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Supreme Court’s landmark interpretation of ITC on Construction: Section 17(5)(d) of CGST Act

1. Case Overview: In Chief Commissioner of CGST & Ors. v. M/s Safari Retreats Pvt. Ltd. & Ors. (Civil Appeal No. 2948 of 2023), the Supreme Court addressed whether ITC can be claimed on GST paid for goods and services used in constructing immovable property intended for leasing or renting. The appellant argued that denying ITC under Section 17(5)(d) while taxing rental income leads to double taxation.

2. Legal Provision – Section 17(5)(d): Section 17(5)(d) of the CGST Act disallows ITC on goods and services used for the construction of immovable property, except for plant and machinery. This restriction was contested in the context of properties used for business purposes like renting or leasing.

3. Court’s Analysis: The Supreme Court took a broader view, suggesting that if a building serves a crucial business function (such as leasing), it may qualify as a “plant” and be eligible for ITC. The Court remanded the case to the Orissa High Court for fact-finding to determine if the shopping mall meets the “functionality test” for classification as a plant. This decision extends to other structures like warehouses but excludes hotels and cinema theatres.

The Court also upheld the constitutional validity of Section 17(5)(c) and (d), stating that they serve a rational legislative purpose and do not violate Articles 14 or 19(1)(g).

4. Conclusion: This ruling opens the door for ITC claims on immovable properties constructed for leasing or renting, provided they serve a business function akin to “plant.” The final determination from the Orissa High Court could set a precedent for future ITC claims on similar properties.

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