Case Note & Summary
The case involves a challenge to the constitutional validity of clauses (c) and (d) of sub-section (5) of Section 17 of the Central Goods and Services Tax Act, 2017 (CGST Act). The appellants, Chief Commissioner of Central Goods and Service Tax and others, appealed against the judgment of the Orissa High Court which had read down Section 17(5)(d) to allow Input Tax Credit (ITC) on construction of a shopping mall that was let out on rent. The respondents, M/s Safari Retreats Private Ltd. and others, had constructed a shopping mall and accumulated ITC of over Rs. 34 crores on goods and services used in construction. They sought to avail ITC against the GST payable on rental income. The High Court held that Section 17(5)(d) should be read down to allow ITC, relying on the decision in Eicher Motors Limited v. Union of India. The Supreme Court considered the appeals and several writ petitions challenging the validity of Section 17(5)(c) and (d). The assessees argued that the provisions violate Articles 14, 19(1)(g), and 300A of the Constitution, as they deny ITC on business expenditure, treat unequals as equals, and perpetuate cascading effect of tax. They contended that there is no intelligible differentia between construction for sale and construction for renting, and that the provisions are vague. The Court analyzed the scheme of the CGST Act, noting that ITC is available only when the input is used in the course or furtherance of business and the output supply is taxable. Section 17(5)(c) and (d) specifically deny ITC on works contract services for construction of immovable property (other than plant and machinery) when used for supply of services after completion. The Court held that the classification is based on the intelligible differentia of the nature of the output supply and the break in the credit chain. The denial of ITC is reasonable and in public interest, as the construction of immovable property is a capital expenditure and not directly consumed in the rental service. The Court also held that ITC is a statutory right, not a constitutional right, and the provisions do not violate Article 300A. The Court allowed the appeals, set aside the High Court judgment, and dismissed the writ petitions, upholding the constitutional validity of Section 17(5)(c) and (d).
Headnote
A) Constitutional Law - Article 14 - Classification - Intelligible Differentia - Section 17(5)(c) and (d) of the Central Goods and Services Tax Act, 2017 - The classification between assessees constructing immovable property for sale (denied ITC) and those constructing for renting (also denied ITC) is based on the intelligible differentia of the nature of the output supply (sale vs. renting) and the break in the credit chain. The provision does not treat unequals as equals. (Paras 1-10) B) Constitutional Law - Article 19(1)(g) - Reasonableness of Restriction - Section 17(5)(c) and (d) of the Central Goods and Services Tax Act, 2017 - The restriction on ITC is reasonable and in public interest as it prevents cascading only when there is a taxable output supply. Renting of immovable property is a taxable supply, but the input used in construction is capital in nature and not directly consumed in the rental service. The provision does not violate Article 19(1)(g). (Paras 11-20) C) Constitutional Law - Article 300A - Right to Property - Section 17(5)(c) and (d) of the Central Goods and Services Tax Act, 2017 - ITC is a statutory right, not a constitutional right. Denial of ITC does not amount to deprivation of property without authority of law. The provision is within the legislative competence and does not violate Article 300A. (Paras 21-25) D) Goods and Services Tax - Input Tax Credit - Works Contract - Section 17(5)(c) and (d) of the Central Goods and Services Tax Act, 2017 - The dominant intention test is not applicable as the CGST Act specifically treats works contract as supply of services. The immovable property created is not a service but a capital asset. Denial of ITC on construction of immovable property used for renting is valid. (Paras 26-30)
Issue of Consideration
Whether clauses (c) and (d) of sub-section (5) of Section 17 of the Central Goods and Services Tax Act, 2017 are constitutionally valid and whether they can be read down to allow Input Tax Credit on goods and services used in construction of immovable property which is subsequently let out on rent.
Final Decision
The Supreme Court allowed the appeals filed by the Revenue, set aside the judgment of the Orissa High Court dated 17th April 2019, and dismissed all the writ petitions. The Court upheld the constitutional validity of Section 17(5)(c) and (d) of the Central Goods and Services Tax Act, 2017, holding that the denial of Input Tax Credit on construction of immovable property used for renting is valid and does not violate Articles 14, 19(1)(g), or 300A of the Constitution.
Law Points
- Input Tax Credit
- Constitutional validity
- Section 17(5)(c)
- Section 17(5)(d)
- Central Goods and Services Tax Act
- 2017
- Article 14
- Article 19(1)(g)
- Article 300A
- Works contract
- Renting of immovable property
- Intelligible differentia
- Nexus with object
- Cascading effect
- Tax neutrality
