Growth Meets GST: The Expectation-Reality Gap in Office Construction
Constructing a new office or upgrading an existing workplace is often regarded as a significant milestone in a business's development. It signifies growth, stability, and a long-term vision. Naturally, when substantial GST is incurred on flooring, partitions, woodwork, electrical fittings, acoustic panels, steel frameworks, and interior services, the initial response of a business owner is to consider such tax as recoverable Input Tax Credit. After all, the office is not a personal asset; it serves as the fundamental platform for delivering taxable supplies, servicing clients, enabling employees to perform their duties, and generating revenue.
Nevertheless, the Goods and Services Tax (GST) legislation approaches this matter with a distinctly different perspective. Section 17(5)(d) of the CGST Act, 2017, delineates a clear and unequivocal boundary, communicating a definitive legislative directive: the construction of one's own immovable property is not intended to be integrated within the seamless credit chain. This holds true even when the building is used solely for business purposes, when all inward supplies are tax-paid and bona fide, and when outward supplies are entirely taxable. The legislation mandates that GST paid on such construction and capitalised renovations must be regarded as a cost. This constitutes one of those areas under GST where commercial logic must yield to legislative intent, comprehending that intent is vital for prudent tax planning.
जो दीवारें खड़ी करें व्यापार की पहचान, कानून कहे-यहीं थमे क्रेडिट का अभियान।[The walls that define your business space-the law says, this is where the credit race ends.]
Section 17(5)(d): The Legislative Wall Against ITC
Section 17(5)(d) commences with a non-obstante clause, overriding the general eligibility for Input Tax Credit (ITC) provided under Section 16 of the CGST Act. It explicitly states that input tax credit shall not be allowed in respect of goods or services, or both, received by a taxable person for the construction of an immovable property (other than plant and machinery) on his own account, even when such goods or services are used in the course or furtherance of business.
Further, Explanation 1 clarifies that the expression "construction" includes reconstruction, renovation, additions, alterations, or repairs, to the extent such expenditure is capitalised to the immovable property.
The significance of this wording lies in its unmistakable clarity. By consciously inserting the phrase "even when used in the course or furtherance of business", the legislature has pre-emptively neutralised the otherwise intuitive argument that business use alone should justify ITC. Section 17(5)(d), therefore, operates not as a conditional limitation, but as an absolute statutory prohibition once its factual preconditions are satisfied.
Explanation 2 to Section 17(5)(d): When the Legislature Overrules the Courts
Explanation 2 to Section 17(5)(d) performs a critical interpretational function within the GST framework. It clarifies that, for the purposes of clause (d), 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", notwithstanding anything to the contrary contained in any judgment, decree, or order of any court, tribunal, or authority.
The legislative importance of this clarification cannot be overstated. Under pre-GST laws and even during the initial years of GST litigation, taxpayers frequently relied upon judicial precedents where courts had interpreted the word "plant" expansively and disjunctively. In such cases, assets like air-conditioning systems, electrical installations, lifts, or specialised fixtures-despite being embedded in buildings-were sometimes argued to qualify as "plant". Explanation 2 decisively extinguishes such arguments by making it clear that the term "plant" cannot be read independently or in isolation under GST.
By replacing the disjunctive expression "plant or machinery" with the conjunctive and composite expression "plant and machinery", the legislature has deliberately narrowed the scope of the exception under Section 17(5). The benefit of ITC survives only for assets that simultaneously satisfy both elements-being plant as well as machinery-and that are directly used for making outward taxable supplies. Any attempt to isolate "plant" from machinery is legislatively impermissible.
Legislative Response to the Supreme Court Ruling in Safari Retreats
The insertion of Explanation 2 must also be understood in the context of the Supreme Court's judgment in Chief Commissioner of Central Goods and Services Tax & Ors. v. Safari Retreats Private Limited & Ors., Civil Appeal No. 2948 of 2023, decided on 3 October 2024. In this decision, rendered while disposing of the Department's appeal, the Supreme Court examined the scope of Section 17(5)(d) and held that, on a functional and factual analysis, a building used for taxable outward supply-such as renting of immovable property-could potentially qualify as a "plant". The Court observed that denial of ITC in such circumstances may result in cascading of taxes and remanded the matter for factual determination.
Explanation 2 represents a conscious and direct legislative response to this interpretation. By retrospectively clarifying that any reference to "plant or machinery" shall always be read as "plant and machinery", Parliament has expressly neutralised the interpretational latitude recognised by the Supreme Court and restored the original legislative intent with effect from 1 July 2017. The amendment thus reaffirms that buildings and civil structures, even when used for taxable business purposes, cannot be brought within the plant and machinery exception under Section 17(5)(d).
Equally significant is the retrospective clarificatory nature of Explanation 2. The phrase "shall always be deemed to have been construed" leaves no ambiguity that Parliament never intended a liberal or disjunctive reading of the expression. Consequently, judicial pronouncements-howsoever authoritative-cannot now be relied upon to claim ITC on immovable property or office infrastructure by treating such assets as "plant" in isolation.
Thus, Explanation 2 operates as a statutory firewall, protecting Section 17(5)(d) from interpretational dilution and reinforcing the legislative philosophy that GST credit is meant to flow through productive supply chains rather than be absorbed into capital-intensive immovable assets created for one's own use.
From Invoice to Immovable Property: Why HSN/SAC Codes Ultimately Don't Matter
Before examining invoice classifications or HSN/SAC codes, it is essential to identify whether the construction is undertaken on the taxable person's own account. In the case of Kirti Limited, the construction and interior works were neither performed for the outward supply of works contract services nor for the sale of under-construction property. The premises were developed exclusively for the company's internal operational use, and the expenditure was capitalised in the books of accounts.
GST law draws a conscious distinction between outward works contracts and inward construction undertaken on one's own account. In the former scenario, ITC remains embedded within the supply chain; in the latter, the chain is intentionally severed. Once inward supplies lose their independent identity and merge into floors, walls, ceilings, or structural frameworks, the emphasis shifts from invoice description to the nature of the asset created. When that asset qualifies as immovable property and is capitalised, Section 17(5)(d) is automatically triggered.
Immovability and Permanency: The Supreme Court's Test
The concept of "immovable property" has been consistently examined by the Supreme Court of India. In Triveni Engineering & Industries Ltd. v. CCE (2000), the Court held that when components, once assembled and installed, become permanently affixed to the earth and lose their individual identity, the resultant structure assumes the character of immovable property. The decisive test was one of intended permanence and functional integration, rather than theoretical removability.
This principle was reaffirmed in Solid & Correct Engineering Works v. CCE (2010), where the Supreme Court emphasised that installations intended for permanent use and incapable of being dismantled without substantial damage must be treated as immovable property. Applying these principles, items such as flooring, fixed partitions, acoustic walls, lighting grids, embedded electrical wiring, and steel frameworks used in office construction clearly meet the test of immovability.
Capitalised Renovations Are Construction Too: High Court Reinforcement
Explanation 1 to Section 17(5) expressly includes renovation, alterations, and repairs within the meaning of "construction" where such expenditure is capitalised. This statutory position has received consistent judicial endorsement.
In Wipro GE Healthcare Pvt. Ltd. v. Assistant Commissioner (2018), the Karnataka High Court held that interior works and renovations capitalised to the building account fall squarely within the scope of Section 17(5)(d), even if the premises are used exclusively for business. Similarly, in TVS Motor Company Ltd. v. State Tax Officer (2020), the Madras High Court clarified that civil construction and embedded infrastructure do not qualify for ITC merely because they facilitate business operations.
Why "Business Use" Cannot Defeat Section 17(5)(d)
A frequently advanced argument under GST is that exclusive business use should automatically entitle a taxpayer to ITC. Section 17(5)(d) has been specifically enacted to defeat this argument. The Allahabad High Court, in Jaypee Infratech Ltd. v. Union of India (2019), categorically held that where credit is expressly restricted by statute, considerations of business expediency or commercial necessity cannot override legislative intent.
Accordingly, even though Kirti Limited's office premises are used for taxable business activities, such use becomes legally irrelevant once the construction is carried out on the owner's own account and capitalised.
The Plant and Machinery Exception: Why Office Infrastructure Fails the Test
According to the explanation appended after Section 17(6), for the purposes of ITC under Chapter V of the CGST Act and registration under Chapter VI, the expression "plant and machinery" means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supplies of goods or services, and includes such foundation and structural supports, but expressly excludes land, buildings, and other civil structures.
While Section 17 preserves a limited exception for plant and machinery, it simultaneously excludes land, buildings, and civil structures from its scope. Goods and services used in office construction-such as flooring, partitions, ceilings, woodwork, embedded wiring, and structural steel-do not operate as machinery producing output. They merely create the environment in which business is conducted. Courts have consistently distinguished between productive machinery and supporting infrastructure, rendering the statutory exception inapplicable to office construction and interior works.
Practitioner's Checklist: Diagnosing ITC Blockage under Section 17(5)(d)
Before advising or claiming ITC on construction-related expenditure, a practitioner should evaluate whether the supplies relate to construction, renovation, or interior works; whether an immovable property is created or enhanced; whether the construction is on the taxpayer's own account; whether the expenditure is capitalised; whether the items lose independent identity upon installation; whether they fall outside the definition of plant and machinery; and whether the claim rests solely on business use. If most answers are affirmative, Section 17(5)(d) stands activated and ITC is blocked.
When Numbers Speak: Section 17(5)(d) in Action
Kirti Limited constructs and fits out its own office during FY 2025-26 at a cost of ₹1,00,00,000, attracting GST of ₹18,00,000. Since the construction is on its own account and capitalised, the GST of ₹18,00,000 is ineligible for ITC and is included in the asset cost, increasing the capitalised value to ₹1,18,00,000.
In contrast, where Kirti Limited undertakes a works contract for a client and the construction constitutes an outward taxable supply, ITC on inward supplies remains available. The decisive factor is for whom the construction is undertaken, not its physical nature.
When GST Credit Ends, Depreciation Begins: The Income-tax Bridge
Once GST paid on self-constructed assets is capitalised under Section 17(5)(d), attention shifts from ITC to cost optimisation. Under Section 43(1) of the Income-tax Act, 1961, the GST component becomes part of the asset's actual cost, enabling depreciation over its useful life. Though GST is not recoverable upfront, partial relief is achieved through depreciation.
From Litigation to Line-Drawing: GST's Clean Break from the Past
Under the pre-GST regime, credit eligibility on immovable property was fragmented and heavily litigated. GST consciously ended this uncertainty by enacting a clear statutory boundary through Section 17(5)(d). What was once a grey area is now a well-defined legislative line.
The Point Where the Credit Chain Intentionally Stops
Section 17(5)(d) represents a deliberate policy choice. GST treats construction of immovable property on one's own account as a point of final consumption where the credit chain is intentionally halted. Judicial interpretation and legislative clarification now converge on this conclusion.
For taxpayers and professionals alike, the message is unequivocal: when planning office construction or interior projects, GST should be budgeted as a capital cost, not as a recoverable credit.
क़ानून से लड़कर हासिल क्या होगा आख़िर,जो लिखा है तक़दीर में, वही बनता है मुक़द्दर।[What is gained by battling the law?What is written in fate ultimately prevails.]
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