SC lays down ‘functionality’ and ‘essentially’ test for Input Tax Credit eligibility

The Supreme Court on Thursday declared that real estate companies can claim Input Tax Credits (ITC) under the Goods and Services Tax (GST) regime, on costs of construction for commercial structures intended for renting or leasing purposes.

The judgment by a Bench headed by Justice A.S. Oka would give a fillip to the real estate sector by lowering their investment costs. “If a building qualifies to be a plant, ITC can be availed against the supply of services in the form of renting or leasing the building or premises, provided the other terms and conditions of the CGST Act and Rules framed are fulfilled,” Justice Oka held.

The court, however, noted that if the construction of a building by the recipient of service was for his own use, the “chain would break and ITC would not be available”.

“Under the CGST Act, renting or leasing immovable property is deemed to be a supply of service, and it can be taxed as output supply. Therefore, if the building in which the premises are situated qualifies for the definition of plant, ITC can be allowed on goods and services used in setting up the immovable property, which is a plant,” Justice Oka reasoned.

The court said the question whether or not a mall, warehouse or any building other than a hotel or a cinema theatre could be classified as a ‘plant’ within the meaning of the expression “plant or machinery” in Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 was a factual question.

This has to be determined keeping in mind the business of the registered person and the role that building plays in the business. “Functionality test will have to be applied to decide whether a building is a plant,” the judgment noted.

“ITC eligibility will be determined based on the functionality and essentiality tests,” explained Abhishek A. Rastogi, founder of Rastogi Chambers, who represented multiple petitioners in the case before the court. “In essence, the Court has effectively read down the provisions of Section 17(5)(c) and (d) of the GST Act. ITC can only be denied in situations where the nature of the taxpayer’s business and the claimed credits fail to satisfy these two critical tests,” he stressed.

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