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The RFMLR Editorial Board recently interviewed Mr. Onkar Sharma, Partner, Khaitan and Co. on the topic, "Critically Analyzing Supreme Court’s Landmark Verdict in Safari Retreats Case"
What pivotal experiences in your legal career have played a crucial role in shaping the course of your professional journey?
Answer. My professional journey as a lawyer has expanded over the years starting from drafting case briefs, assistance in matters and eventually arguing matters. Many experiences over the years have shaped my career. One of these was when I assisted in a high-stakes tax dispute case involving multiple banks and then there was another one involving multiple online gaming companies. Both these matters taught me the importance of thorough preparation and attention to detail. It also boosted my confidence in handling complex legal issues and reinforced my belief in the power of collaboration. I've approached every case—regardless of size or stakes—with the same commitment to diligence and creative problem-solving. That moment truly set the tone for my professional growth and the standards I hold myself to, as a legal professional.
How will the Supreme Court ruling in “Chief Commissioner of CGST v. M/s Safari Retreats Pvt. Ltd. “ allowing input tax credit (ITC) benefit on construction cost for commercial buildings intended for service provision, such as leasing or renting, impact small and medium enterprises (SMEs) involved in commercial property leasing? Can SMEs fully utilise these ITC benefits compared to larger corporations, considering their financial and operational capacities?
Answer. The Supreme Court in “Chief Commissioner of CGST v. M/s Safari Retreats Pvt. Ltd.” (“Safari Retreats Judgment”) has allowed input tax credit on construction cost for commercial buildings where these are deployed for output taxable supplies like leasing or renting. As of the date of this interview, while the Government has introduced amendments to Section 17 of the CGST Act, vide Finance Bill 2025, I am of the view that the amendments would not apply to scenarios covered by the query. Resultant, SMEs would be entitled to claim input tax credit on commercial property leasing and utilize it to the extent of their output GST liability. Admittedly, SMEs, as opposed to large corporations, may not have enough output GST liabilities to completely offset their ITC entitlement. However, the Safari Retreats decision will help SMEs with upfront tax costs and at the same time easing up working capital. To ensure a level playing field between, SMEs and larger corporations, SMEs may consider appropriate representations before the Ministry of Finance.
What impact might this ruling have on ongoing and future construction projects that were previously ineligible for ITC, and can developers retroactively claim ITC?
Answer. While the Safari Retreats Judgment is a positive one for the industry, the Government vide the Finance Bill 2025 has sought to overrule the same legislatively. The proposed amendment seeks to remove the lacunae pointed out by the Supreme Court in Safari Retreats Judgment vis a vis “plant and machinery” v/s “plant or machinery”. It is noteworthy that the proposed amendment is retrospective effective from 1 July 2017. As a result, despite the Supreme Court’s judgment in Safari Retreats the developers may not be entitled to claim ITC for ongoing and future projects, once the proposed amendment is assented to by the President.
Further, since the proposed amendment is retrospective, it would effectively deny ITC even for the prior period i.e. before the said amendment is even introduced. I foresee that such denial may likely witness a spate of challenges before High Courts. A retrospective denial of vested rights is a vexed issue which has been much litigated and also been frowned upon by Courts in the past and rich jurisprudence exists on that count. Thus, for the past period, developers would have to litigate the matter across appropriate forums.
What are the broader economic implications of this ruling on the commercial real estate market, particularly in terms of construction, leasing, and investment?
Answer. The broader economic implications would have been a reduction in working capital cost for businesses as the ability to utilize ITC would have been available. However, developers and property owners might pass on the tax savings from ITC benefits to tenants in the form of lower rental rates, making commercial spaces more affordable.
The Court held that to give a plain interpretation to clause (d) of Section 17(5), the word “plant” will have to be interpreted by taking recourse to the functionality test, thus, if a building has been so constructed as to serve an assessee’s special technical requirements, it will qualify to be treated as a plant. However, the transition of a building from being a mere setting for the business to becoming a means for carrying out the business is a grey line. What are your opinions on this aspect? Additionally, what guiding criteria should be adopted to ensure consistency in applying the functionality test, and what practical implications could arise from differing interpretations?
Answer. In the Safari Retreats judgment, the Supreme Court has held that if a building serves as a tool of trade, playing an essential role in business activities (such as a mall or warehouse used for renting), it could be classified as a plant or machinery. It relied on several previous decisions (like CIT v. Taj Mahal Hotel, Solid and Correct Engineering Works, Anand theatre, CIT v. Karnataka Port) to reinforce that buildings or structures that serve specific business functions can qualify as “plants ”. As such, I am of the view that the earlier jurisprudence relating to ‘plants and machinery’ would be a good guide to identify the functionality test.
The judgment acknowledges two key exceptions to the restrictions under Section 17(5)(d): the "other than own account" exception and the "plant or machinery" exception. Despite holding that construction intended for lease or license are covered under the own use exception, the Court also examines the applicability of the "plant or machinery" exception. In your opinion, is there a need to consider the 'plant or machinery' exception if the 'other than own account' exception is interpreted broadly to include all constructions intended for use by other parties, or does this dichotomy need to be resolved?
Answer. To my mind, Safari Retreats essentially lays down three independent tests - (1) Whether the item in question is movable or immovable. If movable then the ITC restriction in 17(5)(d) does not kick in.; (2) If the item is immovable property, then whether it is a plant and machinery. If it is a plant and machinery then the ITC restriction will not kick in; (3) If the item is immovable property and a ‘plant or machinery’ then whether is has been used on own account or not. If the immovable property has not been used on own account, then credit restriction would not kick in.
Essentially therefore the three test are disjunctive and independent of one another.
The ruling highlights that ITC is a statutory right, and its denialdoes not violate fundamental rights. How does this principle shapebusinesses’ expectations regarding ITC under the CGST Act, andwhat potential reforms could balance the interests of taxpayers andthe government?
Answer. The Supreme Court has highlighted that ITC is a statutory right (and not fundamental right) which vests on the taxpayer once the vestative conditions have been fulfilled. However, the proposed amendment vide the Finance Bill, 2025 seeks to detract this vested right by the stroke of the legislative pen. Clearly, the messaging that such a retrospective amendment gives to businesses is that even vested rights are not safe anymore. Any such restrospective amendment cannot go uncontested and businesses would be well advised to contest once the proposed amendment is added to the statute book.
Considering that this judgment has the potential to influencefuture tax litigation and policy-making, how do you view its long-termimpact on the legal interpretation of "plant" and "immovableproperty"? Additionally, do you believe this ruling could promptfurther judicial or legislative clarification on other ambiguities in theCGST Act, such as the treatment of mixed-use properties or othertax-blocked credits?
Answer. The decision of Safari Retreat offers judicial guidance on how to distinguish between property used for business purposes (potentially qualifying for ITC) and those that don’t, offering a more predictable framework for businesses to operate in.
In practice, businesses that operate in properties with both residential and commercial use face challenges in claiming ITC for the portion of the property used for business. Clarifying how to apportion credits between taxable and non-taxable uses could be a necessary follow-up to the Safari Retreat ruling. Given that the Safari Retreat judgment likely touches on broad principles of asset classification under GST, it could encourage lawmakers to address similar ambiguities in other parts of the CGST Act. The government may decide to introduce clearer definitions, specifically for mixed-use properties, or revisit provisions around blocked credits to ensure alignment with judicial trends. It could also trigger the introduction of guidelines or circulars by the tax authorities to harmonize the application of the judgment across different sectors.
What is your advice to young professionals and law students who aim to build a career in the field of Taxation Laws?
Answer. Building a career in Taxation Laws is both rewarding and challenging, given the dynamic nature of tax legislation and its impact on businesses, individuals, and governments. Young professionals and law students would be well advised to start with a strong foundation in the core principles of taxation laws, including direct and indirect taxes, income tax, GST, international taxation, customs laws, and tax planning. Since tax laws evolve constantly with amendments, new regulations, and court decisions, students must keep themselves updated on new notifications, and changes in the tax system. Separately, students would be advised to participate in internships at law firms, taxation advisory firms. This experience is invaluable for understanding how tax laws are applied in real-world scenarios.
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