The Supreme Court has held that if the building in which the premises are situated qualifies for a ‘plant’, Input Tax Credit (ITC) can be allowed on goods and services used in setting up the immovable property, which is a plant.

The Court in its decision dated 3 October 2204 was of the view that if the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the Central Goods and Services Tax Act, the building could be held to be a plant, and consequently taken out of the exception carved out by clause (d) of Section 17(5) to Section 16(1).

It may be noted that the challenge to the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act, 2017 was however held as not established.

For the purpose of availability of ITC, the Court observed that there are two exceptions in clause (d) of Section 17(5) for exclusion from blocked ITC - where goods or services or both are received by a taxable person to construct an immovable property consisting of a ‘plant or machinery’, and where goods/services/both are for the construction of an immovable property not ‘on his own account’.

‘On own account’

Regarding the second exclusion, the Apex Court was of the view that construction is said to be on a taxable person’s ‘own account’ when either it is made for his personal use and not for service, or it is to be used by the person constructing as a setting in which business is carried out. According to the Court, construction cannot be said to be on a taxable person’s ‘own account’ if it is intended to be sold or given on lease or license.

Distinction between ‘plant and machinery’ and ‘plant or machinery’

Further, regarding exclusion of ‘plant or machinery’, the Supreme Court observed that the expression ‘plant or machinery’ as used in Section 17(5)(d) is not defined under the Central Goods and Services Tax Act, 2017. It then pondered over the question as to whether the Explanation laying down the meaning of the expression ‘plant and machinery’ in Section 17 will apply to the expression ‘plant or machinery’.

Rejecting the submission of the Revenue department that the word ‘or’ in clause (d) should be read as ‘and’, the Apex Court noted that the expression ‘plant or machinery’ appeared to be intentionally/ consciously incorporated by the Legislature. It was therefore held that the expression ‘plant and machinery’ and ‘plant or machinery’ cannot be given the same meaning. According to the Court, it will be doing violence to the words used in the statute if the expression ‘plant or machinery’ is given the same meaning as the expression ‘plant and machinery’.

The Department’s argument of discrimination, if different meanings were given to the two phrases, was not accepted by the Court while it observed that clauses (c) and (d) of sub-section 17(5) operate in substantially different areas.

Functionality test

Relying upon its earlier Larger Bench decision in the case of Karnataka Power Corporation, the Supreme Court held that the word ‘plant’ used in 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. The Apex Court in this regard noted that the Larger Bench had earlier laid down the ‘functionality test’ and held that if it is found on facts that a building has been so planned and constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance.

It was hence held that 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’. However, according to the Court, each case will have to be tested on merits as the question whether an immovable property or a building is a plant is a factual question to be decided.

No break in chain

The Supreme Court in Chief Commissioner v. Safari Retreats Private Ltd. also rejected in entirety the argument of the Department that the credit chain is broken once a building comes into existence by using goods and services, as the Union legislature cannot levy tax on land and buildings. It observed that if a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, subject to fulfilment of other conditions