CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS. versus M/S SAFARI RETREATS PRIVATE LTD. & ORS. (03/10/2024) — Supreme Court headnote

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Summary

The Supreme Court upheld clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act, which block input tax credit on construction of immovable property. It held that 'plant or machinery' in clause (d) is wider than the defined 'plant and machinery', so a building such as a mall or warehouse can be a 'plant' under a functionality test. Whether a building qualifies is a question of fact, so the Orissa High Court's reading-down judgment was set aside and the mall case remitted on that point; the writ petitions were rejected subject to this interpretation.

Issues

Whether the definition of 'plant and machinery' in the Explanation to Section 17 of the CGST Act applies to the expression 'plant or machinery' in Section 17(5)(d).
If not, what 'plant' means in Section 17(5)(d), and whether a building such as a shopping mall let out on rent can be a plant.
Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act violate Articles 14, 19(1)(g) and 300A of the Constitution.
Whether Section 17(5)(d) should be read down to allow input tax credit on construction of buildings used for taxable outward supplies such as renting.

Provisions considered

Section 17(5)(d), Central Goods and Services Tax Act, 2017Blocks credit on goods or services for construction of immovable property on one's own account, except 'plant or machinery'. The Court held construction is on one's own account when for personal use or as a setting for business, not when meant for sale, lease or licence. Since 'plant or machinery' was used deliberately, a building can be a plant under a functionality test. (¶¶ 30, 32, 43, 44, 46, 52, 55, 65)
Section 17(5)(c), Central Goods and Services Tax Act, 2017Works contract services for construction of immovable property are blocked except for 'plant and machinery' as defined, or where they are input for a further works contract. The clause was given its plain meaning, and excluding works contracts was held not to defeat the Act's object. (¶¶ 30, 31, 34, 41, 54)
Explanation to Section 17 (definition of 'plant and machinery'), Central Goods and Services Tax Act, 2017The definition covers fixed apparatus, equipment and machinery and excludes land, buildings and civil structures. It was held not to govern 'plant or machinery' in clause (d), which is used only once and was chosen deliberately. (¶¶ 30, 35, 42, 43, 44, 45, 52)
Section 16(1), Central Goods and Services Tax Act, 2017Gives a registered person credit on inputs used in the course or furtherance of business, subject to prescribed conditions. Section 17(5)'s non obstante clause overrides it, and credit was held to be purely a statutory creation. (¶¶ 27, 30, 58)
Section 16(3), Central Goods and Services Tax Act, 2017The bar on claiming both depreciation and credit on the tax component of capital goods and plant and machinery was explained as preventing a double benefit. (¶¶ 27, 28)
Section 16(4), Central Goods and Services Tax Act, 2017The time limit for claiming credit on an invoice or debit note, as amended by the Finance Act, 2022, was upheld; no arbitrariness or discrimination was shown. (¶¶ 29, 63, 65)
Section 7 read with Schedule II, clauses 2 and 5, and Schedule III, clause 5, Central Goods and Services Tax Act, 2017Lease or letting of buildings for business and renting of immovable property are supplies of service. So is construction of a building sold before completion certificate or first occupation, but sale of land and of completed buildings is not. Hence credit on a building that is a plant can be set off against rent. (¶¶ 36, 37, 38, 39, 40, 53, 55)
Section 9, Central Goods and Services Tax Act, 2017The charging section levies CGST on intra-State supplies of goods or services or both, including on reverse charge where notified. (¶ 26)
Article 14, Constitution of IndiaApplying the wide latitude given to tax laws, the Court held that immovable property forms a distinct class. The separate treatment in clauses (c) and (d) has a rational nexus with not encroaching on the States' power over land and buildings, and is not discriminatory. (¶¶ 57, 58, 59, 60, 62)
Seventh Schedule, List II, Entry 49, Constitution of IndiaTaxes on lands and buildings are a State subject. This explained why the CGST Act separately classifies immovable property for the purpose of credit. (¶¶ 36, 59)
Articles 19(1)(g) and 300A, Constitution of IndiaThe challenge under these Articles was rejected because the assessees did not show how any violation arose. (¶¶ 7, 61)

Held

The Court restated the rules for construing taxing statutes: read them strictly as written, without additions or subtractions; prefer the taxpayer where two views are possible; equity has no place; and undefined words take their commercial or trade meaning, not their definition in an unrelated statute. (¶ 25)
'Plant or machinery' in Section 17(5)(d) cannot be read as 'plant and machinery'. The legislature used 'and' in about ten places but 'or' only here, departed from the Model GST Law, and did not correct the supposed mistake despite years of litigation, so the choice was deliberate. Importing the definition would do violence to the words. (¶¶ 43, 44)
'Plant' in clause (d) is undefined and must take its ordinary commercial meaning; the clause itself shows a plant may be immovable property. Following Karnataka Power Corporation, which confined Anand Theatres to hotels and cinemas, a building planned and built to meet the business's special requirements can be a plant under the functionality test, a question of fact. (¶¶ 46, 50, 51, 52)
If a mall, warehouse or other building (other than a hotel or cinema) qualifies as a plant, credit on goods and services used to build it can be set off against GST on renting or leasing, since those are taxable supplies. Where the owner builds for his own use, the tax chain breaks and no credit is available. (¶¶ 53, 55, 65)
Clauses (c) and (d) of Section 17(5) operate in substantially different fields, works contract services and goods or services for construction on one's own account. Giving them different meanings therefore does not produce discrimination. (¶¶ 34, 54)
Input tax credit is a statutory concession that the legislature may restrict. Immovable property is a distinct class for GST, and its separate treatment has a rational nexus with respecting the States' power over land and buildings. Testing it further would mean entering complex fiscal adjustments beyond judicial expertise, so clauses (c) and (d) are not discriminatory. (¶¶ 57, 58, 59, 60)
That a tax provision could ideally have been drafted differently or better does not make it unconstitutional. The time limit in Section 16(4) was upheld, and as the plain meaning of clauses (c) and (d) creates no ambiguity, there was no occasion to read them down. (¶¶ 62, 63, 64)
Since the High Court had read down the provision instead of deciding whether the mall met the functionality test, and each building differs, the question had to go back for fact-finding. The writ petitioners must raise it in appropriate proceedings. (¶¶ 56, 66, 67)

Result

Civil appeals partly allowed; the Orissa High Court's judgment set aside and the writ petition remitted for the limited question whether the shopping mall is a 'plant' under Section 17(5)(d). The constitutional challenge to Sections 17(5)(c), 17(5)(d) and 16(4) failed, and the writ petitions were rejected subject to the Court's interpretation of clause (d), leaving petitioners to raise the plant question in appropriate proceedings.