1] Introduction :-

            There always have been controversies regarding the applicability of Section 17(5) of CGST/SGST Act, 2017.This Section provides for certain restrictions on the availability of Input Tax Credit. Sub- sections ( c ) & ( d) of the said Section are also matters of litigation for many years. These sub-sections deal with the restriction on ITC related to Works Contract Services & to goods & services which are used for the construction activities.

            M/s. Safari Retreats Pvt. Ltd.( hereinafter referred to as “company”)  was engaged in the construction of shopping malls and letting out of the shops constructed. The company availed ITC on materials and other inputs in the form of cement, bricks, sand, steel, electric equipments and services in the form of consultancy, architectural, legal services, etc.

            Revenue objected on this ITC quoting Section 17(5) & 17(6) of CGST/SGAT Act,2017 & stating that since the inputs & services were used for the construction activity, ITC was not permissible.

            The company filed a writ petition before Hon.Orissa High Court & the court allowed all the Input Tax Credit availed by the company. Hon. High Court particularly laid on the emphasis on Section 17(5)(d) while giving the judgment.

Revenue filed Special Leave Petition (SLP) against said order of Orissa High Court & Hon. Supreme Court passed a landmark judgment giving the a partial relief to the company.[reported in (2024) 23 Centax 62 (S.C.) ]

This article intends to deal with the important issues discussed by the Apex Court.

2] Sub-Sections 17(5)( c ) & (d):-

            In order to understand the issue involved in the abovementioned case, it is necessary to read the provisions of Section 17(5)(c ) & (d) of CGST/SGST Act,2017.

            “Section 17(5):- Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

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(c)works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d)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.

            Explanation.—For the purposes of clauses (c) and (d), the expression "construction" includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;”

            Explanation at the end of Section 17 is given as follows-

“Explanation.— For the purposes of this Chapter and Chapter VI, the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—

1. land, building or any other civil structures;
2. telecommunication towers; and
3. pipelines laid outside the factory premises.”

3] Summary  of the judgment passed by Hon. Supreme Court :-

            Paras 64 to 67 of the judgment throw light on the highlights of the judgment.

            Paras are quoted as per the judgment as under-

            A] Para 64 :-

                        Constitutional validity of  Sub-Section 17(5)(c) & (d) is upheld.

B] Para 65:-

i). 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 to Section 17;

ii) The question 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, in the light of what we have held earlier, 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).

C] Para 66:- In the light of what we have held above, by setting aside the impugned judgment in Civil Appeal Nos. 2948 and 2949 of 2023, 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 are partly allowed in above terms.

D] Para 67 :-While deciding these cases, we cannot make any final adjudication on the question of whether the construction of immovable property carried out by the petitioners in Writ Petitions amounts to plant, and each case will have to be decided on its merit by applying the functionality test in terms of this judgment. The issue must be decided in appropriate proceedings in which adjudication can be made on facts. The petitioners are free to adopt appropriate proceedings or raise the issue in appropriate proceedings.

4] Conclusion :-

            i) Hon. Supreme Court has upheld the Constitutional validity of Sub-sections 17(5)(c) & (d) which means the taxpayers cannot challenge these sub-sections as ultra-virus the Constitution of India.

            ii) There is a distinction between the terms “Plant or Machinery” & “Plant & Machinery”.

            iii) The question whether a civil construction or a building is a “Plant”                   ( under the scope of sub-section 17(5)(d) of CGST/SGST Act,2017) or not will depend on the fact as to whether the building is  essential for carrying out the activity of supplying services. Hence the functionality test is very important to decided this issue.

            iv) The case is remanded back to Orissa High Court for deciding the above issue. It means that M/s.Safari Retreats Pvt. Ltd. has got a partial relief in this case.

            v) In future  each case will have to be decided on its merit by applying the functionality test in terms of this judgment.

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