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Supreme Court Ruling on Input Tax Credit (ITC) and the "Plant" Exception: Key Insights from CA Vikash Dhanania
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Namaste DOST!

On October 3, 2024, the Supreme Court of India passed a significant ruling that impacts the treatment of Input Tax Credit (ITC) for the construction of immovable properties. The ruling clarifies the scope of Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017, which restricts ITC on goods and services used for the construction of immovable property, except for “plant or machinery.” This decision has far-reaching implications, particularly for businesses involved in the leasing or renting of properties.

The Supreme Court's Decision: When Buildings Can Be Considered "Plant"

The Supreme Court held that if the construction of a building is essential for carrying out an activity like renting or leasing services, the building may fall within the "plant" exception under Section 17(5)(d). To determine whether a building qualifies as a "plant," the Court emphasized applying a "functionality test." This test assesses whether the structure is integral to the service being provided.

The ruling also clarified that Section 17(5)(d) of the CGST Act need not be interpreted differently to exclude cases where immovable property is constructed for the purpose of letting out on rent. Therefore, businesses constructing properties specifically for renting or leasing services may have an opportunity to claim ITC on the materials used in the construction, depending on whether the property qualifies as a "plant."

The case, Chief Commissioner of Central Goods and Service Tax and Ors v. M/S Safari Retreats Private Limited and Ors., has been remanded to the High Court for further factual determination on whether the shopping mall in question qualifies for the "plant" exemption.

The Background: Safari Retreats and Input Tax Credit Claim

The petitioners in this case, M/s Safari Retreats Pvt. Ltd., constructed a shopping mall in Bhubaneswar with the sole purpose of letting it out to tenants. They incurred significant expenses in purchasing materials and services like cement, steel, and architectural services, on which they paid GST. Safari Retreats sought to claim an ITC of Rs. 34.4 crore on these inputs to offset their GST liability arising from the rental income. However, the tax authorities denied the ITC, citing Section 17(5)(d), which restricts ITC for immovable property construction on one's own account.

Insight from CA Vikash Dhanania: A Landmark Moment for Businesses

CA Vikash Dhanania, a seasoned expert in GST and indirect taxes, believes this ruling is crucial for businesses engaged in the leasing and renting sector. According to him, the application of the functionality test brings a practical perspective to how properties used for services like renting should be treated under the GST regime.

"This decision emphasizes the need to assess how integral a building is to the service being provided. The Supreme Court has opened up the possibility for developers and businesses to potentially claim ITC on construction materials, something that was previously restricted under Section 17(5)(d)," says Dhanania.

He further adds, "This ruling bridges the gap between the intent of the GST framework—to avoid cascading taxes—and the practical realities of businesses involved in property leasing. By potentially treating buildings as 'plants,' we can ensure that businesses are not unfairly burdened with double taxation."

Orissa High Court's Stand: Double Taxation and ITC Denial

In the original judgment from the Orissa High Court in 2019, the court ruled in favor of Safari Retreats, observing that denying ITC for the construction of a property intended for renting would result in double taxation. The court argued that GST was paid both on the inputs used in construction and on the rental income, which would disrupt the flow of credit and violate the GST regime's intent to eliminate cascading effects.

The High Court further highlighted that Section 17(5)(d) should only apply to cases where the immovable property is constructed for sale, not for renting. According to the court, denying ITC to developers renting out properties would make their business uncompetitive and goes against the GST law's spirit.

Implications of the Supreme Court Ruling

While the Supreme Court did not fully endorse the Orissa High Court's interpretation of Section 17(5)(d), it acknowledged that certain properties constructed for renting out services might qualify as "plant." This subtle but crucial distinction will allow the High Court to determine whether the Safari Retreats shopping mall qualifies for ITC under the plant exception.

From a business perspective, this ruling offers a glimmer of hope for those involved in the construction and leasing of properties. Developers may now explore the possibility of claiming ITC on construction materials if their properties meet the functionality test established by the Supreme Court.

What’s Next?

The case has been remanded to the High Court for further proceedings to determine whether the facts of Safari Retreats’ construction fall within the plant exemption. The detailed judgment from the Supreme Court is eagerly awaited, as it will clarify the nuances of this decision and provide businesses with more certainty on how to approach ITC claims for constructed immovable properties.

Final Thought by CA Vikash Dhanania:

"While the functionality test provides a pathway for some relief, businesses must carefully evaluate the use of their properties and how essential they are to their services. This ruling has opened a new dimension in how GST laws can be interpreted, but each case will need to be judged on its specific facts."

This ruling reinforces the importance of nuanced legal interpretations in GST, and businesses should stay vigilant for the upcoming developments in this case.

Vikash Dhanania

Founder of GST DOST, is a seasoned CA with exceptional expertise in GST. Honored with the prestigious Hariyana Pratibha Puruskaar, Vikash is known in the market as DOST, reflecting his friendly and supportive approach. He excels in leveraging AI, KI, and EI to deliver impactful solutions that satisfy clients. An accomplished author, prolific blogger, and creator of educational videos for the business community, he also launched the groundbreaking online GST talk show, "GST ki Baat Dost ke Saath."