Summary: In the case of Safari Retreats Private Ltd., the Supreme Court held that Section 17(5)(c) & (d) of the CGST Act is constitutionally valid. The Court clarified that the term “plant or machinery” used in Section 17(5)(d) cannot be interpreted in the same way as the defined term “plant and machinery” under the CGST Act. The case centered around whether Safari Retreats, which constructed a shopping mall for rental purposes, could claim input tax credit (ITC) on GST paid for the mall’s construction. Although the Orissa High Court initially ruled in favor of allowing ITC, the Supreme Court remanded the case to determine whether the mall qualifies as a “plant” under Section 17(5)(d) based on the functionality test. The functionality test considers whether a building serves an essential technical function in the business. Each case, the Court emphasized, must be decided on its individual merits. The case is sent back to the High Court of Orissa for further proceedings to determine if the shopping mall qualifies as a “plant.”
In recent case of M/s Safari Retreats Private Ltd. & Ors. (W P (C). 804 of 2022 & 1030 of 2022 C P NO. 2949 OF 2023 WP (C) 1036 of 2022 & 90 of 2023 WP(C) 846 of 2023 and WP (C) NO. 847 of 2023, Supreme court held that, Sec 17 (5) and (d) are constitutionally valid however The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17.
Fact of the case:- (Safari Retreats Private Ltd.) SRPL is engaged in the construction of a shopping mall for the purpose of letting out premises in the malls to different tenants. Vast quantities of material, inputs and services are required and used in the construction of the mall are taxable under the CGST Act.
SRPL letting out of units in the shopping mall attracts CGST based on the rent received by the SRPL since it amounts to the supply of service under the CGST Act. Therefore, the SRPL was desirous of availing the Input Tax Credit (ITC) accumulated against the rental income received by it upon letting out the mall premises. However same is not accepted by GST department.
writ petition before the High Court of Orissa seeking a declaration that Section 17(5)(d) of the CGST Act and the corresponding provisions of the Orissa Goods and Services Act, 2017 do not apply to the construction of immovable property intended for letting out on rent. The High Court held that if the assessee is required to pay GST on the rental income from the mall, it is entitled to ITC on the GST paid on the construction of the mall. It was held that the narrow interpretation given by the Department to Section 17(5)(d) would frustrate the very object of the Act. Agaist the same SLP filed in Apex Court.
Court Finding and conclusion.
The expression “plant and machinery” appears at ten different places in Chapters V (Input Tax Credit) and VI (Tax Invoice, Credit and Debit Notes) of the CGST Act. whereas , the expression “plant or machinery” appears only in clause (d) of Section 17(5). the Model GST Law, which the GST Council Secretariat circulated in November 2016 to invite suggestions and comments from the public, the expression ‘plant and
machinery’ was used in clauses (c) and (d). However, while enacting the CGST Act, the legislature has consciously chosen to use the expression “plant or machinery” only in clause (d).
Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d). 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”.
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.
The explanation to Sec 17(5) c and d defines the meaning of the expression “plant and machinery”. However, as stated earlier, the expression “plant or machinery” has not been defined under the CGST Act. The very fact that the expression “immovable property other than “plants or machinery” is used shows that there could be a plant that is an immovable property.
The Court has laid down the functionality test. The Court held that whether a building is a plant is a question of fact. The Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. 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”, which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression “plant or machinery”. We have discussed the provisions of the CGST Act earlier. To give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test.
Conclusion in summery
1. The challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act is not established;
2. The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined by the explanation to Section 17;
3. The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. 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, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. Then, it is taken out of the exception carved out by clause (d) of Section 17(5) to sub-section (1) of Section 16. Functionality test will have to be applied to decide whether a building is a plant. Therefore, by using the functionality test, in each case, on facts, in the light of what we have held earlier, it will have to bedecided whether the construction of an immovable property is a “plant” for the purposes of clause (d) of Section 17(5).
We (The Court) cannot make any final adjudication on the question of whether the construction of immovable property carried out by the petitioners in Writ Petitions amounts to plant, and each case will have to be decided on its merit by applying the functionality test in terms of this judgment. The issue must be decided in appropriate proceedings in which adjudication can be made on facts. The petitioners are free to adopt appropriate proceedings or raise the issue in appropriate proceedings.
The Court remanded back writ petitions to the High Court of Orissa for limited purposes of deciding whether, in the facts of the case, the shopping mall is a “plant” in terms of clause (d) of Section 17(5). Appeals are partly allowed in above terms.
Author Bio
