Chief Commissioner of Central Goods and Service Tax and Ors. Versus  Ms Safari Retreats Private Limited and Ors.

Civil Appeal No. 2948 of 2023

Facts and Background: 

The first Respondent 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 materials, inputs and services are required for the construction of the malls in the form of cement, sand, steel, aluminium etc., and also consultancy services, architectural services, legal and other professional services. These goods and services used in the construction of the mall are taxable under the Central/State Goods and Services Tax Act, 2017 (“the Act”). At the same time, the first Respondent’s letting out of units in the shopping mall attracts Goods and Services Tax (GST) based on the rent received by the first Respondent since it amounts to the supply of service under the Act. Therefore, the first Respondent was desirous of availing the Input Tax Credit (ITC) accumulated against the rental income received by it upon letting out the mall premises. According to the first Respondent, when it approached the concerned authorities, it was advised to deposit GST on rent without deducting ITC because of the exception carved out by Section 17(5)(d) of the Act.

The first Respondent filed a writ petition before the High Court of Orissa seeking a declaration that Section 17(5)(d) of the 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 alternative prayer made was, that in the event it is held that the bar under Section 17(5)(d) is applicable even to the construction of immovable property intended for letting out, a declaration be issued that Section 17(5)(d) is violative of Articles 14 and 19(1)(g) of the Constitution of India.

By the impugned judgment dated 17.04.2019, the High Court held that in view of the decision of the Supreme Court in the case of Eicher Motors Limited and Anr. v. Union of India and Ors., Section 17(5)(d) was required to be read down as the very purpose of ITC is to benefit the Assessee. 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 Central Board Of Indirect Taxes & Customs to Section 17(5)(d) would frustrate the very object of the Act.

The Petitioner preferred an appeal before the Supreme Court against the order of Orrisa High Court.

Issues:

The issues before the Supreme Court of India in this case were:

Whether the definition of “plant and machinery” in the explanation appended to Section 17 of the Act applies to the expression “plant or machinery” used in Clause (d) of Sub-section (5) of Section 17?

If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”? and

Whether Clauses (c) and (d) of Section 17(5) and Section 16(4) of the Act are unconstitutional?

Judgment Summary:

The expression “plant and machinery” cannot be read as “plant or machinery”. That is so clear from the explanation in Section 17, which says that “plant and machinery” means apparatus, equipment and machinery fixed to the earth by foundation or structural support that are used for making outward supply of goods or services or both. The expression includes such foundation and structural support fixed to the earth. However, the definition excludes land, buildings or any other civil structure.

The Court has laid down the functionality test. It held that whether a building is a plant is a question of fact, and 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. 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”.

It was held that if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed thereunder are fulfilled.

One of the arguments of learned ASG was that if different meanings were given to the words “plant and machinery” and “plant or machinery”, it could result in discriminatory treatment. Clause (c) of Section 17(5) operates in a completely different field, as it applies only to works contract services supplied for the construction of immovable property; while Clause (d) deals with services received by a taxable person for the construction of an immovable property on his own account. As Clauses (c) and (d) operate in substantially different areas, the argument of ASG relying on discrimination cannot be accepted.

In the main appeal, the High Court has not decided whether the mall in question will satisfy the functionality test of being a plant. Therefore, in each case, fact-finding enquiry is contemplated. The Hon’ble Court sent back the matter to the High Court to decide whether, on facts, the mall in question satisfies the functionality test to be termed as a plant within the meaning of bracketed portion in Section 17(5)(d). The Supreme Court held that the same rule applies to warehouses or other buildings except hotels and cinema theatres. A developer may construct a mall predominantly to sell the premises therein after obtaining an occupation certificate. Therefore, it will be out of the purview of Clause 5(b) of Schedule II. The Hon’ble Supreme Court observed that each case will have to be tested on merits as the question of whether an immovable property or a building is a plant is a factual question to be decided.

Decision:

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;

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 in Section 17;

The question of 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, it will have to be decided whether the construction of an immovable property is a ‘plant’ for the purposes of Clause (d) of Section 17(5).

The writ petitions are remanded 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 were partly allowed in the above terms.

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