GST: Buildings Can Qualify As Plants Based On Their Functionality, Says Supreme Court

If the construction of a building is essential for carrying out the activity of supplying services, such as renting it or giving it on lease, the building could be held as a plant for the purpose of availing input tax credit under the Goods & Services Tax Act, the Supreme Court has held.

The apex court said that the question of whether a mall or a warehouse or any building, other than a hotel or cinema, can be classified as a plant within the meaning of the expression plant or machinery as used in section 17(5)(d) of the GST Act is a factual question that is to be decided keeping in mind the business of the registered person and the role that the building plays in the said business.

It is crucial to note that the Act doesn't allow taxpayers to avail input tax credits for any goods or services availed by such a taxpayer for the construction of an immovable property. However, the credits will be allowed if the said goods or services are availed for the construction of a plant or machinery.

The court ruled that a functionality test will have to be applied to decide whether a building is a plant.

However, the top court rejected the challenge to the constitutional validity of Section 17(5)(d) of the Act.

While some litigation is expected with regards to the tests laid down by the top court, this is a very welcome ruling for the taxpayers, said Abhishek A Rastogi, founder of Rastogi Chambers, who represented some of the taxpayers before the court in this case.

Rastogi added that the court has categorically stated that in order to classify a building as a plant for the purposes of availing input tax credit, the facts of each case will have to be looked into. Everything from the role of the building to the nature of the business carried out will be a factor in deciding whether the building classifies as a plant or not.

The greatest positive is that the court has categorically held that there is no blanket restriction against input credit/set-off of the GST cost incurred on the construction of civil structures/immovable property, especially when the said structure itself is integral to providing the output services in question, said Sudipta Bhattacharjee, partner at Khaitan & Co.

Companies in the commercial real estate as well as infrastructure sectors will do well to review their input credit positions in light of this verdict, Bhattacharjee opined.

The case pertains to the issue of claiming tax credits under the Goods & Services Tax regime.

In April 2019, the High Court of Odisha read down Section 17(5)(d) of the GST Act. The section states that the facility of availing tax credits shall not be available for any goods or services availed by such a taxpayer for the construction of immovable property (other than in the construction of a plant or machinery), even when done so in furtherance of the business.

The case came before the high court when some construction companies stated that they were engaged in the business of constructing shopping malls for the purpose of letting them out. They had highlighted that a host of materials are used in constructing the malls, such as cement, sand, steel, escalators, transformers, etc., and services such as consultancy, legal, and other professional services.

One of the companies, Safari Retreats Pvt., contended that it should be allowed to avail the tax credit that has accumulated on account of purchasing the goods and services and avail the facility against the tax that the company has to pay in lieu of collecting rent from the tenant.

An amount received as rent is also chargeable under the GST Act.

The high court ruled in favour of the companies by holding that denial of input tax credit would be completely arbitrary, unjust, and oppressive and would be directly opposed to the basic rationale of GST itself, which is to prevent the cascading effect of multi-stage taxation and the inevitable increase in costs that would have to be borne by the consumer at the end of the day.