Like the word, the decision of the Apex Court in the matter of Chief Commissioner of Central Tax & Ors., Vs. M/s. Safari Retreats Private Limited., & Ors [2024 INSC 756] had sent everyone on an expedition to understand the ratio of this decision. Briefly put, the assessee was engaged in the construction of a mall for the purpose of letting out premises and had earned ITC on the construction expenses such as sand, steel, cement, air-conditioning plants etc., It was their contention that the ITC availed by them could be used to set-off their GST liability which would arise on the account of letting out the stores for renting in the mall. The view of the Revenue was that they could not utilize the said ITC for purpose of paying the GST liability arising out of rental due to the exception carved out in Section 17 (5) (d).

Aggrieved assessee preferred a Writ Petition before the Hon’ble High Court of Orissa which read down the provision on the grounds that the assessee is entitled to avail ITC for the GST paid on construction of the mall if they must pay GST on letting out the stores for renting or otherwise, it would frustrate the very object of the Act. Thereon, this safari had travelled to the Apex Court, wherein the issues was broadly classified as Whether the definition of “plant and machinery” as provided for Section 17 (5) (c) will also be applicable to Section 17 (5) (d) which uses the term “plant or machinery”? If the explanation does not apply to “plant or machinery”, then what is the definition of the term “plant”? Constitutionality of Section 16 (4) and Section 17 (5) (c) and (d). At the outset, the Hon’ble Court was very clear in their findings in Paragraph 41 that while deciding the above issues, they cannot add or subtract anything from Section 17 (5) (c) other than its plain and natural meaning, this is because ITC is a creation of the legislature, and they are empowered to exclude certain categories. Exclusion of works contract per se  will not defeat the object of the Act. It was the decision of the Hon’ble Court that the term “plant and machinery” used in Section 17 (5) (c) and the term “plant or machinery” in Section 17 (5) (d) is intentional and that the two terms cannot be used interchangeably. In such a case, the term “plant or machinery” used in Section 17 (5) (d) can be either a plant or machinery. It was their view that very fact Section 17 (5) (d) uses the expression “immovable property other than “plants or machinery” shows that there could be a plant that is an immovable property. If that is indeed the case, the term “plant” was not defined anywhere under the GST Act or the Rules framed thereunder.

In order to define the term “plant”, the Hon’ble Court had looked into various judgements and definitions in other relevant Acts. One of the crucial decisions that played a key part in this matter was that of Anand Theatres where the issue was whether a building used as a hotel or a cinema theatre can be considered as an apparatus or a tool for running a business where it can be termed as a plant and depreciation can be allowed on the same under the Income Tax Act, 1961.  In this case, it was held that a building which was used as hotel or cinema theater could not be given depreciation on the basis that it was a plant. However, in the case of Karnataka Power Corporation, a three-judge Bench held that the decision of Anand theatres must be limited to the buildings of hotels and cinema alone and will not apply otherwise. They held that it is a question of fact and where a building has been constructed for an assessee’s special technical requirement, it will qualify to be treated as a plant for the purposes of investment allowance.   Based on the above observation in Karnataka Power Corporation, the Hon’ble Court had laid down the functionality test. Much of the talk regarding the present decision has revolved around the functionality test.  Essentially, if it is found on facts that a building has been so planned to and constructed to serve an asseesee’s special technical requirement, it will qualify to be a “plant” as used in Section 17 (5) (d).

The “plant” used in “plant and machinery” under Section 17 (5) (c) specifically restricts lands, buildings and civil structures and the same cannot be equated to the “plant” in “plant or machinery” used in Section 17 (5) (d).  However, at this juncture, it must be pointed out that objectively, there are no parameters or upper-limits as to how the present functionality test must be carried out. This is because every assesee will not be wrong in assuming that their building was planned to serve their special technical requirement and will qualify as a “plant” in terms of Section 17 (5) (d). Even a theater owner will be right in assuming that the building was constructed for their special technical requirement with sound absorbing materials on the walls, special screens, spacing for the expensive sound systems and projectors, however, due to the decision of the Karnataka Power Corporation which did not over rule Anand Theaters but simply held that it was on a narrow compass and must be applied only to theaters and hotels had now come back to exclude them out of the present functionality test. Even while deciding that every mall is different, there are no objective terms as to what the remand officers must do to satisfy themselves regarding the functionality test.

If every mall is indeed different, then what are the hard limits that determine that the building was constructed for a special technical requirement and whether it passes the functionality test or not? If we are unable to satisfy the same on the subject matter of the present case, i.e., malls, the question of determination of buildings used in the industry will be a litigious path unless the present theory/ test propounded is properly defined and explained. Maybe, the explanation in Conclusion C of this decision which provides that the functionality test in essence is to verify whether the construction of a building is essential for carrying out the supply is concise, but it does feel like future decision that will arise out of the “functionality test” litigation(s) will expand it and define it better. Only time will tell. With respect to the constitutional challenge, the Hon’ble Court declined to intervene inasmuch as it held that the violation of Articles 19 (1)(g) and 300A were not sufficiently established by the assessee and held that the mere fact that a provision could been drafted in a better manner cannot be sufficient to attract arbitrariness.