The landmark decision of the Hon’ble Supreme Court of India (“SC”) in Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., had provided relief to many taxpayers involved in the construction of immovable property intended for generating rental/lease income. The literal interpretation of Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (“the Act”) adopted by the judgement had also brought hope to taxpayers who believed that they were entitled to Input Tax Credit (“ITC”), especially since the SC had opined that the claim for ITC eligibility under Section 17(5)(d) of the Act with respect to ‘plant’ should be determined on a case-by-case based on a ‘functionality test’.
The controversy arose due to the language of Section 17(5)(d) of the Act, which used the phrase “plant or machinery” instead of “plant and machinery”, which is defined in Section 17 and used in Section 17(5)(c) of the Act. However, the relief was short-lived as the legislature thought it just and appropriate to revisit the language and make a retrospective amendment to uniformly restrict ITC on “plant and machinery” under both the sub-clauses of Section 17(5) of the Act.
The decision of the SC was an outcome of, inter alia, a challenge to the decision of the Hon’ble Orissa High Court (“OHC”). The writ petitioner, Safari Retreats Private Limited, had approached revenue authorities seeking credit of the tax paid with respect to inputs and input services procured by the petitioner for the construction of a mall intended to be leased out to various retailers. However, the petitioner was advised to deposit tax without claiming ITC in view of the restriction in Section 17(5)(d) of the Act and was warned of penal consequences for non-compliance.
The OHC observed that the Act aims to provide uniformity in the levy and collection of tax and prevent double taxation. The OHC recognized that blocking the petitioner from claiming ITC on inputs used in the construction of a mall intended to be leased out (taxable under GST) frustrates the very purpose of the Act. The OHC read down Section 17(5)(d) of the Act as the very purpose of credit is to give benefit to the assessee and consequently extended the benefit of ITC to assessees but found no reason to strike it down.
The Revenue agitated the matter before the SC and the matter was taken up along with several batch matters where the vires of certain provisions of the CGST were also challenged. The SC declined to hold the provision ultra vires the Constitution. However, the Court refused to accept that the term “plant or machinery” used in Section 17(5)(d) must be read as “plant and machinery”, which is defined and used in other places of the Act. Essentially, the Court held that even a building may be considered a “plant” after an examination of its intended function on a case-by-case basis. This would not apply to cases where the building is constructed by the assessee “on his own account” (interpreted by the Court as either “personal use” or used by the registered person as “a setting in which business is carried out”). The Court observed that when a property is used for further supplies – such as renting or accommodation services, sale, or license – the same cannot fall under the expression “on his own account”.
The foundation of the rule of law is that the Courts are the final arbiter in matters of statutory interpretation and discerning parliamentary intent. While coming to the aforesaid conclusion, the Court was mainly interested in the question of whether the term “plant or machinery” was inadvertently used in Section 17(5)(d) of the Act. The Department argued that it was merely an error and that the expression does not appear anywhere else in the Act. However, the assessees pointed out that in the GST model law, the term “plant and machinery” is used in Section 16(9)(d) (analogous to Section 17(5)(d) of the Act), which shows clear parliamentary intent and the change from “and” to “or” is an expression of that intent. The Court agreed with this view and, as the final arbiter in discerning parliamentary intent, held categorically that distinction between “or” and “and” is made consciously by the legislature and that they cannot be equated.
The implications of the decision are significant as assessees were not required to bear dual tax burden in cases where certain immovable properties were constructed for the purpose of further supplies, as the ITC on the procurement was available for discharging the outward liability. Earlier, with the blockage of ITC, this burden would get passed on to the consumer from whom tax is also collected, which resulted in a cascading effect of tax.
However, the relief is short-lived since the recommendation of the 55th GST Council meeting has been implemented through clause 119 of the Finance Bill, 2025. It substitutes the expression “plant or machinery” with “plant and machinery” with retrospective effect from July 1, 2017. A new Explanation has been added to Section 17(5)(d), overriding any judgement/ order/ decree and creates a deeming fiction that the Section has always referred to “plant and machinery." Additionally, the Department in early January 2025 filed a review petition before the SC seeking the reversal of the Court's decision.
The principle of the legislature overruling decisions of the SC is fairly settled. Unless the amendment to the underlying law is manifestly arbitrary or fails to cure the ‘defect’ identified by the Court, it would amount to usurpation of judicial powers and hence would be unconstitutional. Broadly, there are two tests a law needs to pass judicial scrutiny viz., competence of the government to impose tax under Schedule VII of the Constitution (which would now have to be read as Article 246A, in the context of GST laws) and the taxation not being discriminatory, unduly burdensome and harsh, creating a restriction on the right to carry on business. As far as constitutionality is concerned, the SC in Safari Retreats (supra) chose not to interfere with the same by holding that it was within legislative competence to prescribe the restriction. Hence, the retrospective amendment can be construed to be within legislative competence. With respect to the other test, it will now be open for the Courts to consider whether the amendment has created any unintended consequences, which has imposed additional burden on the taxpayer.
Retrospective amendments and ‘clarifications’ are effective albeit rare measures taken by the legislature, especially in taxation. For example, in CIT v. Smifs Securities Ltd. where the government retrospectively denied depreciation on goodwill through the Finance Act, 2021. Another example, though unsuccessful, is in the case of Vodafone International Holdings BV v. UOI, where the government sought to retrospectively apply look-through provisions to tax the Vodafone-Hutchinson transaction. The government maintained that the look-through provisions have always been under the scheme of the Income-tax Act, 1961, and the amendment was merely clarificatory. This did not hold water as the Permanent Court of Arbitration held that the stance of the Indian government was in violation of the Fair and Equitable Treatment of the India-Netherlands Bilateral Investment Treaty.
A few other examples are the retrospective insertion of Section 7(1)(aa) in the Act through the Finance Act, 2021 to overcome the decision of the SC in State of WB v. Calcutta Club, and the retrospective empowerment of DRI officers as ‘proper officers’ to regularize SCNs already issued through Section 97 of the Finance Act, 2022 to overcome the judgement of the SC in Canon India v. Commr. of Customs.
The principles of legislative overruling of judgements are clear but must pass judicial muster on a case-by-case basis. The effect of judgments may be nullified by removing the basis of the judgment, but the retrospective amendment cannot be arbitrary or unreasonable. The proposed amendment will have to bear additional scrutiny as it takes away a benefit granted by a fiscal statute retrospectively.
In our view, while the legislature has the power to amend the law, such amendments must be made prospectively, in accordance with the doctrine of separation of powers and in recognition of the principle of comity between institutions. Following the OHC judgment in 2019, many assessees who opted to claim ITC instead of depreciation on the tax component of the cost of capital goods will now be required to repay the ITC, along with interest and (possibly) a penalty. However, the corresponding benefit of depreciation under the Income Tax Act will no longer be available, as the time limit for amending returns would have lapsed, leaving the assessees without remedy. This lacuna cannot go unaddressed and may lead to another round of litigation.
About the authors: Rishab J is an Associate Partner and Prahalad Sriram is an Associate at Shivadass & Shivadass (Law Chambers).
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