2025 (12) TMI 1721 - AAR - GST

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 ... Admissibility of ITC - goods or services utilized for the construction of warehouse or shed from which storage and warehousing services are provided as furtherance of business or provided on rent - HELD THAT:- The issue before the Supreme Court in Chief Commissioner of Central Goods and Services Tax Vs Safari Retreats Pvt. Ltd. [2024 (10) TMI 286 - SUPREME COURT] was whether the restrictions imposed by Section 17(5)(c) and Section 17(5)(d) for availment of ITC will apply in their case. Section 17(5)(c) restricts ITC on works contract service when supplied for construction of an immovable property, with the exception that they are received by the taxable person for the construction of ‘plant and machinery’, as defined in the explanation to Section 17. Section 17(5)(d) restricts ITC on goods or services or both received by a taxable person for the construction of an immovable property on his own account including when such goods or services or both are used in the course or furtherance of business, with the exception that they are received by the taxable person for the construction of ‘plant or machinery’ - The Supreme Court observed that the expression ‘plant and machinery’ used in Section 17(5)(c) and ‘plant or machinery’ used in Section 17(5)(d) are different and the definition of ‘plant and machinery’ given in the explanation to Section 17 will not apply to the expression ‘plant or machinery’ used in Section 17(5)(d). Coming to the blockage of ITC on the goods or services or both used for the construction of an immovable property on his own account, mentioned in clause (d) of Section 17(5), the Supreme Court held that since the exclusion is only for ‘plant or machinery’, which is not defined, the functionality test has to be applied. The Supreme Court further held that 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. The applicant is not eligible to avail ITC on the Cement, Steel, beam, column etc. and construction services used for construction of their warehouse, which is used for providing storage and warehousing services, or given on lease to a tenant. 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.