Supreme Court Rules Building Qualifies as 'Plant' Under GST Section 17(5)(d) If Functionality Test Is Satisfied

Executive Summary

• The Supreme Court upheld the constitutional validity of Section 17(5)(c), Section 17(5)(d), and Section 16(4) of the CGST Act, 2017.
• Setting aside the High Court of Orissa's reading down of Section 17(5)(d), the Court ruled that statutory re-writing was impermissible.
• The Court held that the phrase "plant or machinery" in clause (d) is distinct from the restrictive definition in the Explanation to Section 17.
• Immovable property, including a shopping mall or warehouse, qualifies as a "plant" if it satisfies the functionality test.

1. The Issue

The assessee constructed a commercial shopping mall in Bhubaneswar, incurring inward procurement costs on inputs and works contract services (including cement, steel, structural glazing, electrical fixtures, lifts, and architectural services). Because the units were constructed for letting out under commercial leases rather than for pre-completion sale, the outward supply attracted GST under Entries 2 and 5 of Schedule II to the CGST Act, 2017.

The Revenue denied input tax credit (ITC) on the inward supplies under Section 17(5)(d) of the CGST Act, 2017, which blocks credit on goods or services received for the construction of immovable property (other than plant or machinery) on the taxpayer's own account. The dispute raised three critical questions: whether Section 17(5)(d) blocks credit when the immovable property is constructed to generate continuous taxable rental streams; whether the statutory restriction can be "read down"; and whether an immovable commercial building can constitute a "plant" under the exception to Section 17(5)(d).

2. Department's Arguments

The Revenue contended that Section 17(5) begins with an overriding non-obstante clause that explicitly trumps the general entitlement in Section 16(1). Relying on the doctrine that tax credit is a pure statutory concession rather than an inherent constitutional or common-law right ( Union of India v. VKC Footsteps India Pvt. Ltd. ), the Revenue argued that Parliament enjoys wide latitude under Article 14 to determine which input streams qualify for credit.

On statutory interpretation, the Revenue submitted that the Explanation appended to Section 17 explicitly defines "plant and machinery" by excluding "land, building or any other civil structures". The Revenue maintained that this exclusion governs both clause (c) and clause (d) of Section 17(5). Consequently, no building or civil structure constructed by a developer on its own account could ever qualify for ITC. Finally, the Revenue argued that the High Court of Orissa had overstepped judicial limits by reading down an unambiguous legislative mandate.

3. Assessee's Arguments

The assessee argued that the denial of credit creates an acute tax cascading effect, directly frustrating the foundational object of the 101st Constitutional Amendment and the CGST Act, 2017. If output GST is mandatorily recovered on lease rentals, denying credit on the construction cost embeds tax into the lease pricing, causing tax on tax.

The assessee further contended that Section 17(5)(d) uses the disjunctive expression "plant or machinery", in marked contrast to the conjunctive phrase "plant and machinery" used in Section 17(5)(c). The restrictive definition in the Explanation to Section 17 applies exclusively to the compound phrase "plant and machinery" and cannot be imported into clause (d). Relying on established common-law tests ( CIT v. Taj Mahal Hotel ; Karnataka Power Corporation v. CIT ), the assessee asserted that a modern commercial shopping mall is an integrated commercial tool of trade without which specialized leasing services cannot be supplied.

4. Holding and Reasoning

The Supreme Court partly allowed the Revenue's appeals, establishing the following core conclusions:

• Constitutional Validity Upheld and Reading Down Rejected: The Court repelled the constitutional challenge to Sections 17(5)(c), 17(5)(d), and 16(4) of the CGST Act, 2017, affirming Parliament's wide economic classification powers. The Court held that because the statutory provisions are plain and unambiguous, the High Court erred in reading down Section 17(5)(d) (Paragraph 64).
• Textual Independence of "Plant or Machinery": The Court held that the expression "plant or machinery" in Section 17(5)(d) cannot be equated with the defined phrase "plant and machinery" in the Explanation to Section 17. The Explanation specifically defines "plant and machinery", but Parliament deliberately chose the disjunctive phrase "plant or machinery" in clause (d). Therefore, the automatic exclusion of buildings in the Explanation does not govern clause (d) (Paragraph 65(b)).
• Adoption of the Functionality Test: In the absence of a statutory definition of the standalone word "plant", the Court held that the functionality test must be applied to determine whether a building is a plant. Drawing from Karnataka Power Corporation and distinguishing Anand Theatres , the Court ruled that if a building is not merely the passive setting or venue of a business, but is an essential tool with which the registered person carries on the taxable activity of supplying leasing or rental services under Schedule II, the building qualifies as a "plant" (Paragraph 65(c)).
• Remand for Factual Adjudication: The Court clarified that whether a shopping mall, warehouse, or other commercial building (excluding hotels and cinema theatres) qualifies as a plant is a pure question of fact that must be decided on evidence in appropriate proceedings. Consequently, the Supreme Court set aside the High Court of Orissa's judgment and remanded Civil Appeals 2948-2949 of 2023 for limited factual inquiry under the functionality test (Paragraphs 66–67).

5. Then and Now: The Pre-GST Lineage

The judgment imports the pre-GST "functionality test" formulated under Section 32 of the Income-tax Act, 1961, into the GST framework. In CIT v. Taj Mahal Hotel (1971), the Supreme Court established that assets serving an indispensable functional role in the taxpayer's operations qualify as plant. A three-judge bench affirmed this in Karnataka Power Corporation v. CIT (2002), ruling that a specially engineered building serving an assessee's technical requirements is a plant, as opposed to a mere convenience or shelter ( CIT v. Anand Theatres (2000)).

In indirect tax, under Rule 2(a) and 2(k) of the CENVAT Credit Rules, 2004, courts applied the "user test" to allow credit on structural steel embedded in machinery foundations ( CCE v. Rajasthan Spinning & Weaving Mills Ltd. (2010)). However, civil structures faced sustained denial of credit ( Bharti Airtel Ltd. v. CCE (2014)). The Supreme Court in Safari Retreats bridges this divide by holding that under GST, where renting an immovable property is deemed an independent taxable service under Schedule II, the immovable structure itself can operate as a functional tool of supply.

6. Allied Law Lens

The Court reaffirmed standard canons of statutory interpretation: the doctrine of reading down is a measure of last resort available only to save a statute from constitutional invalidity, never to alleviate perceived commercial hardship ( B.R. Enterprises v. State of U.P. (1999)).

On the constitutional plane, the Court reiterated the principle in Union of India v. VKC Footsteps India Pvt. Ltd. (2022) that input tax credit is not a common-law or vested property right under Article 300A, but a statutory benefit circumscribed by legislative discretion under Article 14.

Legislative Amendment to Section 17(5)(d) of the CGST Act Post- Safari Retreats Judgment

The Supreme Court’s decision in Chief Commissioner of Central Goods and Service Tax & Ors. v. M/s Safari Retreats Private Ltd.  held that the expression "plant or machinery" in Section 17(5)(d) of the CGST Act is distinct from the defined phrase "plant and machinery" in the Explanation to Section 17. The Court further introduced the functionality test to determine whether a building or civil structure qualifies as a "plant" for input tax credit (ITC) purposes.

In response, Parliament enacted a retrospective amendment to Section 17(5)(d) via Section 124 of the Finance Act, 2025, with effect from 1 July 2017. The amendment substitutes the phrase "plant or machinery" with "plant and machinery", aligning the provision with the restrictive definition in the Explanation to Section 17.

Key Features of the Amendment

1. Statutory Text (Post-Amendment)

Section 17(5)(d) of the CGST Act (as amended) now reads:

"input tax credit shall not be available in respect of—
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course or furtherance of business."

2. Explanation to Section 17 (Definition of "Plant and Machinery")

The Explanation defines "plant and machinery" as:

*"apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises."

This definition applies to both Section 17(5)(c) and Section 17(5)(d) post-amendment.

Effect of the Amendment

1. Retrospective Application (1 July 2017 Onwards)

   • The amendment is curative and clarificatory, applying from the inception of the CGST Act.
   • Courts and tribunals have been directed to re-adjudicate pending cases in light of the amended provision ( Konkan LNG Limited v. Commissioner of State Tax ,  (2025) 31 Centax 419 (Bom.)  ).

2. Overriding the Functionality Test

   • The functionality test (as laid down in Safari Retreats ) no longer applies to Section 17(5)(d).
   • Buildings and civil structures (including shopping malls, warehouses, and resorts) are explicitly excluded from the definition of "plant and machinery", regardless of their functional role in the business.

3. Impact on Pending Litigation

   • Courts have remanded cases for fresh adjudication under the amended provision ( Konkan LNG Limited ,  (2025) 31 Centax 419 (Bom.) ; ESNP Property Builders ,  (2026) 46 Centax 364 (Mad.)  ).
   • The GSTAT, Bengaluru ( Flora Kingdom Farm Resort ,  (2026) 47 Centax 97 (Tri. - GST - Bengaluru)  ) held that post-amendment, no civil structure (including resorts) qualifies as "plant and machinery", even if it satisfies the functionality test.

4. Exceptions Retained

   • Movable assets (e.g., electrical installations, fire hydrants, sprinklers) remain eligible for ITC if they do not form part of an immovable structure ( ADV Industrial Services ,  (2026) 46 Centax 189 (Telangana)  ).
   • Construction not on "own account" (e.g., intended for sale/lease) may still qualify for ITC, subject to factual determination.

Judicial Response to the Amendment

1. Supreme Court (Post-Amendment Rulings)

   • In Konkan LNG Limited ( (2025) 32 Centax 175 (S.C.)  ), the Court set aside a High Court judgment denying ITC on breakwater construction and remanded the case for fresh adjudication under the amended Section 17(5)(d).
   • The Court acknowledged that the Finance Act, 2025 sought to nullify the Safari Retreats ruling but held that pending litigation must be decided under the amended law.

2. High Courts and Tribunals

   • Kerala High Court ( Lulu International ,  (2025) 27 Centax 26 (Ker.)/2025 (97) G.S.T.L. 70 (Ker.)   ) remanded a case for factual determination under the amended provision.
   • Madras High Court ( ESNP Property Builders , 2026 Taxo.online 2618) quashed an assessment order denying ITC, noting that the amendment was not considered by the lower authorities.
   • GSTAT, Bengaluru ( Flora Kingdom Farm Resort ,  (2026) 47 Centax 97 (Tri. - GST - Bengaluru)   ) denied ITC on resort construction, holding that the amended clause blocks credit on all civil structures, regardless of functionality.

Practice Implications

1. For Taxpayers

   • Reassess ITC claims on construction-related expenses in light of the retrospective amendment.
   • Segregate movable assets (e.g., machinery, electrical fittings) from immovable structures (e.g., buildings, civil works) in books of accounts.
   • Preserve evidence (contracts, invoices, BOQs) to distinguish between eligible and ineligible ITC.

2. For Revenue Authorities

   • Reopen assessments where ITC was allowed under the Safari Retreats functionality test.
   • Issue show-cause notices for reversal of wrongly availed ITC with interest under Section 50(3) of the CGST Act.

3. For Advisors

   • Advise clients on voluntary reversal of ineligible ITC to avoid penalties.
   • Challenge demands where the amendment was not applied or where movable assets were incorrectly classified as immovable.

Conclusion

The Finance Act, 2025 has retrospectively amended Section 17(5)(d) to replace "plant or machinery" with "plant and machinery", effectively nullifying the Safari Retreats functionality test. Buildings and civil structures are now excluded from ITC eligibility, regardless of their functional role in the business. Taxpayers and advisors must re-evaluate pending and past ITC claims in light of this curative amendment.

The judgment is a double-edged sword. While it forecloses constitutional challenges and invalidates the sweeping relief granted by the High Court of Orissa, it carves out an evidentiary pathway under the functionality test.   However, by remanding the question of fact, the Court has shifted the battlefield to adjudication. Tax authorities will predictably treat every commercial building as a mere passive "setting" under the Anand Theatres doctrine. Furthermore, taxpayers must prepare for legislative countermeasures: the GST Council has already considered amendments to Section 17(5)(d) to substitute "plant or machinery" with "plant and machinery" to nullify this ruling. Until any statutory amendment takes effect, the functionality test remains the governing standard.

8. Practice Tips

1. Plead the Functionality Test Explicitly: Move away from general cascading arguments in replies to show cause notices. Specifically plead that the premises constitute a functional tool under Karnataka Power Corporation .
2. Build an Evidentiary Engineering Dossier: Place detailed architectural blueprints, heating, ventilation, and air conditioning (HVAC) designs, mechanical load-bearing specifications, and plumbing schematics on record to demonstrate that the property was constructed to specialized technical specifications rather than as standard real estate.
3. Segregate Capital Expenditure in the Books: Maintain separate ledgers and fixed-asset schedules for core civil shells versus dedicated operational systems (e.g., escalators, sub-stations, fire suppression, and building management systems).
4. Preserve Contractor Documentation: Retain itemized contracts, bills of quantities (BOQ), and work completion certificates demonstrating direct functional linkage to the output leasing supply.

Case Snapshot

• Case Name: Chief Commissioner of Central Goods and Service Tax  v. M/s Safari Retreats Private Ltd. .
• Court and Bench: Supreme Court of India; Abhay S. Oka and Sanjay Karol, JJ. (Opinion authored by Abhay S. Oka, J.)
• Case Type and Number: Civil Appeal No. 2948 of 2023 with Civil Appeal No. 2949 of 2023, Writ Petition (Civil) No. 804 of 2022, and connected matters
• Date of Judgment: 3 October 2024
• Neutral / Reporter Citation: 2024 INSC 756; [2024] 10 S.C.R. 793; (2024) 131 GSTR 184 (SC)
• Provisions Involved: Sections 16(1), 16(4), 17(5)(c), 17(5)(d), and Explanation to Section 17 of the Central Goods and Services Tax Act, 2017; Schedule II, Entries 2 and 5 of the CGST Act, 2017.