Judgment of Hon’ble High Court of Orissa in the matter of M/s Safari Retreats Private Limited interprets provisions of Section 17(5)(d) of CGST Act, 2017 to check admissibility of Input Tax Credit paid on procurement of goods or services used for construction of immovable property for own purpose of assessee.
Hon’ble High court has held that as petitioner is paying GST on rental income which is arising out of investment on which GST has been paid and since there is no break in chain of business from point of procurement of material and services for construction till renting of immovable property, ITC should be allowed on construction of immovable property when used for further renting.
1. Brief facts of the case
- M/s Safari Retreats Private Limited (“Petitioner”) was engaged in the business of construction of shopping malls for the purpose of further letting out.
- For such construction, petitioner acquired huge quantity of material such as cements, sand, steel, alumimum etc, and also took services in form of consultancy, legal and professional service, architectural service etc.
- All such procurement of goods and services were subject to GST. Petitioner has paid GST of huge amount on procurement of goods and services.
- Activity of letting out of shopping mall is considered as supply of service under GST and therefore, is liable to GST.
2. Dispute in the matter involved
- Petitioner accumulated ITC in respect of purchase of goods and services to utilize the same for payment of GST on rental services.
- However, Department restricted such availement of ITC due to restriction given u/s 17(5)(d) of the CGST Act. Therefore, petitioner had to pay a very large amount of GST.
- Section 17(5)(d) of the CGST Act, 2017 is reiterated as follows:
“Notwithstanding anything contained in sub-section (1) of section 16 and sub-section
(1) of section 18, input tax credit shall not be available in respect of the following, namely:-
goods or services or both received by a taxable person for construction of an immovableproperty (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
- Understanding of the above mentioned provisions is that input tax credit in respect of goods and services used for construction of immovable property shall be allowed only if such immovable property is intended to be sold before issuance of completion certificate.
- However, renting of immovable property is not considered as supply of such immovable property. Therefore, assessee is not entitled to claim ITC of GST paid on input or input services.
- Accordingly, petitioner moved a writ petition to the Hon’ble Orissa High Court to challenge the constitutional validity of Section 17(5)(d) of the CGST Act under Article 14.
3. Argument by Petitioner
Petitioner has filed the petition contending:
- As there is no break in business activity of petitioner from point of construction of mall till letting out it to its tenants. Whereas, disallowance of input tax credit to petitioner will break the chain of tax credit and will result in cascading effect of taxes.
- ITC is allowed when a builder sells building before issuance of completion certificate as the tax chain is not broken. Similarly, chain is not breaking in case of letting out also. Therefore, not adopting same interpretation in case of renting of shopping mall is highly discriminatory and arbitrary in nature.
- Such interpretation violates fundamental right of a person vested by virtue of Article 14-“equality before the law and equal protection”.
4. Argument by Respondent
In response to the writ filed by petitioner, respondent contended:
- Input tax credit can’t be claimed as a matter of constitutional right by any assessee. Article 14 of the constitution can be said to be breached only when there is gross disparity resulting in clear discrimination.
- Provision of section 16 supra can’t be read in isolation rather should be read with conditions and restrictions provided. Assessee can’t follow act to the extent of his suitability. Therefore, provisions of section 16 should be read with restrictions provided with it under section 17.
- Justice or unjustice of a provision is a matter of legislature and same can’t be open for judicial review.
5. Interpretation by Hon’ble High Court
High Court has interpreted as follows:
- If petitioner would have disposed of the property after issuance of completion certificate then petitioner would have paid GST in form of ITC. However, if property would have been sold before issuance of completion certificate then he would not be required to pay GST.
- In the given case, petitioner is retaining the property and is not using it for its own purpose rather he is letting it out which is covered under GST. Still petitioner is required to pay huge amount of GST to which he is not liable.
- Provisions of section 17(5)(d) should be read down and narrow restriction as imposed by the department while reading provisions is not acceptable as the vary purpose of the credit is to give benefit to the assessee.
As Petitioner is paying GST on rental income which is arising out of investment on which GST has been paid by him. Therefore, petitioner should be entitled to claim ITC paid on inward supply of goods or services.
Hon’ble high court had allowed benefit of ITC. However, it refused its inclination to declare provisions of Section 17(5)(d) as ultra vires.