Safari Retreats Verdict on ITC for Construction of Immovable Property

Safari Retreats Verdict- ITC Allowance on Construction of Immovable Property- Key Takeaways

In the judgment dated 03-Oct-24 the Apex Court while upholding the constitutional validity of the GST provisions in question stated that – if the building being constructed passes the functionality test – then it can be considered as plant and Input Tax Credit of the goods and services used for constructing it shall be allowed.

1) Principles of interpretation of taxing statutes: Taxing statutes need to be read literally without considering any equitable consideration or any presumption or assumption^{[Para 25]}

2) No ITC if Depreciation claimed: If depreciation under the Income Tax Act is claimed on tax (GST) component of capital goods, plant and machinery, then no ITC will be allowed of said GST. ^{[Para 28]}

3) ITC on the construction of Immovable Property

a) with the exception of i) construction of Plant and Machinery and ii) further supply of works contract service, Sec 17(5)(c) disallows ITC of works contract on construction of immovable property ^{[Para 31]}

b) The explanation u/s 17 to the expression “Plant and Machinery” [as used in Cl. (c)] excluding land, building, and other civil structures from its ambit cannot be applied to the expression “Plant or Machinery” [used in Cl. (d)] ^{[Para 35]}

c) Situations when ITC will be allowed ^{[Para 32]}

Sec 17(5)(d) provides the exceptions when ITC will not be disallowed-

i) 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”,

ii) 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.

4) Own account vis-à-vis Not on Own Account ^{[Para 32]}

a) Own Account: ITC will be disallowed in case of construction of an immovable property for his own account which is-

i) made for personal use and not for service or,

ii) to be used by the person constructing it as a setting in which business is carried out.

b) Not on own account- 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.

5) Expression- “Plant AND Machinery” is different from “Plant OR Machinery”

a) The expression “plant or machinery” used in Sec 17(5)(d) cannot be given the same meaning as the expression “plant and machinery u/s 17(5)(c) ^{[Para 44]}

b) Both the elements- i) plant ii) machinery- are required for anything to be covered in the expression “plant and machinery” ^{[Para 45]}

c) Expression plant or machinery is to be interpreted differently as there could be a plant that is an immovable property ^{[Para 46]}

6) Functionality test– Is building a plant? ^{[Para 52]}

a) In a given case, a building can also be treated as a plant, which is excluded from the purview of the exception stated in Section 17(5)(d) as it will be covered by the expression “plant or machinery”.

b) Whether a building is a plant is a question of fact.

c) 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”,

7) ITC allowed- if the building is plant: In line with the philosophy laid in Mohit Minerals case, GST being a consumption and destination-based tax, ^{[Para 40]} once a building qualifies as Plant- ITC of goods / services can be availed against the output supply of renting services. ^{[Para 55]}

8) Factual Determination of the status of Building

a) In each case fact-finding enquiry is contemplated to test on merits whether the mall, warehouses and other buildings [except hotels and cinema theatres] satisfy the functionality test to qualify as plant under the expression “Plant or Machinery u/s 17(5)(d) keeping in mind the business of the registered person and the role that building plays in the said business. ^{[Para 56 r.w. Para 65]}

b) 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, the building could be held to be a plant. ^{[Para 67]}

c) While remanding the matter back to High Court ^{[Para 66]}, the SC stated that factual determination to determine whether the construction of immovable property is a plant- to be decided in appropriate proceedings ^{[Para 67]}

9) Status of Hotel/ Cinema theatre as Plant

a) With respect to the interpretation of phrase “Plant and Machinery” under Income Tax Act, it was held that building used for running of a hotel or carrying on cinema cannot be given depreciation as plant. [Ref Anand Theatres case (dtd 12-May-2000) ^{[Para 49]} , Taj Mahal Hotel case (12-Aug-1971)^{[Para 48]}

b) The decision of Karnataka Power Corporation (dtd.27-Jul-2000) as decided by a larger bench limits the applicability of Anand Theatre judgment by two-member bench and same cannot be applied while considering the question of whether a mall or warehouse or a building other than a hotel or a cinema theatre can be said to be a “plant”. ^{[Para 51]}

10) Analysis of supply w.r.t. land/ immovable property ^{[Para 39, 40]}

a) Supply of Services-

i) Any lease, tenancy, easement or licence to occupy land.

ii) Any lease or letting out of buildings for business or commerce, wholly or partly

iii)Renting of an immovable property

iv) If there is a complex, building or civil structure constructed which is intended for sale to a buyer, wholly or partly, construction becomes a supply of service only if consideration for sale is received before the issuance of a completion certificate or after its first occupation, whichever is earlier

b) Not a supply of service-

i) Sale of land

ii) If the lease or letting out of a building is for a residential purpose

11) Constitutional Validity Challenge^{[Para 57 to 62]}: While ruling out the challenge to the provisions of Sec 16(4), 17(5)Cl. (c)/(d) it was stated that-

a) In framing fiscal policy, legislature enjoys a wide latitude than laws touching civil rights such as freedom to speech, religion etc.

b) As the present matter is a complex issue, greater freedom and greater play in the joints has to be allowed to the legislature.

c) The cases covered under cl. (c) and (d) of Sec 17(5) are distinct from other cases and intelligible differentia exists which the Court has not experience/ expertise to embark upon.

d) ITC is a statutory right and exceptions to entitlement u/s 16(4) can be craved in the law.

12) Way forward

a) Construction of a building with the intent to further lease/ renting may be saved from rigours of functionality test of the same as a Plant ^{[Para 32]}

b) In view of author, the scope of same may be enlarged to all buildings intended for lease/ renting (including hotels, theatres) as it will fall in the second limb of exception as in Sec 17(5)(d).

c) ITC not claimed–

i) Past/ Continued projects: To claim within the time lines of Sec 16(4) as validated by SC for the past period 2023-24 till return filed by 30-Nov-24.

ii) New Projects: Should be claimed, with ensuring that it does beyond the restriction stated in Sec 17(5)(c) [works contract]

d) Any ITC litigation:

i) Ongoing litigation, make additional submissions

ii) ITC already reversed- Should be reclaimed/exploring refund

Though one can plan the course of action as per this landmark judgment and its interpretation, the future is still unpredictable as circulars, clarification by department including any retrospective/ prospective change in law may follow, which may again be tested before judiciary.