In a boost to commercial real estate and infrastructure projects, the Supreme Court on Monday ruled that if the building is constructed for supplying services such as renting or leasing out, it can be regarded as a plant and input tax credit (ITC) under GST will be eligible. However, it rejected constitutional validity challenge to blocked credit provisions in the GST law.

“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, the building could be held to be a plant,” a division bench comprising Justices Abhay S Oka and Sanjay Karol said.

ITC norms

With this the apex court upheld Odisha High Court’s ruling in the matter of Safari Retreats. The issue here revolved around section 17(5) of the CGST Act. This particular section prohibits ITC for works contract services when supplied for construction of an immovable property. However, this will exclude plant and machinery. The big question concerned what will be included in the definition of ‘plant and machinery’?

The High Court had 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. Aggrieved by this, the Tax Department moved the Apex Court. After going through all the submissions, the top Court while saying the shopping mall is a ‘plant’, held that functionality test will have to be applied to decide whether a building is a plant.  

Expert terms this ruling as a boon for the industry. “The outcome of the ruling that ‘functionality test’ should be applied on buildings to determine whether the same qualify as plant is very positive for the industry. With this ruling, by applying the functionality test, if one is able to prove the nexus/ role a particular product with the business of a taxpayer, credit should ideally be admissible” said Harpreet Singh, Partner at Deloitte.

“The eligibility of input tax credit (ITC) will be determined based on the functionality and essentiality tests,” explained Abhishek A. Rastogi, founder of Rastogi Chambers, who represented multiple petitioners in the case before the Supreme Court. “In essence, the Court has effectively read down the provisions of Section 17(5)(c) and (d) of the GST Act. ITC can only be denied in situations where the nature of the taxpayer’s business and the claimed credits fail to satisfy these two critical tests.

Post this ruling, there will be no requirement to amend the law. According to Rohit Jain, Deputy Managing Partner at Economic Laws Practice, the top Court has upheld the existing provisions and interpreted that building for leasing qualifies as a “plant” and no restriction of ITC is applicable. “There is no need to make any changes in the law,” he said.

Sudipta Bhattacharjee, Partner at Khaitan & Co felt by reiterating this broader principle in the context of GST, the Supreme Court has given a lot of hope to taxpayers across the country, especially those whose input costs include substantial construction expenses. “Companies in the commercial real estate as well as infrastructure sectors will do well to review their input credit positions in the light of this judgment,” he said.