GST Dept. Files Review Petition on Safari Retreats SC Ruling following 55th GST Council decision to Amend 'Plant and Machinery' Provisions

The GST Department has filed a review petition in the Supreme Court to challenge the landmark decision in the Safari Retreats Pvt. Ltd. case. In the recent 55th GST Council meeting, the council decided to amend the GST law retrospectively to correct what it described as a "drafting error" in the legal provisions related to Input Tax Credit ( ITC ).

Safari Retreats Case Ruling

In the Safari Retreats case, the Supreme Court ruled that builders and developers could claim ITC on the cost of constructing buildings if those buildings were used to provide taxable services like renting or leasing.

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The court applied what is known as the “functionality test” to make this decision. The functionality test examines whether building construction is essential for business activities such as leasing. If it is, the building can be considered a "plant," which makes it eligible for ITC.

Businesses widely welcomed this ruling but raised concerns for the GST department. The department argued that the judgment could lead to revenue losses and might not align with the law's original intent.

The "Plant or Machinery" Debate

The main issue in the Safari case was the wording of Section 17(5)(d) of the CGST Act, 2017. This section restricts businesses from claiming ITC on immovable property like buildings but the law uses the phrase “plant or machinery” in this clause, other parts of the GST law consistently use the term “plant and machinery.”

The department argued that the use of “or” was an error in the drafting of the law. It claimed that the term “plant and machinery” was intended to be used here which would have restricted the broader ITC claims allowed under the Supreme Court’s ruling.

On the other hand, the petitioner (Safari Retreats) argued that the phrase “plant or machinery” was intentionally included by the legislature in Section 17(5)(d). They pointed out that earlier drafts of the GST law had used the phrase “plant and machinery”, but this was deliberately changed before the law was finalized.

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CBIC Chairman Acknowledges Drafting Error

During a press conference after the 55th GST Council meeting, CBIC Chairman Sanjay Kumar Agarwal confirmed that there had been a drafting mistake in the law. He explained, “The term ‘plant and machinery’ appears at 11 places in the GST Act but in one place, it was incorrectly written as ‘plant or machinery.’ This error is now being corrected with retrospective effect from July 1, 2017.”

To resolve the issue, the GST Council has proposed a retrospective amendment to the CGST Act. The amendment will replace the term “plant or machinery” with “plant and machinery” in Section 17(5)(d). The goal of this change is to restrict ITC claims in line with the government’s original intent and prevent broader interpretations, such as those in the Safari Retreats case.

By filing the review petition, the GST Department seeks to support this amendment and ensure it is upheld as constitutional.

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