SAFARI RETREAT: A PARADOX
If the total of A & B is equal to C and one has to find out what is A we write C-B=A. This is a simple thing, which was taught to all in the early school days. A lot is being said about the judgment of Hon’ble Supreme Court in case of Safari Retreats. There are experts, learned advocates and judges who are wise, wiser and wisest. We have been taught not to question the wisdom of such wise, wiser and wisest persons. Before saying anything about the judgment, I googled to check whether one can criticize the judgment and it was found that yes, a judgment can be criticized. Before proceeding further, I would say that the judgment is being analyzed here and is not being criticized. In my long career, in indirect taxation, I have never commented on any judgment of Tribunal/High Court/Supreme Court. We are not supposed to comment and have been taught to bow our heads. As I had been seeing the head notes, extracts, comments about the judgment on social media, I was tempted to read the complete judgment. Yesterday, I read all the 96 pages of the judgment.
As the facts of the case are obviously well known, there is no need to state the facts again here. The issue involved was as to whether a registered person can avail the Input Tax Credit (ITC) in respect of goods or services or both supplied/used for construction of an immovable property. This issue came up in view of two clauses (c) & (d) of section 17(5) of CGST Act, 2017. The ITC is blocked in view of these two clauses. It was observed in the judgment that both the clauses have exceptional clauses where the ITC is not deniable. Clause (c) uses the words “plant and machinery” and clause (d) “plant or machinery”. In the explanation at the end of section 17 the expression plant and machinery has been defined which is as under-
“Explanation. — For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and
machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.”
Here, while defining “plant and machinery” land, building or any other civil structure has been excluded. In other words, the exception is not applicable to land and building. There is however no definition given, anywhere in the Act for “plant or machinery”. It was also observed that this differentiation pertaining to “plant and machinery” and “plant or machinery” is intentional and the legislation wants to
treat both the exceptions differently. The issues before the Hon’ble Supreme Court were as follows:
1. Whether the definition of “plant and machinery” given in section 17 is applicable to “plant or machinery”?
2. If it is not applicable to “plant or machinery”, what is the meaning of the word “Plant”?
3. Whether section 17(5) (c)& (d) are unconstitutional?
Issue no. 3 above has been held to be constitutional and is nor the subject matter of the discussion.
At para 31 of the judgment, the clauses (c) & (d) of section 17(5) has been analyzed. It was observed that there are two exceptions in clause (d). These are:
I. When goods or services or both are received by a taxable person to construct plant or machinery; and
II. When goods or services or both are received by a taxable person for construction of an immovable property made not on his account.
The ASG, at one stage, had submitted that “or” shall be read as “and” which is found to be not acceptable. And the court observed that if the same meaning is given “we will be doing violence to the words in the statute”. At para 46 of the judgment, it was observed that plant or machinery means, it is either a plant or a machinery and that this meant there could be plant that is an immovable property. Plant, however, is not defined in the CGST Act or Rules anywhere.
The Hon’ble Supreme Court referred two contradictory judgments,
1. Karnataka Power Corporation; and
2. Anand Theaters
In first judgment, a hotel has been considered as a plant whereas in second judgment, a theater has not been considered as a plant. Judgment in case of Karnataka Power Corporation being a larger bench decision is held to prevail upon the judgment of Anand Theaters.
At para 53 of the judgment, it was observed that “functionality test” in section 17 (5) (d) cannot be given restricted meaning provided in the definition of “Plant and Machinery” (which excludes land & building). It was held that a building can also be treated as a “Plant”. At para 65 the conclusion was summarized, as follows:
a. Challenges to unconstitutional validity of section 17(5) (c) & section 17(5) (d) and section 16(4) not established.
b. “Plant or Machinery” and “Plant and Machinery” cannot be given the same meaning.
c. The functionality test is to be applied in each case on the basis of facts.
At para 66, finally the matter was remanded to high court for the limited purpose of deciding whether shopping mall is a “Plant” in terms of section 17(5) (d) of CGST Act, 2017.
So far as the observations and conclusion of the hon’ble court have been mentioned. The submissions of the ASG that “or” should be read as “and” has not been found acceptable. The two expressions “Plant and Machinery” in clause (c) and “Plant or Machinery” in clause (d) are drafted with an intention. There is no omission and the submissions of ASG have been rightfully not found acceptable. In whole of the
judgment one thing has been over-looked whether, deliberately or otherwise. It appears that the distinction between clause (c) & (d) should have been brought to the knowledge of the court in proper prospective which perhaps has not been done.
Clause (c) talks about supply of works contract which has been defined at section 2(119) of CGST Act, 2017 the same is reproduced hereunder-
“(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement,
modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;”
In supply of works contract it is a combination of supply of goods as well as services. A complete contract is given. It is better for understanding to restrict this works contract to supply for construction of “Plant and Machinery”. Here the supply would include the supply of goods i.e. Plant and Machinery, it also includes erection, installation, fabrication, fitting out and commissioning. This supply cannot be
segregated because the contract is for supply of all goods and services required for construction of plant and machinery.
Coming to clause (d) it may be seen that it pertains to supply of goods or services or both to a taxable person for construction of immovable property. Restricting again to “Plant or Machinery”, it may be seen that these supply of goods or services can be either for a Plant or for a Machinery. It need not necessarily be for both Plant and Machinery. Whereas in clause (c) the supply of works contract services, it is necessarily for Plant and Machinery both. In clause (d), “Plant or Machinery” is the right expression and has been carefully drafted. In clause (d), the supply is for singular purpose, whereas, in clause (d) the supply has to be for plural purpose. There is no error in the drafting of clause (c) and (d). Therefore, the conclusion be at para 65 of the judgment holding that “plant or machinery” and “plant and machinery” cannot be given the same meaning has to be appreciated. This is the correct legal position.
Now what is difficult to digest is that building can also be treated a Plant. The reason for the same is that “Plant and Machinery” has been defined, whereunder land/building for any other civil structure has been excluded. Though “Plant or Machinery” has not been defined, I come back to the first sentence which we were taught in the school, that if A+B=C, then A=C-B. In other words, if A is a Plant and
B is Machinery which as a plural is C and is defined then, the definition of plant has to be read within that restricted definition of “Plant and Machinery” and the definition of Plant cannot be expanded to include land & building. There was no need for the legislation to define “Plant or Machinery”, once “Plant and Machinery” has been defined. The definition of Plant has to be read in this definition only.
The judgments being relied upon might not have the restricted definition of plant and machinery. Had it been there, the view in those judgments would have been different.
There could be more to write about the judgment, but I halt here on the advice of my young team. My team of Kapil Yadav (Advocate), Sakshi Verma (Advocate) Gauri Bhatnagar (Advocate) and Sumit Bamba (CA) is kind enough to halt me and advise me to write this article.
I halt.
Ashok K. Bhasin
Advocate