Budget Implications on the Landmark Judgement of Safari Retreats

In the Union Budget 2025 many changes were proposed in the direct as well as indirect taxation. Out of the changes proposed in the indirect taxation, one of the significant change is that there has been an amendment in the clause (d) of section 17(5) which has had a major impact on the landmark judgement pronounced by the Hon'ble supreme court in case of  Safari Retreats. In this article we will discuss what the supreme court has pronounced in this judgement and the implication of the same after the amendment in section 17(5)(d).

As we know that section 17(5) of CGST Act 2017 contains the list of the goods or services in respect of which the ITC is blocked. The clause (c) & (d) of Section 17(5) states that ITC would not be available in respect of;

"(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (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 capitalisation, to the said immovable property"

In 2019, the Orissa High Court delivered a significant ruling in M/s. Safari Retreats Private Limited vs. Chief Commissioner of CGST [2019(04)LCX0016] by holding that the businesses constructing immovable property for renting or leasing should not be restricted from availing ITC on related inputs. The Court reasoned that since such properties generate taxable income through leasing or renting, denying ITC would contradict GST's primary objective of ensuring seamless credit flow and avoiding the cascading effect of taxes. However, the Revenue department promptly challenged this decision before the Hon'ble Supreme Court. 

In 2024, the Hon'ble Supreme Court has pronounced the much awaited landmark judgement in the case of Safari Retreats [2024(10)LCX0001] wherein it was held that the ITC on building given on rent would be available if such building can be classified as a plant under the expression "plant or machinery" in section 17(5)(d) depending on its role in the business and functionality test and no works contract service is involved in it. Further Section 17(5)(c) & (d) are constitutional valid

Observations of the Hon'ble Supreme Court in this case:
1. The Supreme Court observed that the phrase "plant or machinery" under Section 17(5)(d) is distinct from "plant and machinery," used in section 17(5)(c) of CGST Act. Accordingly, with respect to clause(d) of section 17(5) there would no relevance of the definition of "plant and machinery" given in the explanation of the Section 17, since both are different terms. As the expression "plant or machinery" has not been defined in the CGST Act, the ordinary meaning of the expression "plant" as well as "machinery" in commercial terms will have to be applied.

2. Further, it was observed by the Supreme Court the restriction on ITC given under section 17(5)(d) of the CGST Act would not be applicable to;
(i) the ITC for construction involving "plant or machinery" and
(ii) when the construction is not for the taxable person's own account, but for other purposes such as sale, lease, or license.

3. The supreme court has allowed the ITC based on the "functionality test." This test states that the immovable property serves as an essential and integral component of their business operations.

The Recommendations made by the GST Council:
The GST Council in their 55th meeting which was held on 21.12.2024 has made the recommendations for amending the section 17(5)(d) of CGST Act 2017, to replace the phrase "plant or machinery" with "plant and machinery", retrospectively, with effect from 01.07.2017, so that the said phrase may be interpreted as per the Explanation given at the end of section 17 of CGST Act, 2017.

The Recommendations made by Finance Bill 2025:
The same recommendation was also incorporated in the Finance Bill 2025 through clause 119 of the said bill which states that the word “plant or machinery” given under section 17(5)(d) should be retrospectively replaced with the word “plant and machinery” with effect from 01.07.2017. In addition to this there was also a recommendation in the finance bill that is to insert an explanation in section 17 that notwithstanding anything to the contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to "plant or machinery" shall be construed and shall always be deemed to have been construed as a reference to "plant and machinery".

Thus from the above recommendations it is very clear that the said recommendation was proposed to counteract this ruling of the Supreme Court so that the ITC will remain restricted on the construction of immovable properties, even if they are used for taxable supplies like renting. The amendment is retrospective, effective from July 1, 2017, rendering the Supreme Court’s interpretation in Safari Retreats invalid.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.