Building can also be treated as a plant u/s 17(5)(d) of CGST Act 2017 for giving benefit of ITC – SC remands case to High Court to decide whether the shopping mall is a “plant”
In a recent judgment, the Hon’ble Supreme Court has held that a building can also be treated as a plant u/s 17(5)(d) for giving benefit of ITC . The issue was remanded to High Court to decide whether the shopping mall was a “plant”
ABCAUS Case Law Citation:
4272 (2024) (10) abcaus.in SC
Important Case Laws relied upon:
Shreya Singhal vs. Union of India
The instant case lead appeal was filed by the Commissioner CGST against the order of the Odisha High Court directing benefit of ITC to respondent towards construction of shopping mall. Several other writ petitions filed by assessees were clubbed together.
In the instant appeal, the issue was with respect to the constitutional validity of the clauses (c) and (d) of sub-section (5) of Section 17 of the Central Goods and Services Tax Act, 2017 (the CGST Act). The clauses (c) and (d) of sub-section (5) of section 17 of the CGST Act prohibits the input tax credit in respect of works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service and in respect of goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business respectively.
The respondent in the case was engaged in the construction of a shopping mall for the purpose of letting out premises in the malls to different tenants. The claim of the respondent towards ITC against the income from letting was denied by virtue of the said provisions.
The respondent filed a writ petition before the High Court of Orissa which held that in view of the decision of the Hon’ble Supreme Court, Section 17(5)(d) was required to be read down as the very purpose of ITC is to benefit the assessee. The High Court held that if the assessee is required to pay GST on the rental income from the mall, it is entitled to ITC on the GST paid on the construction of the mall. It was held that the narrow interpretation given by the Department to Section 17(5)(d) would frustrate the very object of the Act.
Apart from above, several writ Petitions were filed by the assesses contending that due to the restrictions imposed by Section 17(5)(c) and Section 17(5)(d) of the CGST Act, they are unable to avail the credit on GST paid on goods and services used in the construction of factory premises, buildings etc against the GST received by them for the renting/leasing/letting out etc. of the premises. GST is being recovered on the supply of goods and services used in the construction of commercial office buildings, and GST is also being recovered on rentals collected. Accordingly, several writ petitions had been preferred challenging the constitutional validity of clauses (c) and (d) of Section 17(5).
One of the grounds taken by the Petitioners was that Section 17(5)(c) and (d) remain vague due to the absence of definitions of the expressions “on its own account” and “plant or machinery”. The distinction between the expression “plant and machinery” used in Section 17(5)(c) and the expression “plant or machinery” used in Section 17(5)(d) has not been clarified by the Government. Therefore, the provisions suffer from vagueness. It was submitted that if a provision is very vague, it can be struck down.
It was submitted that Clause (d) exempts “plant or machinery” from blocked credit, which is distinct from the expression “plant and machinery” used in Clause (c). Therefore, the explanation to sub-section (6) of Section 17, which defines “plant and machinery” is not applicable to the Clause (d). Further, it was submitted that malls, hotels, warehouses, etc., are ‘plants’ and, therefore, are exempted from the provision. Thirdly, it was submitted that services of renting/leasing/letting out, etc., in relation to immovable property constitute supply.
The Hon’ble Supreme Court observed that though the Explanation to Section 17 defines the meaning of the expression “plant and machinery”. However, as stated earlier, the expression “plant or machinery” has not been defined under the CGST Act. Clauses (c) and (d) do not altogether exclude every class of immovable property from the applicability of ITC. In the case of clause (c), if the construction is of “plant and machinery” as defined, the benefit of ITC will accrue. Similarly, under clause (d), if the construction is of a “plant or machinery”, ITC will be available.
Therefore, the question was whether the explanation that lays down the meaning of the expression “plant and machinery” in Section 17 will apply to the expression “plant or machinery” used in Section 17(5)(d)?
The Hon’ble Supreme Court further observed that in Chapter VI, the expression “plant and machinery” appears in several places, but the expression “plant or machinery” is found only in Section 17(5)(d). If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have specifically used the expression plant or machinery” in Section 17(5)(d). The legislature has made this distinction consciously. Therefore, the expression “plant and machinery” and “plant or machinery” cannot be given the same meaning.
The Hon’ble Supreme Court noted that explanation in Section 17, which says that plant and machinery means apparatus, equipment and machinery fixed to the earth by foundation or structural support that are used for making outward supply of goods or services or both. The expression includes such foundation and structural support fixed to the earth. However, the definition excludes land, buildings or any other civil structure.
The Hon’ble Supreme Court opined that the expression “plant or machinery” has a different connotation. It can be either a plant or machinery. Section 17(5)(d) deals with the construction of an immovable property. The very fact that the expression “immovable property other than “plants or machinery” is used shows that there could be a plant that is an immovable property. As the word ‘plant’ has not been defined under the CGST Act or the rules framed thereunder, its ordinary meaning in commercial terms will have to be attached to it.
The Hon’ble Supreme Court observed that in a case involving classification of hotel as plant within the meaning of Section 10(5) of the Income Tax Act, 1961 the Court held that now it is well settled that where the definition of a word has not been given, it must be construed in its popular sense if it is a word of everyday use. Popular sense means “that sense which people conversant with the subject-matter with which the statute is dealing, would attribute to it.
Further, in a case the Court decided the question of whether a building used for running a hotel or cinema business could be held to be a plant and held that the building used for running of a hotel or carrying on cinema business cannot be held to be a plant.
The Hon’ble High Court opined that the functionality test has to be applied. The Court had held that whether a building is a plant is a question of fact. 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. 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”.
The Hon’ble Supreme Court opined 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 Hon’ble Supreme Court opined that in the main appeal, which was the subject matter of the group appeals, the High Court had not decided whether the mall in question will satisfy the functionality test of being a plant. The reason is that the High Court has done the exercise of reading down the provision. Each mall is different. Therefore, in each case, fact-finding enquiry is contemplated.
The Hon’ble Supreme Court opined that in the facts of the case, the issue have to send the case back to the High Court to decide whether, on facts, the mall in question satisfies the functionality test so that it can be termed as a plant within the meaning of bracketed portion in Section 17(5)(d). The same applies to warehouses or other buildings except hotels and cinema theatres. A developer may construct a mall predominantly to sell the premises therein after obtaining an occupation certificate. Therefore, it will be out of the purview of clause 5(b) of Schedule II. 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
The Hon’ble Supreme Court upheld the constitutional validity of clauses (c) and (d) of Section 17(5), and as held its plain interpretation does not lead to any ambiguity.
Accordingly, the Hon’ble Supreme Court set aside the impugned judgment and the case was remanded to the High Court of Orissa 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).
The Hon’ble Supreme Court clarified that the question of whether the construction of immovable property carried out by the petitioners in Writ Petitions amounted to plant, and each case will have to be decided on its merit by applying the functionality test in terms of the judgment. The issue must be decided in appropriate proceedings in which adjudication can be made on facts.
The batch of appeals were partly allowed in above terms
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