Input Tax Credit on Construction Costs: Supreme Court’s Judgment in Safari Retreat’s Case

The Hon’ble Supreme Court’s recent judgment in the case Chief Commissioner of Central Goods and Services Tax & Ors. Vs Safari Retreats Private Ltd. & Ors. – 2024 (10) TMI 286 is a landmark decision that addresses the availability of Input Tax Credit (ITC) on construction costs related to immovable property. While ITC is generally blocked under Section 17(5), clauses (c) and (d) of the CGST Act, the judgment offers a nuanced interpretation of terms such as “plant and machinery” and “plant or machinery,” potentially altering the applicability of ITC in specific cases. This blog explores the judgment, its implications, and grey areas requiring further clarity. GST Registration

Key Issues Considered by the Supreme Court

The Hon’ble Apex Court deliberated on the following questions:

1. Definition Scope: Does the explanation of “plant and machinery” in Section 17 extend to “plant or machinery” used in clause (d) of sub-section (5)?


2. Meaning of “Plant”: How should “plant” be defined in cases where no statutory definition exists?


3. Constitutionality of Section 17(5): Are clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act unconstitutional?

Relevant Provisions of the CGST Act

Section 17(5) restricts ITC availability for:

• Clause (c): Works contract services for constructing immovable property, except when used for further supply of works contract services.


• Clause (d): Goods or services for constructing immovable property on the taxpayer’s account, including business purposes.

The explanation to these clauses defines “construction” to include activities like renovation, repairs, and additions to immovable property.

Key Observations by the Supreme Court

Interpretation of “Plant and Machinery” vs. “Plant or Machinery”:

• The Act defines “plant and machinery” but not “plant or machinery,” indicating intentional legislative distinction.


• The term “plant” requires a dominant functionality test to determine whether a structure qualifies as a plant based on its technical and operational use.

Functionality Test:

• A building constructed to serve specialized technical requirements (e.g., malls for renting or leasing) can be classified as a “plant” and qualifies for ITC.


• However, ITC is disallowed for buildings used for personal or non-commercial purposes.

Classification and Article 14:

• The Court highlighted that clauses (c) and (d) do not meet the test of reasonable classification under Article 14 of the Constitution. The provisions lack intelligible differentia and fail to establish a rational nexus with legislative objectives. GST Filing

Legislative Power:

• ITC is a statutory right, and its scope can be restricted by legislation. Taxpayers cannot claim ITC as a matter of inherent right unless explicitly provided by the statute.

Scope of Clause (c):

• ITC on works contract services is allowed if the immovable property qualifies as “plant and machinery”.


• ITC remains blocked for materials or services used in constructing immovable property other than plant or machinery.

Practical Implications

The judgment opens the door for businesses to claim ITC on certain immovable property constructions, provided specific conditions are met.

Scenarios and Availability of ITC:

Factory Buildings for Manufacturing:

ITC remains blocked under clause (c). However, applying the functionality test could allow ITC claims if the building qualifies as a “plant” essential for production.

Office Buildings for Service Provision:

ITC is generally disallowed. Yet, if the office building supports direct service delivery, such as renting or leasing, ITC may be allowed.

Commercial Properties for Leasing/Renting:

ITC is available when immovable properties are constructed for leasing or renting services, as this aligns with the functionality test established by the Court.

Grey Areas

The judgment leaves unanswered questions about:

• ITC applicability for factory sheds or office buildings indirectly contributing to taxable supplies.


• Specific guidelines for applying the functionality test to determine whether a property qualifies as a “plant.”

While the decision offers some clarity, taxpayers must analyze individual cases to determine ITC eligibility, ensuring compliance with statutory requirements and anticipating potential litigation.

The Supreme Court’s judgment in the Safari Retreat case is a step forward in clarifying ITC eligibility on construction costs. By emphasizing the functionality test and distinguishing between “plant and machinery” and “plant or machinery,” the decision provides taxpayers with opportunities to claim ITC in specific scenarios. However, businesses must carefully assess each case, backed by robust documentation and legal guidance, to avoid disputes and ensure compliance.

As the tax landscape evolves, taxpayers and professionals must stay vigilant to leverage this judgment effectively while navigating the remaining ambiguities in the law.