Can input tax credit be claimed on building construction under GST law? What Supreme Court held

The Supreme Court recently delivered a crucial ruling on the question of whether input tax credit (ITC) can be claimed for transactions concerning the construction of buildings under the prevailing goods and services tax (GST) regime [Chief Commissioner of CGST and Ors. v. M/s Safari Retreats Private Limited and Ors.]..In its October 3 ruling, a Bench of Justices Abhay S Oka and Sanjay Karol left some room for GST assessees to claim ITC on building construction.The Bench held that whether ITC can be claimed on building construction would depend on whether the building constructed is a "plant." A plant, as ordinarily understood in commercial transactions, refers to land, buildings, machinery, apparatus and fixtures used for carrying on a business (but not including stock). Since the CGST Act of 2017 does not define a "plant" as a standalone term (it only defines "plant and machinery"), the Court held that the ordinary commercial meaning of the term will apply. The Court added that whether or not a building is a "plant" would depend on the function of the building. For instance, if the building is being constructed only so that it is leased out, such leasing out would involve a "supply" of services, thereby bringing the building's construction under the purview of GST laws. In such cases, ITC can be claimed. On the other hand, where there is no such supply of service, a building construction would not fall under GST laws and, consequently, no ITC can be claimed. "Under the CGST Act … renting or leasing immovable property is deemed to be a supply of service, and it can be taxed as output supply. Therefore, if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant," the judgment said. .The clarification was required as Section 17 (5)(c) and (d) of the Central GST Act laid down that ITC generally cannot be claimed for work contracts or goods and services linked to the construction of immovable property (which includes buildings).However, even under Section 17 (5)(d), ITC can still be claimed if the construction is in the nature of a 'plant or machinery'. On the other hand, Section 17 (5)(c) carves out a similar exception if the construction is in the nature of a 'plant and machinery'.Notably, an explanation to Section 17 (which, inter alia, deals with cases where ITC cannot be claimed) of the CGST Act defines 'plant and machinery'. Under this definition, buildings are excluded from the definition of 'plant and machinery'.However, since Section 17(5)(d) allows claiming of ITC for transactions involving the construction of 'plant or machinery', the Court concluded that buildings could still be interpreted as 'plants' on which ITC can be claimed. Notably, the Bench rejected the Centre's stance that 'plant and machinery' and 'plant or machinery' are the same, and that the 'and/ 'or' differences in Section 17(5)(c) and Section 17(5)(d) was only a drafting error."If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression 'plant or machinery' in clause (d) as distinguished from the expression 'plant and machinery'," the Court said..Constitutionality of CGST Act provisionsIn the same ruling the Court also upheld the constitutionality of Section 17(5) (c) and (d) of the CGST Act. Various petitioners had argued that it was arbitrary to exclude transactions concerning immovable property from transactions on which ITC could be claimed. The Court rejected their argument, holding that there was sufficient basis to treat immovable property different and as a class of its own. "The Union of India rightly contends that immovable property and immovable goods for the purpose of GST constitute a class by themselves. Clauses (c) and (d) of Section 17(5) apply only to this class of cases. The right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute. Therefore, the cases covered by clauses (c) and (d) of Section 17(5) are entirely distinct from the other cases. This appears to be done to ensure the object of not encroaching upon the State's legislative powers under Entry 49 of List II. Therefore, it is not possible to accept the submission that the difference is not intelligible and has no nexus to the object sought to be achieved," the Court held.The Court added that test of whether a law is discriminatory, is less rigorous when it comes to taxation laws, given the complex nature of the transactions involved. "Ultimately, the legislature was dealing with a complex economic problem. By no stretch of the imagination, clauses (c) and (d) of Section 17(5) can be said to be discriminatory," the Court concluded. .The Court further rejected a constitutional challenge to the validity of Section 16 (4) of the CGST Act, which laid down a deadline for claiming ITC in certain scenarios. "It is not shown how the provision is arbitrary and discriminatory. The fact that the provisions could have been drafted in a better manner or more articulately is not sufficient to attract arbitrariness," the Court said. .Ball now in High CourtThe Supreme Court's judgment was passed on a batch of petitions, including one concerning the builders of a retail mall in Orissa. The ITC claimed by the building's owners for work done to build the would-be mall (money spent on cement, steel, elevators, air-conditioning systems, and architectural services) was rejected citing Section 17(5)(d) of the CGST. This was challenged before the Orissa High Court, which ruled in their favour. This ruling was challenged before the Supreme Court, which pronounced a common decision by its October 3 ruling in this and other related cases. Having said that some building owners could claim ITC if the building is a 'plant', the Court ultimately left it to the High Court to decide whether a mall was actually such a 'plant.'"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," the top court said while sending the matter back to the High Court. .[Read Judgment]