Case Law Details
A detailed analysis of Hon’ble Supreme Court’s Judgement on Input Tax Credits on Construction of Immovable Property
The Supreme Court of India made several key observations regarding the constitutional validity of Section 17(5)(c) and (d) of the CGST Act, 2017, and the issue of Input Tax Credit (ITC).
Issues for consideration before the Apex Court
1. Whether the definition of “plant and machinery” in the explanation appended to Section 17 of the CGST Act applies to the expression “plant or machinery” used in clause (d) of sub-section (5) of Section 17?
2. If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”? and
3. Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?
Relevant Provisions of the CGST Act,2017
“17(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:
……………..
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.—For the purposes of clauses (c) and (d), the expression “construction” includes re construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;”
Key Observations by the Hon’ble Apex Court
1. The explanation to section 17(5) defines “ plant and machinery”. However, no where in the CGST Act “plant or machinery” is defined Clause ( c) and clause (d) of the CGST Act do not exclude every classes of immovable properties from the applicability of ITC. As per clause (c ) if the construction is of “plant and machinery”, the benefit of ITC will accrue. Similarly, under clause (d) if the construction is of “plant or machinery”, ITC will be available.- Para-33
2. As per the well settled principle of interpretation of taxing statute, there is no scope to give any meaning to clause ( c) of Section 17(5) other than its plain and natural meaning. The “plant and machinery” is defined in the explanation to section 17(5) of the CGST Act,2017. Works contract service is also defined in the CGST Act. Therefore, there is nothing to add or subtract from the clause ( c) of Section 17 of the CGST Act. As ITC is a creation of legislature, it can exclude specific categories of goods or services from ITC and such exclusion, per se will not defeat the object of the CGST Act.-Para 41
3. The phrase “plant and machinery” is used in the CGST Act at several different places.However, the term “plant or machinery” is only used in Section 17(5)(d) of the CGST Act. Therefore, it has been inferred that the legislature has intentionally used the expression “ plant or machinery” in clause (d) of Section 17(5) of the CGST Act,2017. Therefore, the expression “plant and machinery” and “plant or machinery” cannot have the same meaning.-Para 44.
4. The expression “plant or machinery” can either be “plant” or “machinery”. No where in the GST Laws, the word “plant” is defined. In this regard the Apex Court has held that dominant functionality test shall be carried out to determine whether a building can be considered as a “ plant” or not. If it is found on facts that a building has been so planned and constructed so as to serve assessee’s special technical requirements, it will qualify to be treated as ‘ plant’. For the purpose of Section 17(5)(d) ‘plant’ should not be given a restrictive meaning to exclude land, buildings etc.
5. Activity of Renting or leasing buildings is already covered under Schedule-II of the CGST Act,2017 as supply of service. Even the activity of construction of building is a supply of service if the total consideration is collected before getting Completion Certificate. Therefore, building can be considered as “plant” and ITC can be availed for construction of such building if the same is used for further supply of services like renting, leasing etc. However, if the building is used for own use, then ITC will not be available.
6. Further, in regard to the constitutional validity of Section 17(5) clause ( c) and (d), the Apex Court has relied upon the decision in the case of VKC Footsteps and held that the provisions of Section 17(5), clause (c ) and clause (d) do not meet the test of reasonable classification, which is a Part of Article-14 of the Constitution of India. To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. It is further held that the right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute. It cannot be disputed that the legislature can always carve out exceptions to the entitlement of ITC under Section 16 of the CGST Act.[Para 58].
Conclusion
This judgement is landmark decision in regard to availability of ITC on construction activity, which are blocked under section 17(5)(d) of the CGST Act. The Hon’ble Apex Court has categorically decided that ITC shall be eligible in respect of construction of Malls or other buildings which were constructed with the objective of giving it on rent or lease. However, the Hon’ble Court is silent in respect of construction of Factory Buildings where taxable goods are manufactured or construction of office building from where services are provided. The principle of functionality test, as applied by the Hon’ble Apex Court may be used to determine the eligibility of ITC in respect of Factory Building or Office Buildings.
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