THE Orissa High Court has delivered a land-mark decision on April 17, 2019, in M/s Safari Retreats Pvt Ltd And Another Vs Chief Commissioner of Central Goods And Service Tax And Others, reported in – 2019-TIOL-1088-HC-ORISSA-GST, wherein, the Court had read down Section 17(5)(d) of the CGST Act, 2017 and has held that, ITC cannot be denied, on the GST paid on goods and services or both, received for construction of an immovable property, that is let/rented out.
For us to better understand the implications arising out of this decision, let’s take a look at the operative part of this judgment, which is reproduced below:
18. We have heard learned counsel for both the sides.
19. The very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation.
Therefore, the contention which has been raised by the learned counsel for the petitioners keeping in mind the provisions of Section 16 (1) (2) where restriction has been put forward by the legislation for claiming eligibility for input credit has been described in Section 16(1) and the benefit of apportionment is subject to Section 17(1) and (2). While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. Further, the petitioner would have paid GST if it disposed of the property after the completion certificate is granted and in case the property is sold prior to completion certificate, he would not be required to pay GST. But here he is retaining the property and is not using for his own purpose but he is letting out the property on which he is covered under the GST, but still he has to pay huge amount of GST, to which he is not liable.
20. In that view, of the matter, in our considered opinion the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in – 2002-TIOL-149-SC-CX-LB (supra), the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.
21. In that view of the matter, prayer (a) is required to be granted. However, we are not inclined to hold it to be ultra vires. Prayer (b) is not accepted.
The writ petition is allowed to the aforesaid extent.
It would seem that the High Court has made a distinction between immovable property retained for self-use and immovable property let out and has allowed ITC, of the GST paid, on the construction of the immovable property that is let out.
The most important question that would arise is whether, this judgment will have an applicability, beyond the state of Orissa, given the fact that the judgment has been given by the High Court having jurisdiction over Orissa. To get an answer to this most important decision, we need to study the decision of the Supreme Court Kusum Ingots v Union of India, – 2004-TIOL-117-SC-CX-LB, wherein, at Para 22, the Apex Court has held as under:
22. The court must have the requisite territorial jurisdiction. An order passed on writ petition questioning the constitutionality of a Parliamentary Act whether interim or final keeping in view the provisions contained in Clause (2) of Article 226 of the Constitution of India, will have effect throughout the territory of India subject of course to the applicability of the Act.
Irrespective of whether Para 22, referred to above, is in the nature of a precedent or an obiter, coming from the Apex Court, this would bind all subordinate Courts, for sure.
It then seems clear that the judgment of the Orissa High Court, reading down Section 17(5)(d) of the CGST Act, 2017, being a parliamentary legislation, will indeed have applicability throughout the territory of India, unless and until, the Supreme Court stays this judgment. It seems that the Central Government would file an SLP in the Supreme Court and seek a stay of this judgment.
In the meantime, in the event that any High Court takes a different view, the decision of the jurisdictional High Court will prevail, in respect of assessees falling under its jurisdiction. In my view, the benefit of this decision of the Orissa High Court would be available to all Developers, Land Owners and Lessors, throughout India, without the need for any of these parties to file a writ petition in their respective High Courts.
The next question that would arise is whether, this decision would also cover Section 17(5)(c) of the CGST Act, 2017? Yes, of course. The language used in Clauses (d) and (c) of Sub-Section (5) of Section 17 use a very similar language and consequently, the benefit of this landmark decision should also extend to Section 17(5)(c).
For some strange reasons, the Government has been trying to stall the flow of credit, vis-à-vis construction of an immovable property that is let out, right from 2008. It came out with the highly controversial circular No. 98/1/2008-ST dated January 4, 2008, in terms of which, cenvat credit of the duties and service tax paid on construction of the immovable property that is let out, was denied. In this Circular, the Board took the view that Commercial or Industrial Construction service or Works Contract service is an input service for the output namely immovable property and since Immovable property is neither subjected to central excise duty nor to service tax, being neither a service nor goods, cenvat credit cannot be taken.
Despite this circular, the Andhra Pradesh High Court in Commissioner of Central Excise, Visakhapatnam-II vs Sai Samhita Storages (P) Ltd – 2011-TIOL-863-HC-AP-CX, categorically held that, cenvat credit is available in respect of cement and TMT bars used for construction of a warehouse, holding that, without the use of these items, the assessee could not provide storage and warehousing services and hence, are entitled to credit of Central Excise duty paid on these items . The decision rendered in Sam Samhita has been followed by the CESTAT in several decisions, notwithstanding the fact that, the Supreme Court has admitted the SLP filed by the Government against Sai Samhita, in 2015. In a recent case, viz. COMMR. OF GST & C. EX., CHENNAI Versus DYMOS INDIA AUTOMOTIVE PVT. LTD – 2018-TIOL-1947-HC-MAD-ST, the Madras High Court has held that, CENVAT credit of the service tax paid on ‘Commercial or Industrial Construction services’ used for constructing a commercial property which was let out, was available, for the period 2008-09.
In the meanwhile, the Government amended the definitions of ‘inputs’ and ‘input services’, as contained in the Cenvat Credit Rules, 2004, with effect from 1-4-2011, which effectively denied credit in respect of construction of an immovable property that is either retained or let out. In effect, it would seem that, all of the CESTAT decisions, reading down the above referred circular dated January 4, 2018, are for the period prior to 1-4-2011 and will not be relevant, in the context of the amended definitions of ‘inputs’ and ‘input services’.
In the context of the persistent efforts of the Government to deny credit in respect of construction of immovable property that is retained or let out, right from 2008 as aforesaid, this decision of the Orissa High Court comes as a huge relief to Developers, Landlords and Lessors of commercial property.
One does hope that the Government take this decision in its stride and does not go for an amendment to Section 17(5), which would send a very wrong signal to Industry in general and the commercial realty sector, in particular. Of course, the Government is entitled to file an SLP and fight this case in the Apex Court and we will wish the Government well.
Developers and other registered taxable persons, who have not availed of ITC under Sections 17(5)(c) and (d) for FY 2018-19, in respect of the construction of the commercial properties that have been let out, would now be entitled to take this credit, on or before the due date for filing the monthly return for September 2019, subject of course, to the unlikely event of the Supreme Court staying this decision.
As regards 2017-18, it would seem that with the time limit for claiming ITC having already expired (April 20, 2019), Developers and other registered taxable persons would unfortunately not be able to claim the ITC benefit, arising out of this decision, for this period.
Of course, Sections 17(5)(c) and (d) of the CGST Act, 2017 only block / deny ITC of the GST paid, for inputs and input services including works contract services used for construction of the immovable property that is let out. These Sections do not deny ITC of the GST paid in respect of inputs and input services that are not directly linked to the construction activity and consequently, irrespective of whether Safari Retreats is sustained by the Apex Court, ITC on inward supplies that are directly not directly used for construction of the immovable property is still available.
(The views expressed are strictly personal)
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