Supreme Court Ruling On ITC:
The Supreme Court laid down functionality and essentially test for Input Tax Credit (ITC) eligibility under the Goods and Services Tax (GST) regime.
- The verdict was delivered in the Chief Commissioner of Central Goods and Service Tax & Ors. Vs Safari Retreats Case, 2024.
- The Supreme Court (SC) ruled that the real estate sector can claim ITC on construction costs for commercial buildings used for renting or leasing purposes under the functionality and essentially test.
- Earlier ITC was not allowed on such immovable property construction.
- The court clarified that if the construction of a building is essential for providing services like leasing or renting, the building may fall under the category of ‘plant and machinery.’
- This is based on Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017 which permits ITC claims on plant and machinery used in the business of supplying services.
- The court read down the scope of Sections 17(5)(c) and (d) of the CGST Act, 2017 which prohibit ITC claims for construction materials used for immovable property, except for plant or machinery.
- The SC emphasised that determining whether a building like a mall or warehouse qualifies as ‘plant’ under Section 17(5)(d) should be assessed on a case-by-case basis.
- The business nature and the role of the building in the registered person’s business are key factors in this determination.
Functionality and Essentially Tests:
- Functionality Test: It will evaluate whether the building plays a role in the supply of services, akin to the function of plant and machinery in a factory.
- Essentially Test: The SC held that procurement of goods or services must be directly essential to business operations.
- It means that only those goods and services that are directly needed for constructing or developing property can be claimed for tax benefits or input tax credit (ITC). E.g., cement, steel etc.
