![]()
Supreme Court’s Landmark Judgment on Blocking
Input Tax Credit for Construction Materials Used for Renting Purposes
By
Yogesh Verma (CS/LLB) / 2 Min. Read / GST Case Law
Case Title: Chief Commissioner of Central Goods
and Services Tax & Ors. vs. M/s Safari Retreats Pvt. Ltd. & Ors.
Case No.: Civil Appeal No. 2948 of 2023
Date of Order: 2024
Applicant: Chief Commissioner of Central Goods and Services Tax (CGST)
Respondent: M/s Safari Retreats Pvt. Ltd.
Introduction: The Safari Retreats Supreme Court judgment has significant
implications for the general public, particularly for businesses and consumers
involved in real estate and commercial leasing. This case touches upon a
crucial aspect of the Goods and Services Tax (GST) framework: the input tax
credit (ITC) mechanism. The ruling addresses how businesses can claim ITC on
goods and services used in the construction of immovable properties, such as
malls, hotels, or commercial complexes, intended for leasing.
This judgment brings potential benefits by
clarifying how ITC can be claimed, helping businesses avoid the cascading
effect of taxes, thereby reducing the cost of operations. In turn, these
savings may translate into lower rents and better services for consumers.
Additionally, the case sets a precedent for other businesses in similar
sectors, ensuring that the GST's seamless credit principle is upheld, and
businesses can function more efficiently.
By resolving ambiguity in tax laws, the
judgment not only strengthens tax compliance but also ensures fairness in
taxation for industries that rely on immovable properties for business
activities. The public benefits from such clarity as it promotes a more
transparent and efficient tax system that avoids the burden of double taxation.
Facts of the Case:
M/s Safari Retreats Pvt. Ltd. constructed a
shopping mall with the intention of leasing out the space to various tenants.
The company incurred significant costs for goods and services such as cement,
steel, and architectural services, all of which attracted GST. Over time, they
accumulated input tax credit (ITC) worth over ₹34 crores. However, the tax
authorities denied their claim to ITC on the grounds of Section 17(5)(d) of the
Central Goods and Services Tax (CGST) Act, which blocks ITC for immovable
properties unless the property is sold before receiving the completion
certificate.
M/s Safari Retreats challenged this decision,
arguing that since they were collecting GST on the rental income, they should
be eligible for ITC on the construction materials and services. The case was first
brought to the Orissa High Court, which ruled in favor of the company. The
government appealed this decision to the Supreme Court.
Submission by the Petitioner (Safari Retreats Pvt.
Ltd.):
1. Denial of ITC is Unconstitutional: The petitioner argued that denying ITC on
construction materials for properties used to generate taxable rental income
goes against the principles of GST and violates Article 14 (right to equality)
and Article 19(1)(g) (right to trade) of the Indian Constitution.
2. Cascading Effect of Taxes: The core principle of GST is to prevent the
cascading effect of taxes. Denying ITC on such construction materials would
create a situation where the business is taxed multiple times on the same
value, leading to an unfair tax burden.
3. ITC Should Apply to Renting: Since the company was collecting GST on rent,
it was argued that ITC should be available for goods and services used in
constructing the property, which generates rental income, thereby continuing
the tax chain.
Submission by the Respondent (CGST Authorities):
1. Legislative Intent of Section 17(5)(d): The respondent argued that the provision of
Section 17(5)(d) was clear in its intent to block ITC for immovable properties
to prevent tax evasion and misuse of the credit system.
2. Taxing Rights are Legislative: ITC is a statutory right, not a
constitutional one. The tax authorities emphasized that the denial of ITC was
within the legislative scope, and businesses constructing immovable properties
must follow the law as written.
3. Break in the Credit Chain: The government argued that there is a break
in the tax chain when the property is leased, justifying the denial of ITC.
Observations of the Orissa High Court:
The Orissa High Court ruled in favor of M/s
Safari Retreats, reasoning that if GST was being paid on the rental income, it
would be unjust to deny ITC for the inputs used in the construction of the
property. The court held that the narrow interpretation of Section 17(5)(d)
would defeat the primary objective of GST, which is to allow seamless credit
across the supply chain. It stated that businesses renting out commercial
properties should be treated differently from those selling them, as rent also
attracts GST.
Findings and Judgment of the Supreme Court:
1. Statutory Right to ITC: The Supreme Court upheld that ITC is a
statutory right, and the provisions of Section 17(5)(d) of the CGST Act, which
block ITC for immovable property, were constitutional. The court did not find a
violation of Articles 14 or 19(1)(g) of the Constitution.
2. Plant or Machinery Exception: The court applied the "functionality
test" to determine whether the shopping mall could be classified as a
"plant," which would allow ITC. If a property plays an integral role
in the business (as a tool of trade), it could qualify for ITC. However, the
court remanded the case back to the Orissa High Court to apply this test to the
specific facts.
3. No Immediate Relief: The Supreme Court did not immediately grant
ITC to M/s Safari Retreats but left open the possibility that the mall could be
classified as a plant if the functionality test was satisfied.
Conclusion:
The Safari Retreats case is a landmark
decision that clarifies the application of Section 17(5)(d) under the GST
regime. While the Supreme Court upheld the constitutional validity of the
provision that blocks ITC for immovable properties, it left room for further
interpretation by emphasizing the importance of the "functionality
test." This test could allow businesses to claim ITC if they can prove
that the property serves as an essential tool of their trade, rather than
merely being a setting for business activities.
For businesses engaged in leasing immovable
properties, this judgment offers guidance on how to structure their tax claims.
By potentially classifying certain properties as plants under the GST
framework, businesses may continue to benefit from ITC, preserving the chain of
taxation and preventing the cascading effect of taxes.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
Find the Attachment (Press on Click Here )
Click here
