A) ABSTRACT / HEADNOTE

This case evaluates the constitutional validity and interpretation of Section 17(5)(c) and (d) of the Central Goods and Services Tax (CGST) Act, 2017. It examines whether these provisions infringe on the Input Tax Credit (ITC) rights of taxpayers involved in the construction of immovable properties intended for rental or leasing purposes. The pivotal issue was whether a shopping mall qualified as a “plant or machinery” under the exception to Section 17(5)(d). The functionality test was applied to ascertain whether the property could be excluded from the bar under Section 17(5). The court upheld the constitutionality of the provisions but remanded the case for factual determination based on the functionality test.

Keywords: Goods and Services Tax (GST), Input Tax Credit (ITC), Constitutional Validity, Functionality Test, Plant or Machinery.

B) CASE DETAILS

i) Judgement Cause Title: Chief Commissioner of Central Goods and Services Tax & Ors. v. M/s Safari Retreats Private Ltd. & Ors.

ii) Case Number: Civil Appeal No. 2948 of 2023.

iii) Judgement Date: 03 October 2024.

iv) Court: Supreme Court of India.

v) Quorum: Justices Abhay S. Oka and Sanjay Karol.

vi) Author: Justice Abhay S. Oka.

vii) Citation: [2024] 10 S.C.R. 793; 2024 INSC 756.

viii) Legal Provisions Involved:

• Section 17(5)(c) and (d) of the CGST Act, 2017.
• Article 14 and 19(1)(g) of the Constitution of India.

ix) Judgments Overruled by the Case (if any): None explicitly.

x) Case is Related to Law Subjects:

• Taxation Law.
• Constitutional Law.

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The CGST Act, 2017 introduced ITC as a means to avoid tax cascading. However, Section 17(5) created exceptions, restricting ITC on certain items like immovable property. The petitioners, constructing a shopping mall for leasing purposes, challenged this provision. They argued that denying ITC violated Articles 14 and 19(1)(g). The High Court read down Section 17(5)(d), holding that restricting ITC was contrary to GST principles. The Revenue challenged this ruling in the Supreme Court.

D) FACTS OF THE CASE

1. Safari Retreats Pvt. Ltd. engaged in constructing shopping malls, aimed to lease out units, and sought ITC on construction expenses under Section 17(5).
2. They claimed a cumulative GST ITC of ₹34 crores on goods and services used in construction.
3. The Revenue denied ITC, citing Section 17(5)(d), which excludes ITC on immovable property, barring exceptions for “plant or machinery.”
4. The High Court of Orissa ruled in favor of the petitioners, stating that denying ITC on rented malls frustrates the GST Act’s objectives.
5. The Supreme Court was tasked to address the constitutionality of Section 17(5) and interpret “plant or machinery.”

E) LEGAL ISSUES RAISED

1. Constitutionality: Are Section 17(5)(c) and (d) of the CGST Act, 2017, violative of Articles 14 and 19(1)(g)?
2. Interpretation: Does “plant or machinery” in Section 17(5)(d) include a shopping mall intended for leasing?
3. ITC Applicability: Should ITC be granted when immovable property is used for taxable outputs like rent?

F) PETITIONER/APPELLANT’S ARGUMENTS

1. Unconstitutional Restriction: Petitioners argued that Section 17(5)(d) discriminates against those leasing immovable properties by denying ITC, violating Article 14.
2. No Intelligible Differentia: The provision fails the test of reasonable classification as immovable properties rented for business should be treated like movable goods.
3. Economic Objectives: Denying ITC creates a cascading tax effect, defeating GST’s core objective of seamless credit.
4. Vague Language: Terms like “plant or machinery” and “on its own account” lack clarity, causing ambiguity.
5. Functionality Test: A shopping mall qualifies as a “plant” if essential for business.

G) RESPONDENT’S ARGUMENTS

1. Statutory Right: ITC is a statutory right, not a constitutional guarantee, and is subject to Section 17(5) limitations.
2. Break in Tax Chain: Denying ITC is rational, as immovable properties create a break in the GST credit chain.
3. Legislative Policy: Courts should respect legislative intent, especially in tax matters, where wide latitude is granted.
4. Exclusion Justified: Immovable properties like malls are inherently different from movable goods; hence, ITC denial aligns with legislative intent.

H) JUDGMENT

a. Ratio Decidendi:

1. The Supreme Court upheld the constitutionality of Section 17(5)(c) and (d), rejecting claims of arbitrariness.
2. It emphasized that ITC denial aligns with legislative policy and the GST framework.
3. The “functionality test” was introduced to determine if a building qualifies as a “plant” under Section 17(5)(d).

b. Obiter Dicta:

• Immovable property serving as a tool of trade may qualify as “plant.”
• Legislative intent must guide statutory interpretation.

c. Guidelines:

1. Apply the “functionality test” to ascertain if the property serves as a trade apparatus.
2. High Courts must assess factual nuances for ITC applicability.

I) CONCLUSION & COMMENTS

The judgment strikes a balance between legislative intent and taxpayer rights. While validating Section 17(5), it offers flexibility through the functionality test, ensuring fairness in ITC claims for immovable properties serving business needs.

J) REFERENCES

Important Cases Referred:

1. CIT, Trivandrum v. Anand Theatres (2000) 5 SCC 393.
2. Shreya Singhal v. Union of India (2015) 5 SCC 1.
3. Union of India v. Bharti Airtel Limited & Ors. (2021) SCC OnLine SC 1006.

Important Statutes Referred:

1. Central Goods and Services Tax Act, 2017.
2. Constitution of India.