2024 (10) TMI 286 - SC - GST

ITC exclusions for works contracts and 'plant or machinery' interpretation upheld; explanation not applied; buildings may be plant

Whether clauses (c) and (d) of Section 17(5) CGST Act are constitutionally valid: Court held ITC is a legislative creation and clauses may exclude ... Plant or Machinery - Input Tax Credit (ITC) - Constitutional validity of clauses (c) and (d) of sub-section (5) of Section 17 of the Central Goods and Services Tax Act, 2017 - Interpretation of the expression 'plant or machinery' in Section 17(5)(d) of the CGST Act - HELD THAT:- There is no scope to give any meaning to clause (c) of Section 17(5) other than its plain and natural meaning. The expression “plant and machinery” has been specifically defined in the explanation of Section 17. Works contract service has been defined under the CGST Act. We cannot add anything to clause (c) or subtract anything from clause (c). ITC is a creation of legislature. Therefore, it can exclude specific categories of goods or services from ITC. Exclusion of the category of works contracts by clause (c) will not, per se, defeat the object of the CGST Act. Whether the explanation that lays down the meaning of the expression “plant and machinery” in Section 17 will apply to the expression “plant or machinery” used in Section 17 (5)(d)? - HELD THAT:- The explanation to Section 17 defines “plant and machinery”. The explanation seeks to define the expression “plant and machinery” used in Chapter V and Chapter VI. In Chapter VI, the expression “plant and machinery” appears in several places, but the expression “plant or machinery” is found only in Section 17(5)(d). If the legislature intended to give the expression “plant or machinery” the same meaning as “plant and machinery” as defined in the explanation, the legislature would not have specifically used the expression “plant or machinery” in Section 17(5)(d). The legislature has made this distinction consciously. Therefore, the expression “plant and machinery” and “plant or machinery” cannot be given the same meaning. It may also be noted here that the expression ‘plant or machinery’ is used in dealing with a peculiar case of goods or services being received by a taxable person for the construction of an immovable property on his own account, even when such goods or services or both are used in the course of furtherance of business. Therefore, if the expression “plant or machinery” is given the same meaning as the expression “plant and machinery” as per the definition contained in the explanation to Section 17, violence done to the words used in the statute. While interpreting taxing statutes, it is not a function of the Court to supply the deficiencies. What meaning should be given to the expression “plant or machinery”? - HELD THAT:- When the legislature uses the expression “plant and machinery,” only a plant will not be covered by the definition unless there is an element of machinery or vice versa. This expression cannot be read as “plant or machinery”. That is so clear from the explanation in Section 17, which says that plant and machinery means apparatus, equipment and machinery fixed to the earth by foundation or structural support that are used for making outward supply of goods or services or both. The expression includes such foundation and structural support fixed to the earth. However, the definition excludes land, buildings or any other civil structure. The question whether a mall, warehouse or any building other than a hotel or a cinema theatre can be classified as a plant within the meaning of the expression “plant or machinery” used in Section 17(5)(d) is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business. If the construction of a building was essential for carrying out the activity of supplying services, such as renting or giving on lease or other transactions in respect of the building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the CGST Act, the building could be held to be a plant. The writ petitions are rejected subject to the interpretation of clause (d) of sub-section (5) of Section 17 of the CGST Act. Issues Involved:1. Interpretation of the expression 'plant or machinery' in Section 17(5)(d) of the CGST Act.2. Constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act.Detailed Analysis:Issue 1: Interpretation of 'Plant or Machinery'- Background: The case revolves around the interpretation of the phrase 'plant or machinery' in Section 17(5)(d) of the CGST Act, which differs from 'plant and machinery' defined in the explanation to Section 17. The distinction is crucial as it determines the availability of Input Tax Credit (ITC) for construction of immovable property.- Court's Analysis: The court noted that the legislature intentionally used 'plant or machinery' in Section 17(5)(d), distinguishing it from 'plant and machinery.' The explanation defining 'plant and machinery' does not apply to 'plant or machinery,' as the two expressions are distinct. The expression 'plant or machinery' should be interpreted using the functionality test, which considers whether a building serves as an essential tool for business operations.- Conclusion: The court concluded that the expression 'plant or machinery' should be interpreted based on its ordinary commercial meaning, considering the functionality test. This interpretation allows for the possibility that certain buildings, like malls or warehouses, could qualify as 'plant' if they are essential for business operations, thus permitting ITC.Issue 2: Constitutional Validity- Background: The constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) was challenged on the grounds of violating Articles 14, 19(1)(g), and 300A of the Constitution of India. The assessees argued that these provisions create unreasonable classifications and deny ITC unjustly.- Court's Analysis: The court emphasized the wide latitude granted to the legislature in matters of taxation, allowing for reasonable classification. The court found that immovable property and immovable goods form a distinct class under GST, and the exclusion of ITC for these categories is justified to prevent encroachment on state powers under Entry 49 of List II.- Court's Conclusion: The court upheld the constitutional validity of the challenged provisions, stating that the classification is based on intelligible differentia with a rational nexus to the legislative objective. The court rejected the argument of discrimination and found no violation of Articles 19(1)(g) and 300A.Conclusion:- Interpretation of 'Plant or Machinery': The expression 'plant or machinery' in Section 17(5)(d) is distinct from 'plant and machinery' and should be interpreted using the functionality test. This allows certain buildings to qualify for ITC if they are essential for business operations.- Constitutional Validity: The court upheld the constitutional validity of clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act, finding the classification reasonable and justified.- Remand: The case was remanded to the High Court to determine whether the shopping mall in question qualifies as a 'plant' under the functionality test. Each case must be decided on its merits, applying the principles laid out in this judgment.