Introduction

The decision of the Supreme Court in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd. 2024 INSC 756 marks a defining moment in the evolution of Goods and Services Tax (GST) jurisprudence in India, particularly in relation to the scope and limits of the input tax credit (ITC) on the construction of immovable property. The case addresses the constitutional validity and interpretative contours of Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (CGST), which blocks ITC on goods and services used for construction of immovable property other than plant or machinery. This research paper analyzes the broader doctrinal and policy implications of adopting a functional test to determine ITC eligibility. The paper argues that while the Supreme Court upheld legislative competence, its interpretative approach injects commercial realism into GST law with future uncertainty. The litigation raised fundamental questions concerning statutory interpretation, constitutional validity, and the conceptual distinction between capital assets and business infrastructure under GST law.

The Factual Milieu

Safari Retreats Pvt. Ltd. undertook the construction of a shopping mall with the sole commercial objective of leasing out retail spaces to tenants. Under GST, renting out real estate for business purposes is a taxable supply, which means that the person who rents it out has to pay output tax. During construction, they incurred substantial GST on inputs such as cement, steel, works contract services, architectural services, and other construction-related supplies.

Upon completion, the assessee accumulated a large pool of unutilized ITC and sought to avail the same against GST payable on rental income. The Department denied the claim by invoking Section 17(5)(d) of the CGST Act, treating the shopping mall as immovable property constructed on the assessee’s own account. Aggrieved by this, the assessee challenged the denial before the Orissa High Court, questioning both the interpretation and constitutional validity of the provision.

Issues Raised

1. Whether ITC can be claimed on GST paid during construction of immovable property that is later leased out and on which GST is payable, despite the restriction in Section 17(5)(d) of the CGST Act.
2. Whether Sections 17(5)(c) and (d)—which block ITC on immovable property—violate Articles 14 (equality before law) and 19(1)(g) (right to profession/business) of the Constitution by arbitrarily denying ITC to taxpayers.
3. Whether a shopping mall used exclusively for providing taxable leasing services can be classified as “plant” for the purpose of availing ITC.

The Assessee, Safari Retreats Pvt. Ltd., presented its contentions.

The assessee contended that denial of ITC defeats the fundamental design of GST as a Value-Added Tax (VAT). It was contended that if output supplies (leasing services) are subject to taxation, the inputs utilized to develop the infrastructure facilitating such supplies should qualify for Input Tax Credit (ITC). Blocking ITC in such circumstances will result in tax cascading, increasing the cost of business and distorting neutrality.

The assessee further argued that Section 17(5)(d), if interpreted literally, creates an unreasonable classification between businesses using movable assets and those using immovable assets for taxable supplies. It was submitted that it violates Article 14. Additionally, the restriction was claimed to impose an unreasonable restriction on the freedom to carry on business under Article 19(1)(g).

The assessee further argued for a purposive reading of the term “plant,” asserting that a shopping mall functions as an essential business apparatus for providing leasing services and therefore qualifies as a plant under functional jurisprudence developed in earlier tax cases.

The Revenue, represented by the Chief Commissioner of CGST, contended that ITC is a statutory concession, not a constitutional right.

The Revenue maintained that ITC is a statutory concession, not a constitutional right. The legislature is competent to prescribe conditions and exclusions, and Section 17(5)(d) represents a conscious policy decision to block ITC on immovable property to protect revenue.

It was argued that immovable property, by its very nature, stands excluded from the concept of plant or machinery under the CGST framework. Any attempt to treat a building as a plant would amount to judicial rewriting of the statute. The Revenue also asserted that the classification under Section 17(5) is reasonable and bears a rational nexus to legislative objectives.

Judgment of the Orissa High Court, dated 17.04.2019, W.P.(C) No. 20463 OF 2018,

The Orissa High Court ruled in favor of the assessee, holding that denial of ITC on construction of a mall used for leasing defeats the objective of GST. The Court noted that the taxation of rental income necessitates the inclusion of construction inputs in a continuous taxable chain, making them eligible for credit.

The High Court read down Section 17(5)(d), holding that it should not apply where the immovable property is used for providing taxable output services. It found the provision, if applied mechanically, to be arbitrary and violative of Articles 14 and 19(1)(g).

Judgment of the Supreme Court, dated 3.10.2024, C.A. 2948 of 2023.

The Supreme Court partly reversed the High Court’s reasoning. It upheld the constitutional validity of Sections 17(5)(c) and (d), reiterating that ITC is a statutory benefit subject to legislative control. The Court held that the classification of immovable property for ITC exclusion is based on intelligible differentia and does not violate constitutional guarantees.

However, the Court introduced a crucial interpretative nuance. It held that the expression “plant” in Section 17(5)(d) must be interpreted using a functional test rather than a narrow structural test. If an immovable structure is so integrally connected to the business that it constitutes an apparatus for carrying out taxable supplies, it may qualify as a plant.the case was remanded to the Orissa High Court to apply the functional test to the shopping mall.

Grounds of Dismissal of Review Petition by Supreme Court, dated 20.05.2025.

The Supreme Court dismissed the revenue’s review petition stating “No error apparent existed and the interpretation adopted was deliberate and reasoned”, reaffirming its earlier interpretation that ITC eligibility depends on whether the constructed asset functions as a plant in the context of the taxpayer’s business.

Critical Analysis: Doctrinal Impact of Functional Test on ITC Jurisprudence

Prior to Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., ITC jurisprudence under GST largely adopted a literal and exclusionary approach toward immovable property. Section 17(5)(d) was applied mechanically, resulting in wholesale denial of ITC for construction-related inputs, even where the constructed asset was used exclusively for taxable outputs such as leasing, warehousing, or logistics.

The functional test examines whether an asset, irrespective of its immovable character, functions as an essential apparatus or tool for carrying on the taxable business activity. The Court rejected the assumption that all immovable property is inherently excluded from the concept of “plant.” Instead, it held that if an immovable structure is so integrally connected to the business that taxable supplies cannot be made without it, such a structure may qualify as a plant for the purposes of ITC.

Its true impact will depend on how consistently courts and tax authorities apply the test and whether the legislature chooses to accept, refine, or legislatively override this judicial innovation. In its present form, the functional test is both a corrective tool and a source of future contestation in Indian GST jurisprudence.

Conclusion

The Supreme Court's decision shows that it carefully weighed the goals of the law against the facts of the case. The Court upheld the constitutionality of the law, which showed that it respected the power of Parliament to make tax policy. Simultaneously, the functional test prevents Section 17(5)(d) from acting as an inflexible tool that automatically denies credit in all construction-related cases. The functional test adopted in Safari Retreats represents a pivotal yet precarious evolution in ITC jurisprudence. It restores purposive interpretation and economic realism to GST law but at the cost of certainty and administrative ease.