Authored by CA Pooja Jajwani, she can be reached at [email protected]. Shout out to CA Simran Kukreja)
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