Bharat Bhushan (Senior Associate) & Ayush Patria (Associate)

“hoped for Panacea, aimed for Elixir, but ended with Pandora”

With another constitutional roundabout in respect of a hot-potato GST issue, the Hon’ble Supreme Court of India has anew skirted round the sophisticated arguments decked with artistry hurling the constitutional validity of Section 17 (5) (c) and (d) of the CGST Act, 2017 in the alternative of reading them down. Though the said provisions managed to survive on the statute via the ruling, however, the same would now be a renovated battleground for the assesses to be at loggerheads with the GST authorities.

On October 03, 2024, the Hon’ble Supreme Court of India has handed down the decision in Chief Commissioner of CGST & Ors. vs. M/s Safari Retreats Pvt. Ltd. & Ors. [MANU/SC/1080/2024], whereby the department has put to impugnment the ruling pronounced by the Hon’ble High Court of Orissa in M/s Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST & Ors. [MANU/OR/0304/2019].

The original petitioner, namely M/s Safari Retreats Pvt. Ltd., was engaged in the commercial business of constructing shopping malls for the purpose of letting out the same to various lessees and tenants. During the construction of such shopping malls vast number of inputs were put to use, but the ITC thereof was not allowed by the department to be availed against the tax payable qua the outward supply of renting and leasing of such malls on account of the prescriptive embargo enacted under Section 17 (5) (d) of the CGST Act, 2017, though the supply of lease and renting amount to supply of service in terms of clause 5 of Schedule-II of the said Act.

Feeling aggrieved, the original petitioner approached the Hon’ble High Court of Orissa, which though not yielded to declare the provision of Section 17 (5) (d) as ultra vires Article 14 and Article 19 (1) (g) of the Constitution of India, however, in the alternative, the Hon’ble Court read down the said provision to allow the availment of ITC to the petitioner inter-alia observing that neither the tax chain got broken nor the malls were constructed by the petitioner on his own purpose. While having ruled such, such Court was also swayed by the submission that the narrow interpretation put forward by the department would frustrate the very objective of the enactment.

Given the line of reasoning and the diktat pronounced by the Hon’ble High Court of Orissa, the department assailed the diktat before the Hon’ble Apex Court, wherein several other intervenors also joined in the original petitioner to press hard to obviate the embargo prescribed under Section 17 (5) (c) and Section 17 (5) (d) of the CGST Act, 2017. After having the detailed and sophisticated arguments heard, the Hon’ble Supreme Court of India neither read down the provision nor declared the same unconstitutional infracting Article 14, Article 19 (1) (g) and Article 300A of the Constitution of India. While ruling the diktat, the Hon’ble Court stressed and alluded to the well-settled position of field of judicial hermeneutics in the field of taxation statutes. Roving through the provisions of CGST Act, 2017, particularly Section 17 (5) (c), Section 17 (5) (d) and the explanation of plant and machinery appended to Section 17 of the said enactment, the Hon’ble Court noted that the expression ‘plant and machinery’ prescribed in Section 17 (5) (c) cannot be equated with ‘plant or machinery’ in Section 17 (5) (d) inasmuch as the legislature has advisedly used different conjunctions of ‘and’ and ‘or’ in the said provisions. Further, the Hon’ble Court while noting that the enactment provides no definition for ‘on his own account’, ruled that construction cannot be said to be on a taxable person’s own account if the same is intended to be sold or given on lease or license. Moreover, the Hon’ble Court also alluded to clauses 2 (a), 2 (b) and 5 (a), 5(b) and 5 (c) of Schedule II to the CGST Act, 2017 and noted that no distinction concerning first occupation or completion certificate have been made insofar as supply of lease, tenancy or license to occupy land or lease of a building is concerned, which otherwise makes a telling difference in case sale of land and sale of building is concerned.

Moving further, the Hon’ble Supreme Court of India heavily alluded and relied upon its previous decisions concerning and discussing the contouring gamut of ‘plant’ so as to anatomize the expression of plant or machinery prescribed under Section 17 (5) (d) of the CGST Act, 2017. In addition to it, the Hon’ble Court by making reference to taxability of supply of services in terms of leasing or renting of building refuted to succumb to the submission that once a building comes into existence by using goods or services, the chain is broken, rather it categorically ruled that should the building qualifies to be a plant, ITC can very-well be availed against the supply of services in the form of renting or leasing the building or premises, subject to the other terms and conditions of the CGST Act, 2017 and the rules made thereunder. To ascertain as to whether a building or premises would amount to plant or not in terms of Section 17 (5) (d) of the CGST Act, 2017, functionality test has to be applied in the sense that whether 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 so as to be said to have been encompassed under clauses (2) and (5) of Schedule II to the said Act. In such terms and manner, amongst other, the appeals preferred by the department stood allowed by the Hon’ble Supreme Court of India.

Needless to state that though the Hon’ble Court stressed that the expression which stood undefined under a taxation enactment ought to be given popular meaning in the sense that the people conversant with the expression ordinarily and generally mean and understand, however, the ruling endorses and espouses the obverse. With this decision and ruling, the flow of jurisprudence literally understood as the prudence of juris (law) appears to be overarchingly nescient to the industry understanding and popular parlance for hardly such civil structures are accounted as plants in the balance sheets and other financials. Law does and could not operate in silos, but is rather expected to adopt and accustom itself to the language, practice and convention of the industry sought to be regulated or legalized. Be it the cold diktat of judicial sagacity or the fiat of legislature in exercise of its sovereign prerogative, it would be no more than vacant words of bland imposition in case such results in absurdity and incomprehension in a sense to compel the industry players and participants to reconfigure the meaning and sense in terms of legislature intention or judicial sagacity. With this ruling arrives an ever-expanding horizon of ‘plant’, which though is planked and premised on functionality test, but would be a subject of hobby-horse of imagination and sophistry.