ANALYSIS OF THE SUPREME COURT JUDGEMENT IN THE SAFARI RETREATS
PRIVATE LIMITED CASE1
Authored by
Srinivas Kotni, Managing Partner and Tanmay Singh, Junior Associate, Lexport
In the evolving landscape of the Goods and Services Tax (GST) regime, Input Tax Credit (ITC)
plays a pivotal role in ensuring the seamless flow of credit across the supply chain. The seamless
flow of ITC is also essential to avoid any cascading tax consequences. However, quite against the
principles of avoidance of cascading effect, certain inputs and services are artificially excluded /
restricted from eligibility to ITC, known as "Blocked Credits," which has sparked widespread
debate and litigation, particularly in the context of construction of immovable properties.
Section 17(5) of the CGST Act, 2017, outlines provisions for "Blocked Credits," which refer to
certain input tax credits (ITC) that cannot be claimed. These blocked credits cover inputs such as
for food and catering, vehicles for personal use, and construction of immovable property etc. The
rationale behind these restrictions is that these goods and services are primarily consumed by the
end-user rather than being used to generate taxable outputs, thus breaking the taxable supply chain.
To prevent potential tax leakage from such final consumption, the government has restricted ITC
on these items.
However, significant litigation has arisen regarding ITC on the construction of immovable property.
In several cases, immovable properties were not used for personal purposes but were rented out,
with GST payable on the output renting services. Additionally, buildings like hotels, factories, and
other commercial structures often play a crucial role in furtherance of business operations.
Businesses argue that denying ITC in such instances unfairly increases costs since these properties
are essential for generating taxable output.
In the case Chief Commissioner of Central Goods and Service Tax v. Safari Retreats Private Ltd2.,
the Supreme Court delivered a significant judgment that has substantial implications for businesses
involved in constructing and renting out immovable properties. The case revolved around the issue,
1
CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX V. SAFARI RETREATS PRIVATE
LTD - 2024 SCC ONLINE SC 2691
2
2024 SCC Online SC 2691
whether ITC on goods and services used in the construction of immovable property, such as malls,
should be allowed when the property is further used for letting out on rent, which is a taxable supply
under Goods and Service Tax.
The decision by the Hon’ble Supreme Court is a pivotal judgment for businesses constructing and
renting out immovable properties. The Court upheld the validity of Section 17(5)(c) and (d) of the
CGST Act, 2017, while introducing the 'Functionality Test' which is a crucial criterion to
determine whether a building or structure can be classified as 'plant' under the GST law, allowing
businesses to claim ITC on the goods and services used in its construction.
Factual Background
The petitioner, Safari Retreats Private Ltd. is a company engaged in constructing shopping malls
and thereafter renting out such constructed units to tenants. The company accumulated ITC on
goods and services used in the construction of these malls, including cement, steel, and professional
services. However, when the company sought to offset the ITC against GST payable on rent, the
authorities denied the claim, citing the embargo under Section 17(5)(d) of the CGST Act, 2017. This
provision blocks ITC on goods and services used in the construction of immovable property unless
it relates to plant and machinery.
Petitioner challenged the aforesaid embargo under Section 17(5)(d), arguing that ITC should not be
blocked when immovable property is used for further taxable supplies, such as renting or leasing.
Key Legal Issues
The main issues before the Supreme Court were:
1. Interpretation of Section 17(5)(d): Whether the phrase "on his own account" used in the
Section 17(5)(d) of the CGST Act, 2017 applies to immovable property constructed for
letting out rather than for personal use.
2. Constitutional Validity: Whether the restriction on ITC violates Articles 14 and 19(1)(g)
of the Constitution by discriminating against businesses that construct immovable property
for taxable purposes.
3. Cascading Effect of Taxes: Whether denying ITC leads to double taxation, as GST is paid
both on inputs used in construction and on rent collected from tenants.
Submissions by the Petitioner
The Petitioner argued that Section 17(5)(d) should be read down to allow ITC for construction
undertaken for the purpose of renting, as the rental income is subject to GST. Blocking ITC, leads
to a cascading effect, where taxes are paid on both inputs and outputs, contrary to the GST law’s
aim of providing seamless credit and avoiding cascading effect of double taxation.
Petitioner further argued that the restriction violates the principle of equality under Article 14, as it
treats businesses constructing properties for renting on the same footing as those constructing for
further sale, where no ITC is available, which they contended is arbitrary and unreasonable.
Submissions by the Department
The Department, represented by the Additional Solicitor General, defended the denial of ITC,
arguing that the creation of immovable property breaks the tax credit chain. They maintained that
ITC is a statutory benefit, not a fundamental right, and can be restricted as per legislative intent to
prevent abuse.
Moreover, they justified the classification under Section 17(5)(d) based on intelligible differentia
which is the distinction between immovable property construction for sale versus rental, which has
a rational nexus with the objectives of the GST Act.
The Functionality Test
One of the landmark aspects of the Safari Retreats judgment is the introduction of the 'functionality
test' to determine whether a building or structure qualifies as 'plant' under the CGST Act for the
purpose of claiming ITC. The test revolves around the role the building plays in the business of the
Petitioner.
If the structure is more than just a ‘setting’ for conducting business and serves an essential function
such as a warehouse designed for specific business needs or a cold storage facility, then it can be
treated as ‘plant’ under Section 17(5)(d). This, in turn, allows businesses to claim ITC on the goods
and services used in constructing such structures.
The Court distinguished the term 'plant or machinery' in Section 17(5)(d) from 'plant and machinery'
as defined in the explanation to Section 17. While the term 'plant' is not explicitly defined in the
GST law, its interpretation must be derived from commercial parlance and trade practices. For
example, structures like dry docks, insulated walls in freezing chambers, or specialized warehouses
could qualify as 'plant' if they play a critical role in business operations.
Judicial Precedents on the Definition of 'Plant'
The Court drew upon various judicial precedents from income tax law to support its interpretation.
For instance, in earlier cases, sanitary fittings or pipelines installed in hotels were considered 'plant'
because they were essential for the hotel’s operations. Similarly, insulated walls for freezing
chambers and dry docks used in ship manufacturing have been deemed 'plant' based on their
functionality in the respective businesses.
However, the Court clarified that not every building can be classified as 'plant.' For instance, a hotel
building with specialized fittings may not qualify unless the entire structure serves a distinct
operational role beyond being a mere setting for business.
Applicability of the Functionality Test
The Supreme Court emphasized that whether a building qualifies as 'plant' is a question of fact that
must be determined based on the specific business needs in each case. For example, if a building is
planned and constructed to meet the unique technical requirements of a business, it could be
classified as 'plant.' This allows for ITC on the GST paid for the goods and services used in
constructing such a building.
This principle presents opportunities for businesses that construct specialized structures—such as
warehouses, prefabricated buildings, cold storage facilities, or silos—to analyze whether their
buildings could be classified as 'plant' under the functionality test, thereby allowing them to claim
ITC.
Interpretation of phrase, 'On His Own Account'
Another critical aspect of the judgment is the interpretation of the phrase 'on his own account' under
Section 17(5)(d). The Court clarified that this expression refers to cases where the property is
constructed for personal use rather than for providing services, renting, or leasing. Therefore, if the
property is intended for sale, lease, or rental purposes, it does not fall under the 'on his own account'
exception, and ITC may be available if the structure qualifies as 'plant.'
However, the Court noted some ambiguity regarding whether the exceptions related to 'plant or
machinery' and 'on his own account' in Section 17(5)(d) function independently or in conjunction,
particularly in the context of leased properties.
Judgment
The Supreme Court upheld the Revenue's stance that Section 17(5)(d) blocks ITC for goods and
services used in constructing immovable property, even when the property is let out. The Court ruled
that this restriction is in line with the legislative intent to prevent the misuse of ITC and does not
violate constitutional provisions.
However, the Court also provided a nuanced interpretation, suggesting that ITC may be available if
the immovable property qualifies as 'plant or machinery' under the CGST Act. Still, commercial
properties like shopping malls typically do not fall into this category unless they meet the
functionality test.
Conclusion
The Safari Retreats judgment provides a new avenue for businesses to claim ITC on buildings used
in business operations, provided they meet the functionality test. However, the decision also
introduces challenges for businesses in determining how the exceptions under Section 17(5)(d)
interact, particularly concerning the phrases 'plant or machinery' and 'on his own account.'
Businesses must carefully analyze their operations to determine whether their buildings play an
essential functional role and can qualify as 'plant' for the purpose of claiming ITC under GST law.
The judgment highlights the fine balance between preventing tax avoidance and maintaining the
seamless credit system central to the GST regime.
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