• Dated 04^th June, 2025

Supreme Court Reaffirms Eligibility of ITC for Commercial Buildings Based on Functional Use Test:

Brief Facts:

Safari Retreats Pvt. Ltd has claimed ITC on inputs and input services used for constructing a shopping mall for commercial leasing to the tune of Rs. 34 crores(approx.). Although rental income from the mall was exigible to GST, Tax Authorities denied ITC under Section 17(5)(d) of the CGST Act, which restricts credit on construction of immovable property. The Hon'ble Odisha High Court ruled in favour of Safari, declaring the denial of ITC as arbitrary and violative of Article 14 of the Constitution of India. However, on appeal, the Hon'ble Supreme Court upheld the validity of Sections 17(5)(c) and (d), affirming that ITC is a statutory, not a fundamental, right and may be restricted by law. Yet, the Court introduced a crucial exception: if a property like a mall or warehouse functions as a "plant" integral to business operations, ITC may be allowed based on a "functionality test." A subsequent review petition by the Revenue was dismissed, reaffirming the earlier ruling.

Department's Contention: -

The Department argued that ITC on immovable property construction is rightly barred under Section 17(5)(d) of the CGST Act, as ITC is a statutory concession not an inherent right. Allowing such claim of ITC, it claimed, could lead to undue tax advantages, especially if the property is later sold tax-free. Emphasizing that malls and warehouses are immovable assets, the Department asserted the legislative classification is clear, reasonable, and constitutionally valid, opposing any dilution of the provision.

Assessee's Contention: -

The Assessee argued that denying ITC under Section 17(5)(d) is arbitrary and defeats GST legislation's core aim of avoiding cascading effect of tax. Since rental income is taxable, blocking ITC on construction leads to double taxation. The mall, they claimed, is a functional business tool and not a passive asset and should be treated as a 'plant,' leading to ITC admissible in line with business realities.

Decision:

The Hon'ble Supreme Court, while dismissing the review petition, reaffirmed its earlier judgment and held that the determination of whether an immovable property such as a mall or warehouse qualifies as a 'plant' under Section 17(5)(d) of the CGST Act is a question of fact, contingent upon the functional use of the property. The Court reiterated the applicability of the "functionality test," observing that where the construction of such immovable property is integral to the business activity of providing taxable services, it may be construed as a 'plant' and thereby it will fall outside the purview of the ITC restriction under the said provision. Consequently, ITC cannot be disallowed solely on the ground that the asset is immovable.

BTA's Comment:

The Supreme Court's ruling in Safari Retreats Pvt. Ltd. stands as a landmark judgement in evolving discourse on ITC restrictions under GST. While upholding the constitutional validity of Section 17(5)(c) and (d) and affirming that ITC is a statutory concession not a vested right, the Court took a balanced and forward-thinking approach by introducing the "functionality test." In doing so, it acknowledged that in today's commercial environment, structures like malls and warehouses are not mere immovable assets but critical enablers of business operations. The recognition that such buildings could, in specific contexts, qualify as 'plants' reflects a progressive judicial interpretation aimed at aligning legal provisions with economic realities. Importantly, the Court avoided a one-size-fits-all approach, emphasizing a nuanced, fact-based inquiry. This judgment not only reinforces legislative authority but also injects fairness into the ITC framework, offering meaningful relief to taxpayers by asserting that where a property is demonstrably essential to business, credit should not be arbitrarily denied. The decision balances legislative intent with business realities, offering a path for ITC claims where the property's role in business is central.

Author: Pritam Ghosh

Edited by: Shaily Gupta