The Supreme Court has ruled that if the construction of a building is essential for providing services such as leasing or renting, it could fall under the "plant" exception to Section 17(5)(d) of the CGST Act.

This section prohibits claiming input tax credit (ITC) for materials used in the construction of immovable property, except plant and machinery. The court said a functionality test must be applied to determine if the building qualifies as a plant.

It said the functionality test must be applied on a case-by-case basis to determine whether a building qualifies as a plant for tax purposes.

Sudipta Bhattacharjee, partner at Khaitan & Co said: "While determining whether a mall, hotel, jetty, breakwater or warehouse qualifies as a ‘plant or machinery’ will remain a factual question, the greatest positive is that the court has categorically held that there is no blanket restriction against input credit/set-off of the GST cost."

Abhishek Jain, indirect tax head & partner, KPMG, sais: “This ruling, while upholding the constitutional validity of input tax credit restrictions on the construction of immovable property, opens the door to interpretations of what nature of immovable property, basis the functionality test could qualify as “plant”, which if held in affirmative could greatly benefit relevant industries."

In the case of Safari Retreats Pvt. Ltd. and another, the petitioners constructed a shopping mall in Bhubaneswar with the intent of leasing it to tenants.

They incurred expenses on goods and services and paid GST on these purchases. They sought to claim ITC. Tax authorities denied the ITC based on Section 17(5)(d), which restricts ITC for goods and services used in the construction of immovable property for one's own account.