Supreme Court’s Landmark Verdict in Safari Retreats Case: A Ray of Hope for Developers and Infrastructure Sectors

The Hon’ble Supreme Court has delivered final judgment in the Safari Retreats Private Limited case on October 3, 2024. The judgment of the Hon’ble Supreme Court was much awaited not only by the developers engaged in the construction of shopping malls, but also other industry players involved in the construction of ports, airports and others infrastructure companies.

The matter deals with the eligibility of ITC for immovable property, particularly commercial properties like shopping malls meant for leasing/renting. Under Section 17(5)(d) of the CGST Act, developers were not allowed to claim ITC on the GST paid for goods and services used in constructing immovable property meant for own purpose even if the same was used in the course or furtherance of business resulting into an additional financial burden. Writ Petitions was filed before the Hon’ble Odisha High Court challenging the constitutional validity of Section 17(5)(c) and 17(5)(d) of the CGST Act.

In 2019, the Hon’ble Orissa High Court in the case of Safari Retreats Private Limited vs. Chief Commissioner of CGST [TS-350-HC-2019(ORI)-NT] gave a favorable decision to the Petitioner and held that the input tax credit pertaining to goods and services used for the construction of the mall cannot be denied under Section 17(5)(d) of Central Goods and Services Tax Act, 2017 (‘CGST Act’) since the Petitioner is using them for construction of a building which is not used for his own purpose but for fresh stream of GST revenue in the form of rental income. The Hon’ble High Court further held that a narrow interpretation of Section 17(5)(d) of the CGST Act will frustrate the very intention of the Goods and Services Tax Act which is to avoid the cascading effect of multi stage taxation.

The judgment of the Hon’ble Odisha High Court was challenged by the Revenue Authorities before the Hon’ble Supreme Court. The Hon’ble Supreme Court pronounced its verdict on October 3, 2024.

• 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 as the said provisions involved an intelligible classification with a rational nexus to the legislative objective, and there was no discrimination in the treatment of ITC claims related to immovable property.;
• 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. The Court observed that the word ‘plant’ used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of “plant and machinery”, which excludes land, buildings or any other civil structures. 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 to give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test.
• 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) needs factual analysis on a case to case basis considering the business of the registered person and the role that building plays in the said business. It was held that functionality test will have to be applied to decide whether a building is a plant for the purpose of Section 17(5)(d).

The much-anticipated judgment from the Hon’ble Supreme Court has brought relief not only to real estate developers but also to other industry players involved in constructing ports, jetties, warehouses, and other infrastructure projects. Though the Hon’ble Supreme Court has rejected the challenge to the constitutional validity of Section 17(5)(c) and 17(5)(d) of the CGST Act, the acceptance of the submissions of the petitioners qua the meaning of the expression “plant or machinery” stipulated in Section 17(5)(d) of the CGST Act is a positive outcome and indicates a more adaptable interpretation of law.  The Ruling certainly comes as a ray of hope as it indicates that buildings such as mall can be treated as plant and emphasizes on a case-by-case analysis based on the functionality test to determine the ITC eligibility.

However, while the judgment was given in relation to malls, it is yet to be tested whether the term ‘plant’ can  be applied to other sectors such as ports, airports, factories, warehouses etc. The same is left open for interpretation by the authorities. Further, there are certain other unresolved issues which may need further clarification such as Whether ITC of works contract services would be available under Section 17(5)(d) of the CGST Act in relation to buildings constructed for leasing purposes?; etc.

We’ll need to keep a close eye on how things unfold—whether it’s through the Hon’ble Odisha High Court’s interpretation, the stance taken by tax authorities, or any clarifications/amendment by the GST council.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Rohit Jain, Deputy Managing Partner – Email – rohitjain@elp-in.com

Gourav Sogani, Partner, Email – gouravsogani@elp-in.com

Pavni Lakhanpal, Senior Associate, Email – pavnilakhanpal@elp-in.com

Anushka Jain, Associate, Email – anushkajain@elp-in.com