ITC on warehouse construction inputs for storage or leasing u/s17(5)(d) blocked after functionality test deems immovable property

Whether ITC is blocked under s.17(5)(d) of the CGST Act on goods and services used to construct a warehouse/shed for providing storage and warehousing services or leasing was the dominant issue. Applying the SC's holding that, unlike "plant and machinery" in s.17(5)(c), the expression "plant or machinery" in s.17(5)(d) is undefined and therefore requires a functionality test, the AAR treated the warehouse as an immovable property constructed on the applicant's own account and not as "plant or machinery" for this purpose. Consequently, ITC on cement, steel and other structural inputs and construction services used for construction of the warehouse was held inadmissible.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether input tax credit is admissible on goods and services used for construction of a warehouse/shed intended to be used for providing storage and warehousing services or for leasing/renting, in light of the statutory blocking under Section 17(5) and the post-Finance Act, 2025 amendment to Section 17(5)(d).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): ITC on goods and services used in construction of warehouse/shed used for outward supply of storage/warehousing services or for leasing

Legal framework (as discussed by the Court): The Court examined Section 17(5)(c) and Section 17(5)(d) dealing with blocked credits relating to construction of immovable property. It considered the statutory definition of "plant and machinery" in the Explanation to Section 17, which expressly excludes "land, building or any other civil structures." The Court also considered the legislative amendment made by Section 124 of the Finance Act, 2025, which substituted the words "plant or machinery" with "plant and machinery" in Section 17(5)(d) with effect from 01.07.2017, and added an explanation directing that references to "plant or machinery" in clause (d) shall be deemed to have always meant "plant and machinery," notwithstanding anything contrary in any judgment, decree or order; the notified effective date of these provisions was noted.

Interpretation and reasoning: The Court held that, for works contract services used for construction of an immovable property, the governing expression is "plant and machinery" as used in Section 17(5)(c), and the statutory definition applies. Because that definition excludes buildings and civil structures, a warehouse/shed cannot fall within "plant and machinery" for clause (c), and ITC on works contract services for constructing the warehouse/shed remains blocked. For clause (d), although the applicant relied on the approach discussed in the Supreme Court decision regarding interpretation of "plant or machinery," the Court found that the Legislature subsequently amended Section 17(5)(d) to replace "plant or machinery" with "plant and machinery" retrospectively from 01.07.2017 and added a deeming explanation overriding contrary judicial interpretations. Consequently, clause (d) must be read using the defined meaning of "plant and machinery," which again excludes buildings and other civil structures. A warehouse/shed being a building/civil structure, ITC on goods (such as cement, steel, beams, columns) and on construction services used for its construction is therefore blocked even if the warehouse is used in the course or furtherance of business, including providing storage and warehousing services or being leased to tenants.

Conclusion: ITC is not admissible on (a) works contract services for construction of the warehouse/shed, and (b) goods or services used for construction of the warehouse/shed on own account, even when the constructed warehouse/shed is used for providing taxable storage/warehousing services or is rented/leased, because Section 17(5)(c) and Section 17(5)(d), as amended, block such credit for buildings/civil structures.

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