Supreme Court on GST ITC for Malls & Commercial Buildings: Section 17(5)(d) Valid, but a Building Can Be a "Plant" Under the Functionality Test [2024 INSC 756]

The Supreme Court upheld the constitutional validity of Sections 17(5)(c), 17(5)(d) and 16(4) of the CGST Act, but held that the expression "plant or machinery" in Section 17(5)(d) is different from the defined term "plant and machinery". A building such as a mall or warehouse can be a "plant" if, applying the functionality test, its construction is essential for supplying services like renting or leasing – in which case input tax credit on its construction is not blocked. Whether a particular building is a plant is a question of fact; the Orissa High Court's judgment was set aside and the matter remanded on that limited question (paras 44–52, 58–66).

Headnote

Goods and Services Tax — Input tax credit — Blocked credit — Construction of immovable property for letting out — "Plant or machinery" vs "plant and machinery" — Functionality test — CGST Act, 2017, Ss. 16(1), 16(4), 17(5)(c), 17(5)(d), Explanation to S. 17, Schedule II paras 2 and 5; Constitution of India, Arts. 14, 19(1)(g), 300A.

Whether ITC on goods and services used for constructing a shopping mall meant for letting out is barred by S. 17(5)(d), and whether Ss. 17(5)(c), (d) and 16(4) are unconstitutional — Held, (i) the challenge to the constitutional validity of Ss. 17(5)(c), 17(5)(d) and 16(4) is not established; immovable property constitutes a class by itself and ITC is a statutory creation; (ii) "plant or machinery" in S. 17(5)(d) cannot be given the meaning of "plant and machinery" defined in the Explanation to S. 17; (iii) whether a mall, warehouse or other building (other than a hotel or cinema theatre) is a "plant" is a question of fact to be decided by the functionality test – if construction of the building is essential for supplying services such as renting or leasing covered by paras 2 and 5 of Schedule II, it can be a plant and falls outside the bar. Orissa High Court judgment dated 17.04.2019 set aside; writ petitions remanded on the limited question whether the mall is a plant.

(Paras 24, 44–52, 58–60, 63–68)

Judgment Intelligence

Key Holdings

• Sections 17(5)(c), 17(5)(d) and 16(4) of the CGST Act are constitutionally valid; the Article 14 challenge fails and the Articles 19(1)(g)/300A challenge was not substantiated (paras 58–63, 65(a)).
• "Plant or machinery" in Section 17(5)(d) is consciously different from the defined term "plant and machinery", which excludes buildings and civil structures (paras 44–45, 65(b)).
• A building other than a hotel or cinema theatre – such as a mall or warehouse – can be a "plant" if, on the functionality test, its construction is essential for supplying services like renting or leasing (paras 51–52, 65(c)).
• Whether a building is a plant is a question of fact to be decided case by case (paras 65(c), 67).
• Since the provisions are upheld and their plain meaning is clear, there is no question of reading them down (para 64).

Brief Facts

Safari Retreats was constructing a shopping mall to let out premises to tenants, using large quantities of goods and services on which GST was paid (para 2). It sought to set off ITC on these inputs against GST payable on rental income, but was told that Section 17(5)(d) barred ITC on goods and services used for construction of immovable property on its own account. It filed a writ petition before the Orissa High Court seeking a declaration that Section 17(5)(d) does not apply to construction of immovable property meant for letting out, or alternatively that it is unconstitutional (para 3). By judgment dated 17.04.2019, the High Court, relying on Eicher Motors, read down Section 17(5)(d) and held that the assessee was entitled to ITC (para 4). The Revenue appealed, and other assessees filed writ petitions under Article 32 challenging Sections 17(5)(c), (d) and 16(4).

Issues (para 24)

1. Whether the definition of "plant and machinery" in the Explanation to Section 17 applies to the expression "plant or machinery" in Section 17(5)(d)?
2. If not, what is the meaning of the word "plant"?
3. Whether Sections 17(5)(c), 17(5)(d) and 16(4) of the CGST Act are unconstitutional?

Court's Findings

"Plant or machinery" is not "plant and machinery": The Explanation defines "plant and machinery" and excludes land, buildings and civil structures. The expression "plant or machinery" appears only in Section 17(5)(d); had the legislature intended the same meaning, it would not have used it specifically. The distinction is conscious (paras 44–45).

Meaning of "plant" – the functionality test: Drawing on income-tax precedents, the Court held that Karnataka Power Corporation (three Judges) limits Anand Theatres to hotels and cinema theatres. Whether a building is a plant is a question of fact – if it is planned and constructed to serve the assessee's special technical requirements, it can be a plant. Hence a building can fall within "plant or machinery" and outside the exception in Section 17(5)(d) (paras 48–52).

Constitutional validity: Applying VKC Footsteps on the latitude available to the legislature in fiscal classification, the Court held that immovable property constitutes a class by itself, ITC is a creation of statute and the legislature can carve out exceptions. The classification is intelligible and has a nexus with the object, including not encroaching on the States' power under Entry 49 of List II. Section 16(4) was also not shown to be arbitrary (paras 57–63).

No reading down: As the provisions are valid and unambiguous, the High Court's reading down could not be sustained (para 64).

Final Outcome / Directions (paras 66–68)

• Orissa High Court judgment set aside in Civil Appeal Nos. 2948 and 2949 of 2023; the writ petitions remanded to the High Court for the limited purpose of deciding whether the shopping mall is a "plant" under Section 17(5)(d). Appeals partly allowed.
• No final adjudication on whether any petitioner's construction is a plant – each case to be decided on merits by applying the functionality test in appropriate proceedings.
• Writ petitions rejected subject to the interpretation of Section 17(5)(d) laid down in the judgment.

Legal Principle

ITC is a statutory right and the legislature may block it for immovable property; but the bar in Section 17(5)(d) does not apply where the building itself is a "plant" – a factual question answered by the functionality test, i.e., whether the building is essential for the taxable supply (such as renting or leasing) made by the registered person.

Precedents Relied Upon

• Union of India v. VKC Footsteps India Pvt. Ltd. – Relied upon · Discussed at para 57: legislative latitude in fiscal classification; a discriminatory tax provision is not per se invalid.
• Commissioner of Income Tax v. Karnataka Power Corporation (three Judges) – Relied upon · Discussed at paras 50–51: whether a building is a plant is a question of fact; limits Anand Theatres.
• CIT v. Anand Theatres – Distinguished / confined · Discussed at paras 49–51: confined to hotels and cinema theatres.
• CIT v. Taj Mahal Hotel – Considered · Discussed at paras 48–49: wide meaning of "plant" in income-tax law.
• CIT v. Victory Aqua Farm Ltd. – Considered · Discussed at para 50: specially designed pond held to be a plant; functionality test.
• Union of India v. Mohit Minerals Pvt. Ltd., (2022) 10 SCC 700 – Referred to · Discussed at para 41.
• Eicher Motors Ltd. v. Union of India, (1999) 2 SCC 361 – relied on by the Orissa High Court to read down Section 17(5)(d) (para 4); the reading down was not upheld (para 64).

Important Paragraphs of the Judgment

Para 44: "…If the legislature intended to give the expression "plant or machinery" the same meaning as "plant and machinery" as defined in the explanation, the legislature would not have specifically used the expression "plant or machinery" in Section 17(5)(d). The legislature has made this distinction consciously. Therefore, the expression "plant and machinery" and "plant or machinery" cannot be given the same meaning."

Para 52: "This Court has laid down the functionality test. This Court held that whether a building is a plant is a question of fact. This Court held that if it is found on facts that a building has been so planned and constructed as to serve an assessee's special technical requirements, it will qualify to be treated as a plant for the purposes of investment allowance. The word 'plant' used in a bracketed portion of Section 17(5)(d) cannot be given the restricted meaning provided in the definition of "plant and machinery", which excludes land, buildings or any other civil structures. Therefore, in a given case, a building can also be treated as a plant, which is excluded from the purview of the exception carved out by Section 17(5)(d) as it will be covered by the expression "plant or machinery"…"

Para 58: "…The Union of India rightly contends that immovable property and immovable goods for the purpose of GST constitute a class by themselves. Clauses (c) and (d) of Section 17(5) apply only to this class of cases. The right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced…"

Para 65(c): "The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression "plant or machinery" used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. 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, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant…"

What the Ruling Means: Practical Impact

• No blanket ITC for builders: The ruling does not automatically allow ITC on every commercial building. Each assessee must show, on facts, that the building functions as a "plant" for its taxable supply.
• Evidence matters: Design, technical specifications and the role of the building in the leasing business become key evidence under the functionality test.
• Section 16(4) time limit stands: The challenge to the time limit for availing ITC failed.
• Check subsequent amendments: Reports indicate that Section 17(5)(d) was subsequently amended by the Finance Act, 2025 with retrospective effect to replace "plant or machinery" with "plant and machinery". Readers must verify the current statutory position before relying on this judgment.

Frequently Asked Questions

Can a shopping mall claim ITC on construction after Safari Retreats?

Only if, on the functionality test, the mall is found as a fact to be a "plant" because its construction is essential for supplying renting or leasing services. The Court did not decide this for any particular mall and remanded the question (paras 65(c), 66–67).

Did the Supreme Court strike down Section 17(5)(d)?

No. It upheld the validity of Sections 17(5)(c), 17(5)(d) and 16(4) and refused to read them down (paras 64, 65(a)).

What is the difference between "plant or machinery" and "plant and machinery"?

"Plant and machinery" is defined in the Explanation to Section 17 and excludes buildings and civil structures. "Plant or machinery" in Section 17(5)(d) is not governed by that definition, so a building can be a "plant" (paras 44–45, 52).

Is the functionality test new?

The Court applied the functionality test laid down in income-tax decisions such as Karnataka Power Corporation (paras 50–52).

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Download Judgment: 2024 INSC 756 – Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd. (PDF, sci.gov.in)

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