Safari Retreats Case | Supreme Court

The Supreme Court has pronounced the verdict in the landmark case of Chief Commissioner Of Central Goods And Service Tax And Ors. Versus M/S Safari Retreats Private Limited And Ors. in which it was held that builders are eligible for input tax credit (ITC) on construction costs if building constructed for renting services.

The bench of Justice Abhay Oka and Justice Sanjay Karol has ruled that if the construction of a building was essential for carrying out activity of supplying services such as renting or giving on lease or other transactions in respect of the buildings or part thereof which are covered by clauses 2 and 5 of the Schedule 2 of the CGST Act, the building could be held as a plant. Functionality test will have to be applied to decide whether the building is a plant.

The GST department has challenged the decision of Orissa High Court in which the High Court while ruling in favour of the company held that the very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation. If the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.

Background – Safari Retreats Case

Safari Retreats challenged the action of the GST Department before the Orissa High Court, who without considering the provisions under Section 17 (5)(d) of the Central Goods and Services Tax Act held that the provisions of the CGST Act is not applicable in the case of construction of immovable property intending for letting out for rent.

Safari Retreats was mainly carrying on business activity of constructing shopping malls for the purpose of letting out of it to numerous tenants and lessees. Huge quantities of materials and other inputs in the form of Cement, Sand, Steel, Aluminum, Wires, plywood, paint, Lifts, escalators, Air- Conditioning plant, Chillers, electrical equipments, special façade, DG sets, transformers, building automation systems etc.

The company also provided services in the form of consultancy service, architectural service, legal and professional service, engineering service and other services including services of special team of international designers in every sphere of construction of Mall are required for the construction purpose.

Therefore the Company has to purchase/receive these goods and services for carrying out the said construction. All these goods and services which are purchased/received for such construction are taxable under the CGST Act and OGST Act and as such the petitioner company has to pay very huge amounts of Central Goods and Services Tax and Odisha Goods and Services Tax (OGST) on purchases.

One of the large shopping malls constructed by the Company has been completed recently and petitioner has made necessary arrangements for letting out different units of the said shopping mall to different persons on rental basis. It is an undisputed fact that the activity of letting out the units of the shopping mall attracts CGST and OGST on the amount of rent received by the petitioner No.1 because the activity of letting out the Units in the said Mall amounts to supply of service under the CGST Act/ OGST Act.

The company having accumulated input Credit of GST amounting to Rs 34,40,18,028 in respect of purchases of inputs in the form of goods and services is desirous of availing of the credit of input tax charged on the purchase/supply of goods and services which are consumed and used in the construction of the shopping mall in order to utilise the said input credits to discharge and pay the CGST and OGST payable on the rentals received by the company from the tenants of the said shopping mall and approached the revenue authorities in this regard.

However, the company was advised to deposit the CGST and OGST collected without taking input credit in view of restrictions placed as per Section 17(5)(d) and was warned of penal consequences if it did not do so. The company has thus to pay very large amounts of CGST and OGST.

Relevant Provisions – GST Applicability

The CGST Act was implemented with effect from 1st July, 2017 inter alia with the object of avoiding the cascading effect of various indirect taxes and so as to reduce the multiplicity of a number of indirect taxes.

The CGST Act is based on the VAT concept of allowing input tax credit of tax paid on inputs, input services and capital goods which can be utilised for payment of output tax so as to obviate the cascading effect of multistage levies and taxes. GST is levied on supply of goods or services or both, in India w.e.f. 1st July, 2017.

Each State Government has passed its own State GST Act to impose GST on the supply of goods or services or both within the State and these State GST Acts are practically copies of CGST Act, as the definitions and other provisions are identical. For the purpose of imposing GST within the State of Odisha, Government of Odisha has passed OGST Act in which almost all the provisions are virtually identical to that of CGST Act.

The business of the company in the present case inter alia consists of construction of shopping malls and letting them out to different persons on rental basis and collection of rent from them. In view of Section 7 of CGST Act and OGST Act read with Schedule II of the GST Acts.

The activity of the Company of letting out of the units of the shopping mall to different persons amounts to “Supply” within the meaning of both the two Acts and as such the petitioner No.1 squarely comes within the definition of ‘supplier’ as appearing in Section 2(105) of both the GST Acts and the Petitioner is liable to pay CGST and OGST on the rental amounts received by it.

Section 22(1) of CGST Act as well as OGST Act inter alia provide that every supplier shall be liable to be registered under the CGST Act and OGST Act in the State from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees.

Company duly applied for such registration and a certificate of registration was issued to the petitioner No.1 in Form GST REG-06 under Section 25 of the CGST Act read with Rule 10 of the Central Goods and Service Tax Rules, 2017 and a Goods and Service Tax Identification Number was assigned to the company. Once the Company is registered under Section 22 of the CGST Act, it becomes the “Taxable person” within the definition as contained in Section 2 (107) of the CGST Act and OGST Act.

Section 9 of the CGST Act is the charging section provides that subject to the provisions of Section 9 (2). There shall be levied a tax called the Central Goods and Service Tax on all intra-State supplies of goods or services or both.

Except on the supply of alcoholic liquor for human consumption, on the value determined under Section 15 of the CGST Act and at such rates, not exceeding twenty percent, as may be notified by the Government on recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person. Similar provisions in the State Act namely OGST Act have also made under Section 9 of the Act.

Judgement By Orissa High Court

The Orissa Court while ruling in favour of the company held that the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted.

The very purpose of the credit is to give benefit to the assessee. If the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.