SC holds ITC should be eligible on goods and services used for construction of building, if qualifies as a ’plant’

This Tax Alert summarizes a recent ruling of the Supreme Court (SC)[1] on the eligibility of input tax credit pertaining to goods and services used in construction.  The Court has held that the functionality test would need to be applied to determine whether the construction is of a “plant or machinery” to determine credit eligibility.

The key observations of the SC are:

• The expression “plant or machinery” used in Section 17(5)(d) cannot be given the same meaning as the expression “plant and machinery” defined in the Explanation to Section 17.
• The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a “plant” is a factual question which has to be determined keeping in mind the business of the 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, the building could be held to be a plant.
• Therefore, by using the functionality test, in each case, 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).
• 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.  

The writ petitions are remanded to HC 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). 

Comments:

• The Supreme Court has laid down principles to be applied in determining eligibility to input tax credit in matters involving construction of a facility that could qualify as a plant.  
  
• The real estate sector engaged in commercial leasing may need to apply these principles to determine whether input tax credit can be claimed on grounds of the construction being of a plant.  
• A lot of emphasis has been placed by the Supreme Court on the difference in language used by the legislature (“and” vs “or”) in arriving at its conclusion.  It also needs to be seen whether the Government would be inclined to amend section 17(5)(d) to align the same with the expression used in the Explanation thereby restricting the impact of this ruling.
• While this ruling has been rendered in the context of a fact pattern involving the construction and commercial lease of a shopping mall, its applicability to various fact patterns and use cases, upon applying the functionality test, assumes significance for business across sectors.  A determination would need to be made basis whether the constructed facility can be treated as a plant that is crucial for providing services.
• Ability to claim credit would also be a factor of the same having been availed within specified timelines with necessary Income tax adjustments that may need to be undertaken where such credits have been capitalised and with depreciation having been claimed.
• Further clarity on this aspect is likely to arise when the High Court makes its detailed ruling on facts in the context of construction of a mall which is the fact pattern in the Safari Retreats case.

[1] 2024-TIOL-101-SC-GST