Analysis of Safari Retreats Supreme Court Judgement

The Safari Retreats Case involves a significant ruling by the Supreme Court of India in the Civil Appeal No. 2948 of 2023 relates to Section 17(5)(c) and (d) of the CGST Act, which restricts the availment of input tax credit (ITC) on goods and services used for the construction of immovable property. The core challenge was against the constitutional validity of these clauses, and there was a request for “reading down” the provisions.

In the Safari Retreats Case, the arguments were presented by senior legal professionals on both sides:

  1. For the Appellants (CGST): Mr. Tushar Mehta, Solicitor General of India, appeared for the appellants, representing the tax authorities.
  2. For the Respondents (Safari Retreats): The respondents were represented by Mr. Arvind Datar, Senior Advocate, along with Mr. Harish Salve, Senior Advocate.

Contents : Safari Retreats Case

Case overview……………………………………………………………………….. 2

Submissions on behalf of assessees…………………………………………………… 5

Meaning of the expression “plant or machinery”………………………………………… 7

Summary of Supreme Court Judgement and Conclusion…………………………………. 8

Analysis…………………………………………………………………………. 8

Conclusions……………………………………………………………………… 8

Final Judgement : Assesse Favour or Revenue Favour ?……………………………… 9

Key Judgements Cited during the hearings……………………………………………. 10

Rules regarding the interpretation of taxing statutes…………………………………….. 14

Disclaimer…………………………………………………………………………. 15

Case overview

1.The original judgment in the Safari Retreats Case was pronounced in 2024 as part of Civil Appeal No. 2948 of 2023

2. Parties Involved

a. Appellants (Defendants): The appellants include the Chief Commissioner of Central Goods and Services Tax (CGST) and others representing the tax authorities.

b. Respondents: The respondents are M/s Safari Retreats Private Ltd. and others. Safari Retreats is the primary party that filed the challenge against the provisions of the CGST Act.

3. Orissa High Court Judgement

  1. The Orissa High Court in its judgment dated 17th April 2019 ruled that Section 17(5)(d) of the CGST Act, which disallows Input Tax Credit (ITC) on the construction of immovable properties, must be read down in cases where the immovable property is intended for leasing. It observed that the purpose of ITC is to prevent tax cascading and, thus, it should be allowed if GST is being paid on the rental income from such properties. The High Court found that restricting ITC in such cases would frustrate the objective of GST.
  2. The court further held that businesses should be allowed to claim ITC for goods and services used in constructing buildings meant for rental, as they pay GST on the rental income. The High Court found the department’s interpretation of Section 17(5)(d) too narrow, as it would undermine the purpose of seamless credit.

4. Background of the Safari Retreat Business:

a. The respondents, M/s Safari Retreats Private Ltd., were engaged in constructing a shopping mall with plans to lease out portions to different tenants.

b. In this process, substantial input goods and services were utilized, such as steel, cement, construction services, and engineering designs.

c.These inputs attracted GST, resulting in the accumulation of ITC exceeding Rs. 34 crores.

5.Legal Issue:

a. The company sought to claim ITC on goods and services used in the construction of the shopping mall.

b. However, Section 17(5)(c) and (d) disallowed ITC in cases where goods and services were used for construction leading to immovable property (like the mall), except if the property was sold before the issuance of a completion certificate.

6.Safari Team Arguments:

a. The respondents argued that disallowing ITC for the mall’s construction, where the premises are intended for leasing and GST is payable on rental income, creates an anomalous situation and violates the principle of seamless credit under the GST framework.

b.Essentially, they contended that the provisions were discriminatory and unconstitutional.

7.Ruling:

a. The Supreme Court delivered a detailed judgment focusing on whether this provision violates the essence of GST, which is designed to avoid cascading effects of taxation and to ensure credit continuity throughout the supply chain.

b.  On Plant and Buildings:

  • The court emphasized that whether a building qualifies as a “plant” must be determined based on the functionality test.
  • If a building is specifically designed to serve a particular technical requirement essential to the business, it could be considered a “plant” for the purposes of investment allowance.
  • However, this does not apply to ordinary buildings used in general business, such as hotels and theaters.

c.   Reading Down of Section 17(5):

  • The court noted that the provision under Section 17(5) blocks ITC for inputs used in the construction of immovable properties (except when the property is used for sale before obtaining a completion certificate).
  • However, the reading down of the provision was argued, suggesting that ITC should be allowed for business activities that generate further taxable outputs (such as renting of malls).
  • The court did not entirely agree with this interpretation and sent the matter back to the High Court for a factual determination of whether the mall in question satisfies the functionality test.

d.  ITC Denial:

  • The court upheld that Input Tax Credit (ITC) is not a constitutional right but a statutory benefit.
  • Denial of ITC under Section 17(5)(c) and (d) was justified based on legislative intent to prevent cascading effects.
  • This clause, while seemingly inequitable in practice, was not considered unconstitutional by the court.

e.  Functional Role of Buildings:

  • The court also differentiated between a building merely providing shelter for business activities versus one functioning as a key business tool (a “plant”).
  • For instance, in cases where a structure like a dry dock plays an integral role in operations, it can be deemed a plant. But general commercial buildings like hotels or cinemas do not qualify for this treatment.

Submissions on behalf of assessees

Key submissions on behalf of the assessees in the Safari Retreats Case focused on the following key points:

1.      Challenge to Section 17(5)(c) and (d):

  1. The assessees argued that Section 17(5)(d) of the CGST Act, which blocks input tax credit (ITC) on immovable property construction, violated Article 14 (Equality before law) and Article 19(1)(g) (Right to trade) of the Constitution of India.
  2. They contended that businesses renting out premises should not be treated the same as those selling immovable properties, since renting still generates taxable income.

2.      Cascading Effect of Tax:

  1. A significant submission was that the denial of ITC leads to a cascading effect of taxation, contrary to the objectives of GST.
  2. The ITC denial forces the tax paid on construction inputs to become part of the cost of renting the property, which results in tax on tax. This contradicts the GST’s intent to allow seamless credit.

3.      Interpretation of “Own Account”:

  1. The phrase “on his own account” in Section 17(5)(d) was challenged, with the assessees arguing that it should apply only when the immovable property is used by the builder personally (such as for an office). If the property is rented out, it becomes a means of providing taxable services, and thus the assessees should be eligible for ITC.

4.      Principle of Reading Down:

  1. The assessees called for reading down the provisions of Section 17(5)(d) to ensure that ITC is available when the immovable property is used to provide taxable services, such as renting out spaces, rather than being used personally by the business owner.
  2. They argued that this reading would align the provision with the broader intent of GST to avoid cascading taxes.

5.Miscellaneous Submissions

a.Non-Obstante Clause in Section 17(5):
Even though Section 17(5) starts with a non-obstante clause, it was argued that this clause should not override the entirety of Section 16(1).
•The claim was that Section 17(5) cannot restrict or cut down the scope of Section 16(1), which grants the right to input tax credit (ITC).
b.Inconsistent Application of ITC:
•The classification within Section 17(5) leads to invidious discrimination. ITC is allowed for the construction of plant and machinery under works contracts, but ITC is blocked for other developers.
•This inconsistency in the law was highlighted as problematic

c.Discrimination Among Developers:
•It was further pointed out that the Revenue’s interpretation leads to unequal treatment, as ITC is allowed in some construction works (e.g., plant and machinery) but not others (e.g., buildings meant for leasing).
•This differentiation lacks a rational basis.

d.Gist of the Rejoinder in the Safari Retreats Case presented by the counsel representing the assessees includes the following key points:

  • “Plant or Machinery” Distinction: The counsel argued that the legislative intent is clear in using the expression “plant or machinery” in Section 17(5)(d), which differs from the expression “plant and machinery” used in other parts of the statute. The legislature’s deliberate use of this terminology should be adhered to.
  • Previous CENVAT Credit Rulings: It was submitted that CENVAT credit was allowed for the construction of buildings in earlier tax regimes, as observed in decisions by Tribunals and High Courts. This precedent should apply to the GST regime as well.
  • Misuse Concerns Addressed: In response to concerns raised by the opposing counsel regarding potential misuse of the GST system, it was emphasized that even if the argument of the assessees is accepted, ITC would only apply to a limited extent—specifically to GST payable on the rental activity generated from the mall or warehouse.

Meaning of the expression “plant or machinery”

The analysis and conclusion regarding the meaning of the expression “plant or machinery” in clause (d) of Section 17(5) of the CGST Act in the Safari Retreats Case highlighted several points:

1.      Literal Interpretation of “Plant or Machinery”:

  • The court emphasized that clause (d) of Section 17(5) uses the term “plant or machinery” instead of “plant and machinery,” indicating a deliberate legislative choice. It clarified that these expressions cannot be equated, as doing so would undermine the legislative intent.

2.      Different Connotation:

  • The phrase “plant or machinery” signifies that either a plant or machinery could qualify for input tax credit (ITC) under certain conditions. The court rejected the argument that “or” should be read as “and,” which would erase the distinction between clauses (c) and (d). This differentiation is crucial because clause (d) deals with immovable property constructions.

3.      Commercial Interpretation:

  • Since “plant” is not defined under the CGST Act, the court applied the functionality test, where the meaning of “plant” is determined by its role in business operations. The court referred to several previous decisions (e.g., CITv. Taj Mahal Hotel and Solid and Correct Engineering Works) to reinforce that buildings or structures that serve specific business functions can qualify as plants.

4.      Conclusion:

  • The court concluded that when a building (like a mall or hotel) is specifically designed to meet unique business needs, it could be classified as a plant under clause (d). This allows for the possibility of availing ITC for such constructions, depending on their functionality and usage in generating outward supplies.

Summary of Supreme Court Judgement and Conclusion

In the Safari Retreats case, the analysis and conclusion regarding the meaning of “plant or machinery” as used in Section 17(5)(d) of the CGST Act were crucial. Here’s a summary of the analysis and conclusions:

Analysis:

1.      Literal vs. Intentional Interpretation:

  • The court noted that while Section 17(5)(d) uses the phrase “plant or machinery”, the term “plant and machinery” is used in other sections of the Act. This distinction is crucial because if the legislature intended both expressions to mean the same thing, it would not have used different terms.
  • The explanation to Section 17 defines “plant and machinery”, but the court emphasized that the expression “plant or machinery” used in Section 17(5)(d) was deliberately distinct. Therefore, they rejected the argument that the word “or” should be read as “and”.

2.      Movability and Fixation:

  • The court referred to the common understanding of a plant—whether it is movable or fixed to the earth. Items like equipment, machinery, or structural supports that are fixed but integral to the process of business qualify as plant.

3.      Functionality Test:

  • The functionality test was applied to determine if a building or structure could be considered a plant. If a building serves as a tool of trade, playing an essential role in business activities (such as a mall or warehouse used for renting), it could be classified as a plant.

Conclusions:

1.      Plant or Machinery:

  • The phrase “plant or machinery” in Section 17(5)(d) has a distinct meaning from “plant and machinery” as defined in the Act. This differentiation was intentionally made by the legislature.

2.      Eligibility for ITC:

  • The court concluded that a building or immovable property could be classified as a plant if it is integral to business operations, such as in cases where a mall or warehouse is essential for supplying services (renting). The functionality test must be applied to assess this.

Final Judgement : Assesse Favour or Revenue Favour ?

In the Safari Retreats Case, the final ruling did not conclusively allow input tax credit (ITC). Instead, the Supreme Court remanded the case back to the Orissa High Court for a factual determination of whether the shopping mall constructed by the assessee could be classified as a “plant” under Section 17(5)(d) of the CGST Act. The Court emphasized that the functionality test must be applied, meaning the mall’s role in the business and whether it qualifies as “plant or machinery” would need to be analyzed further by the High Court .

Thus, the ruling was partly in favor of the assessee, as it left open the possibility for ITC to be granted if the mall could be shown to be essential for business operations and classified as a “plant” under the functionality test .

However, no final decision on allowing ITC was made at this stage.

Key Judgements Cited during the hearings.

  1. Anand Theatres v. CIT [(2000) 5 SCC 393] – This case discussed whether buildings used for cinemas or hotels could be considered as “plant” for depreciation purposes under the Income Tax Act.

a.The court held that the decision in Anand Theatres, which considered buildings used for hotels or cinemas as not qualifying as “plant,” was limited to those specific cases.

b.However, in the context of shopping malls, the court did not dismiss the possibility that a mall could be treated as a “plant” under GST if it passes the functionality test.

2.CIT v. Karnataka Power Corporation [(2002) 9 SCC 571] – The Supreme Court held that a power-generating station could be considered a plant. This held that an electricity generating station building could qualify as a “plant,” was applied in part, supporting the functionality test. This case was not overruled but referenced to aid in determining whether a building like a shopping mall could also qualify.

3.Eicher Motors Limited & Anr. v. Union of India & Ors. was discussed primarily in the context of input tax credit (ITC) and the purpose of ITC provisions.

a.The Orissa High Court cited Eicher Motors Limited to emphasize that the very purpose of ITC is to ensure that tax is paid only on the value addition at each stage, preventing cascading taxes. The court highlighted that disallowing ITC for goods and services used in the construction of immovable property (such as shopping malls, which are subsequently rented out) would contradict this principle.

b.The Eicher Motors case was particularly relevant because it reinforced the idea that ITC should be granted to benefit businesses and to avoid taxation on tax (cascading effect). The judgment supported the reading down of Section 17(5)(d) to allow ITC where the property is used for generating taxable rental income.

4.Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors. was referred to in the

Safari Retreats Case for its principle concerning the dominant intention test.

  1. The dominant intention test determines whether a transaction is primarily one of supply of goods or services, irrespective of the form of the final deliverable.
  2. This was crucial in discussing whether works contracts involving immovable property (like buildings) should be considered primarily as a service, thus attracting GST, even if the final deliverable (a building) has immovable characteristics.

5.Shreya Singhal v. Union of India was referred to in the Safari Retreats Case to emphasize the principle that a legal provision can be struck down if it is excessively vague and leads to uncertainty in its application.

a.The respondents in the Safari Retreats Case argued that the phrases “on its own account” and “plant or machinery” used in Section 17(5)(d) of the CGST Act were vague, thereby creating ambiguity in understanding when input tax credit (ITC) would be blocked.

b.They relied on the Shreya Singhal case, where the Supreme Court struck down Section 66A of the IT Act for vagueness, as an example to argue that the CGST provisions should be interpreted or possibly struck down.

6.Union of India v. Bharti Airtel Limited & Ors. to support the argument that Input Tax Credit (ITC) is a statutory right and not a fundamental or constitutional right.

a.The decision emphasized that courts cannot issue a mandamus to grant ITC unless the right is expressly provided for under statute.

b.This case was referenced to justify the denial of ITC under Section 17(5)(d) of the CGST Act, underscoring that ITC is purely a creation of statute, and any limitations or restrictions imposed by the legislation are valid.

7.Federation of Hotel & Restaurant Association of India, etc. v. Union of India and Ors. was referred in the Safari Retreats Case to discuss the concept of reasonable classification under taxation laws.

a.The Supreme Court in that case had established that, although taxing laws are not entirely immune to Article 14 (right to equality), the legislature has a wide discretion in matters of classification, provided there is equality and uniformity within each group. The court in Safari Retreats invoked this principle to emphasize that while classification is permissible, it cannot be arbitrary or discriminatory.

b.In Safari Retreats, the assessees argued that Section 17(5)(d) of the CGST Act was discriminatory as it blocked ITC for immovable properties constructed for leasing but allowed it for other business activities.

c.The Federation of Hotel & Restaurant Association case was cited to demonstrate that even with wide latitude, such classifications must pass the test of reasonable classification under Article 14, meaning that it should not result in hostile discrimination.

d.Other similar cases

i.R.K Garg v. Union of India and Ors.- (1981) 4 SCC 675,

ii.Twyford Tea Co. Ltd. and Anr. v. State of Kerala and Anr.- (1970) 1 SCC 189,

iii.Union of India and Ors. v. Nitdip Textile Processors Pvt. Ltd. and Anr.- (2012) 1 SCC 22.

8.Sanjeev Coke Manufacturing Company v. M/s Bharat Coking Coal Ltd. & Anr. was discussed to emphasize the broad discretion given to the government in matters of taxation and the presumption of constitutionality of taxation laws

a.This case was used to highlight that courts should not lightly interfere with fiscal decisions made by the government, as taxation policy is within the purview of the legislature and not the judiciary.

b.The principle from this case helps justify that the legislative intent behind the provisions of Section 17(5) of the CGST Act, which blocks input tax credit (ITC) for immovable properties, should be given deference unless proven manifestly arbitrary.

9.Union of India & Anr. v. Mohit Minerals Pvt. Ltd. was discussed in the Safari Retreats Case to highlight the design of the GST regime, which allows for seamless transfer of Input Tax Credit (ITC) across various stages of value addition.

a.This case emphasized that GST is a destination-based tax, and the ultimate tax burden should be borne by the consumers, not businesses. In line with this, the Mohit Minerals case reinforced the idea that ITC is intended to eliminate the cascading effect of taxes.

b.The assessees in Safari Retreats used this argument to support their claim for ITC on the construction of malls, asserting that disallowing ITC leads to a cascading tax burden, which contradicts the core principles of GST

10.Indian Social Action Forum (INSAF) v. Union of India and Delhi Transport Corporation v. DTC Mazdoor Congress & Ors. were discussed in the Safari Retreats Case tohighlight key legal principles related to reading down statutory provisions.

a.Indian Social Action Forum (INSAF) v. Union of India: This case was referenced to support the argument that provisions of law can be read down to make them constitutionally valid rather than striking them down entirely. The assessees argued that Section 17(5)(d) of the CGST Act should be read down in a way that allows Input Tax Credit (ITC) when immovable property is used for business activities like renting out, rather than being blocked altogether.
b.Delhi Transport Corporation v. DTC Mazdoor Congress & Ors.: This case was cited to discuss the principle of interpretation of statutes. It was used to argue that while courts must interpret the law as written, they can also apply a purposive approach, especially when a strict interpretation leads to unjust results or violates fundamental rights.
c.These references were made to bolster the argument that Section 17(5)(d) could be construed in a way that avoids inequitable outcomes while maintaining legislative intent.


11.was referred to in the Safari Retreats Case to emphasize the principle that, in the interpretation of legal provisions, terms like “and” and “or” can sometimes be interpreted interchangeably.
a.This was crucial in the discussion regarding the phrase “plant or machinery” in Section 17(5)(d) of the CGST Act. The argument revolved around whether “plant or machinery” should be read as “plant and machinery,” which would have an impact on whether the construction of shopping malls could be classified under plant and therefore be eligible for Input Tax Credit (ITC).
b.The reference to R.M.D. Chamarbaugwala supported the argument that such interpretative flexibility is permissible in specific contexts.

12.CIT v. Taj Mahal Hotel, Secunderabad [(1971) 3 SCC 550] – This case discussed the meaning of “plant” in the context of income tax.

13.CIT v. Victory Aqua Farm Ltd. [(2016) 16 SCC 553] – This case dealt with whether ponds used for prawn farming could be treated as “plant”.

14.ALD Automotive Pvt. Ltd. v. Commercial Tax Officer [(2019) 13 SCC 225] – This case was referenced regarding the statutory nature of Input Tax Credit (ITC).

15.Indore Development Authority v. Manoharlal & Ors. [(2020) 8 SCC 129] – Discussed the interpretation of “or” and “and” in legal statutes.

16.Joseph Shine v. Union of India [(2019) 3 SCC 39] – was cited to affirm the principle that taxing statutes are generally granted a wide degree of deference unless proven to be manifestly arbitrary. This case’s principles were used to uphold the constitutionality of the disputed GST provisions.

These cases were critical in framing the court’s view on issues such as whether certain types of buildings qualify as “plant” and the broader implications of Input Tax Credit under the GST regime.

Rules regarding the interpretation of taxing statutes

The points listed page 32 , Para 25 regarding the Interpretation of Taxing Statutes in the Safari Retreats Case cover the following principles:

1.Literal Interpretation: A taxing statute must be read as it is, with no additions or subtractions based on legislative intent.

2.Absurd Results: If applying the plain language leads to an absurd result, the court is not to intervene; it is the legislature’s role to correct it.

3.Strict Interpretation: Tax provisions should be interpreted strictly, and if there are two possible interpretations, the one in favor of the taxpayer should be adopted.

4.No Equitable Considerations: Equity considerations do not apply to tax statutes. The statutes must be interpreted based on the exact wording without adjustments.

5.No Assumptions or Presumptions: A taxing provision cannot be interpreted based on assumptions. The court must follow what is explicitly stated.

6.Deficiencies in Statutes: Courts cannot import provisions into a statute to correct perceived deficiencies.

7.Commercial Understanding: Undefined terms should be understood in their usual commercial sense.

8.Literal vs. Unjust Interpretation: If a literal interpretation produces an unjust result that was not intended by the legislature, the court may modify the language.

Disclaimer:
The opinions expressed in this document are based on the preliminary reading of the Supreme court Judgment. We do not guarantee that these interpretations will be upheld by revenue authorities or courts in other matters. These views are provided solely for educational purposes to aid in understanding of the case, recommended
•a self-reading of the full judgment.
•Get updated version of the document time to time.

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