In a significant ruling, the Hon’ble Supreme Court of India addressed the constitutional validity of exceptions under clauses (c) and (d) of Section 17(5) of the CGST Act.
The appeal resulted from the construction of a shopping mall by Safari Retreats, which claimed ITC on the goods and services used for the construction. It was argued that since the mall was let out for commercial purposes, they should be allowed to claim ITC against the rent received.
The Court addressed the issue whether the denial of ITC in such cases was constitutionally valid and whether the definition of “plant and machinery” in Section 17 will also apply to “plant or machinery” in Section 17(5)(d).
The Hon’ble Supreme Court made the following observations:
Section 17(5)(d) does not exclude all immovable properties from ITC eligibility. ITC is available for the construction of “plant or machinery.” Whether a building is a “plant”, is a question of fact.
The term "plant" is not defined under the GST laws. The Supreme Court applied the functional test to determine whether a building can be considered a "plant." If a building is constructed for technical requirements, it can qualify as a “plant”. If the building is used for personal use or as a site of business, ITC will not be available.
Section 17(5)(c) and (d) of the CGST Act does not violate the Constitution. Restrictions on ITC imposed under Section 17(5) are based on reasonable classification and have a rational nexus to the objectives of the CGST Act. Section 16(4) has also been held to be constitutional.
Under clause (c), the chain of credit breaks at the dividing line of ‘issuance of completion certificate or after its first occupation’. Ther is no such line in Clause 2 of Schedule II and hence in case of renting or leasing, the building may qualify to be a “plant”.
The expression ‘own account’ means: (i) construction is made for personal use and not for providing service, or (ii) construction is to be used as a setting in which business is carried out.
Matter has been remanded to the High Court to determine whether the shopping mall in question qualifies as a “plant” based on the functionality test.
W&B Comments: By recognizing that a building integral to business operations may qualify as a “plant,” the Court has opened the door for claiming ITC on GST paid during the construction of such buildings, where the construction directly contributes to service provision, such as leasing or renting.
Despite the Court recognizing that constructing immovable property for leasing or licensing falls under the first exception, it still proceeded to examine the second exception related to "plant or machinery" and remanded the matter to the High Court. This creates a grey area. The exception of "Other than own account" is broad enough to exclude all constructions intended for leasing or licensing, which should allow ITC for supplies used in such construction without requiring further tests.
The functional test adopted by the Supreme Court also appears subjective. The distinction between a building being a "mere setting" for business and a "means" of carrying out business is subtle. In our opinion, if a building is constructed with the intention of leasing, it should be viewed as the primary asset for the leasing business, making it a "means" for conducting that business and qualifying for ITC. If such functionality exists, ITC should not be blocked.
While the Supreme Court has upheld the constitutional validity of Section 17(5)(c) and 17(5)(d), its acceptance of the argument on the interpretation of “plant or machinery” is a positive development. But it requires case-by-case analysis using the functional test to determine ITC eligibility.