SC Ruling on ITC for Construction Projects in Case of Safari Retreats

Our Take on The Decision of The Hon’ble Supreme Court in The Case of Safari Retreats Private Ltd.
1. Recently Hon’ble Supreme Court delivered an important verdict on the issue of the availability of input tax credit (ITC) on the supplies used for the construction of immovable property in the case of Chief Commissioner of CGST & Ors. Vs. M/s Safari Retreats Private Ltd. & Ors. (Civil Appeal No. 2948 OF 2023). Our take on the said verdict is as follows.
The issue before the Court
2. Sec.17(5)(d) of the CGST Act, 2017 restricts the ITC in respect of “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”.
3. Hon’ble Orissa High Court read down the said provisions to hold that the ITC shall be admissible in respect of the supplies used for the construction of a shopping mall wherein the units were intended to be let out in respect of which GST was leviable.
4. Revenue challenged the said decision before the Hon’ble Supreme Court. Several other applicants having diverse set of facts (such as the construction of factory premises, office buildings for renting/leasing, etc.) also joined the said matter before the apex Court. The Court formulated the following issues for consideration:
i. 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?
ii. If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”? and
iii. Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?
Findings of the Court

Restrictions u/s 17(5)(d) carve out two exceptions viz. first where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery” and second 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. ITC is not restricted in the case of the said two exceptions.
Construction is said to be on a taxable person’s “own account” when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot be said to be on a taxable person’s “own account” if it is intended to be sold or given on lease or license.
The expression “plant or machinery” u/s 17(5)(d) is distinct from the expression “plant and machinery” as appearing at ten different places in Chapters V (Input Tax Credit) and VI (Tax Invoice, Credit and Debit Notes) of the CGST Act. Model law circulated by the GST Council Secretariat in November 2016 used the expression ‘plant and machinery’ in clauses (c) and (d) of Sec. 17(5) but while enacting the CGST Act, the legislature has consciously chosen to use the expression “plant or machinery” only in clause (d). If the use of “or” in the expression “plant or machinery” was actually “and” then the legislature could have stepped in to correct it but the same has not been done since the decision of the Hon’ble Orissa High Court which was pronounced six years ago. Therefore, the exception u/s 17(5)(d) pertaining to “plant or machinery” has been intentionally incorporated.
The Explanation to Sec. 17 defining “plant and machinery” which excludes land, buildings or any other civil structure shall not be relevant for the purpose of construing the restriction u/s 17(5)(d).
Since the expression “plant or machinery” has not been defined in the CGST Act, the ordinary meaning of the expression “plant” as well as “machinery” in commercial terms will have to be applied.
Functional test will have to be applied to construe the meaning of the given expressions. The expression “plant” can include a building if a building has been so planned and constructed as to serve an assessee’s special technical requirements. The building to be eligible as a “plant” must not be a mere setting for the conduct of the business but must be a means for carrying out the business.
17(5)(c) and (d) cannot be said to be discriminatory when the said restrictions appear to have been done to ensure the object of not encroaching upon the State’s legislative powers under Entry 49 of List II (to tax land and buildings). The given restrictions are therefore constitutional.
The matter was remanded back to the High Court for determination of whether the mall in question qualifies as a “plant” or not so as to determine the application of restrictions u/s 17(5)(d).

Our take
5. In our view, the closer scrutiny of the decision reveals a dichotomy. This is so because the Hon’ble Supreme Court acknowledges two exceptions to the restrictions u/s 17(5)(d) viz. (i) other than own account exception and (b) plant or machinery exception. Now despite holding that own use exception covers the situation of constructing immovable property for giving it on lease or licence the Court proceeds to examine the second exception related to the construction of the expression “plant or machinery” and relegates the matter to the High Court to apply the functional test to examine whether construction of the given mall intended to be given on lease falls within the said expression. The said dichotomy will have to be resolved. In our view, the other than own account exception as interpreted by the Court is wide enough to exclude all constructions which are intended to be used by other parties (either on lease/licence/rental) and hence the ITC qua the supplies used for such construction shall not be restricted.
6. The functional test adopted by the Hon’ble Supreme Court appears to be very subjective. The transition of a building from being a mere setting for the business to becoming a means for carrying out the business is a grey line. In our view, the construction of a building with the intention of giving it on lease has to be considered to be a means for carrying out the leasing business as the building is the main subject for the given supply. In other situations, one has to examine whether the building plays an active role in the business activity in terms of having a special technical capability which is used for making outward taxable supplies. An affirmative answer will not lead to the blocking of the ITC.
(Views are strictly personal)