The Case of Safari Retreats: A Critical Analysis

Input tax credit (“ITC”) is one of the important features of the Central Goods and Services Tax Act, 2017 (“CGST Act”) which avoids the cascading effect of taxes. The availment of ITC rests on fulfilment of conditions provided in Section 16 of the CGST Act. Nevertheless, certain additional restrictions are imposed by Section 17(5) of the CGST Act and no benefit can be availed in such cases. Recently, in SafariRetreats (P) Ltd. v. Chief Commissioner of Goods & Service Tax [2019 SCC OnLine Ori 443], the constitutionality of Section 17(5)(d) of the CGST Act was challenged on the basis of Article 14 and 19(1)(g) of the Indian Constitution.

Section 17(5)(d) of the CGST Act states as follows:

The Hon’ble Odisha High Court read down the provision to prevent it from being declared unconstitutional, however, the case is now pending before the Hon’ble Supreme Court for final verdict. The final hearing is scheduled in the last week of March’ 23, hence, a critical analysis of the case is of paramount importance.

Hereafter, a brief analysis has been provided by the author regarding the concerned issue. It may be noted that all references to the CGST Act also apply to Odisha Goods and Services Tax Act, 2017 as far as the case of Safari Retreats is concerned.

Petitioners are engaged in the business of construction of shopping malls for the purpose of letting it out to tenants on rental basis. In the process, petitioners procured huge quantities of input supplies such as cement, lift, escalator, paint etc. for construction of the mall and the same was leviable to GST. The ITC of goods and/ or services procured for construction of an immovable property is blocked under section 17(5)(d) of the CGST Act. The petitioner approached the Revenue authorities for claiming the ITC and utilising it for payment of output tax. However, the Revenue denied input tax credit on these inward supplies and directed the petitioner to pay tax on the outward supplies received by way of rent from the tenants of shopping mall.

Whether Section 17(5)(d) of the CGST Act is violative of Article 14 and Article 19(1)(g) of the Indian Constitution.

Section 17(5)(d) of the CGST Act contemplates only those cases where the tax chain is broken and no further GST is levied i.e. those cases where the immovable property is sold after receipt of completion certificate or first occupancy whichever is earlier. However, it cannot be interpreted to include those cases where GST will be subsequently levied by way of some transaction (such as letting out in present case). Further, the latter interpretation shall lead to arbitrariness and be violative of Article 14 since the case of petitioners cannot be treated at par with those assessees who sell off their property after construction. Additionally, it would also violate Petitioner’s fundamental right to carry business as the increased costs by way of double taxation would render the buildings unattractive and uncompetitive.

The Department has alleged that the transactions undertaken by the petitioners during the construction of shopping mall would fall under Section 17(5)(d) of the CGST Act and hence, no ITC would be available in such respect. Additionally, the Department also contended that greater latitude is given to legislature in case of taxing statutes and that, credit is just a concession which cannot be demanded as a matter of right.

Accepting the contentions of the Petitioners, the Hon’ble Odisha High Court held that the provision requires to be read down to the extent that Section 17(5)(d) of the CGST Act shall only cover those cases where the immovable property is sold after grant of completion certificate since there would not be any further tax incidence. However, since the Petitioner is retaining the property even after completion and letting it out on rental basis, it will be eligible to claim ITC since the subsequent transactions of letting out will be covered by GST. It is also important to note that the Court did not held the provision to be ultra vires the Constitution.

The case [SLP No. 26696/2019] is currently pending before the Hon’ble Supreme Court at the final hearing stage and it is hopeful that the Hon’ble Court will soon provide its verdict on the issue.

The Statement of Object and Reasons of the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 clearly provide that GST requires to be introduced in order to remove the cascading effect of taxes by way of ITC. All the entities in the tax chain except the ultimate buyer are provided with the benefit of ITC in order to prevent the cascading effect of taxes.

Drawing the analogy to the current case, it is clear that the chain of events was not broken since the Petitioners let out the shops on which GST would be levied. Hence, disallowing the credit facility created the situation of double taxation wherein tax was levied twice on the same chain of events.

The test of manifest arbitrariness embedded in Article 14 has been recognized by the Apex Court in the case of Shayara Bano v. Union of India [2017] 9 SCC 1. It held, “Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle.” In a case of manifest arbitrariness, the courts are empowered to invalidate legislation as well as subordinate legislation.

Application of test in the present case reveals the impugned provision poses a threat of arbitrariness and also accords similar treatment to differently situated registered persons. In light of the same, the provision may be considered to be unconstitutional unless it is read down.

Section 16 of the CGST Act prescribes certain conditions and qualifications for availing ITC. However, pursuant to fulfilling such conditions, ITC becomes a vested right in favour of the taxpayer as per Article 300A of the Indian Constitution. Resultantly, stipulation of further conditions to dispute such credit on other grounds is not sustainable. To overcome this defect, Section 17(5) begins with a non-obstante clause. Nevertheless, in the case of Rana Nahid v. Sahidul Haq Chisti [2020] 7 SCC 657, the Supreme Court held that “The non obstante clause cannot be lightly assumed to bring in the effect of supersession. It should not be allowed to demolish or extinguish the existing right unless the legislative intention is clear, manifest and unambiguous”. Hence a view may be taken (though far-fetched) that the provision cannot possibly take away a right by addition of non-obstante clause since the same is contrary to the object of the Act.

Taxing statutes enjoy greater latitude and courts often refrain from declaring such provisions unconstitutional. In many circumstances, the courts read down a provision to secure its sanctity or interpret it in a manner to prevent it from being declared redundant or unconstitutional. To understand the trend of such cases where the constitutionality of credit-related provision was in issue, an attempt has been made to identify and analyse a few such cases in the erstwhile as well as the current regime.

Erstwhile Regime

In the case of Indsur Global Ltd. v. Union of India [2015] 53 taxmann.com 131/49 GST 445/2014 (310) E.L.T. 833 (Guj.), the Hon’ble Gujarat High Court heldRule 8(3A) of the Central Excise Rules, 2002 to be violative of Article 14 on the ground of arbitrariness since the impugned provision took away the accrued right of the assessee to claim CENVAT credit where duty had already been discharged. A similar decision was also passed by the Hon’ble Madras High Court in the case of Malladi Drugs & Pharmaceuticals Ltd. v. Union of India, [2015] 62 taxmann.com 275. Additionally, in Brite Rubber Processor Pvt. Ltd. v. State of Tripura, 2017 SCC OnLine Tri 178, the Hon’ble High Court of Tripura read down a provision of Tamil Nadu VAT Act which denied the benefit of ITC based on the post-production commercial activity of the assessee. However, the same did not have any nexus with the object of the Act since benefit was being extended even in those cases where no further tax could be received by the Revenue.

Hence, a similar approach may be adopted by the Supreme Court to read down Section 17(5)(d) to the extent it restricts availability of ITC to registered persons who do not sell the immovable property but only let it out on rental/lease basis.

In the present GST regime, the case of SafariRetreats has been one of the initial judgments where constitutionality of provision restricting ITC was challenged. Apart from that, many cases concerning different clauses of Section 17(5) of the CGST Act have been before various High Courts for consideration. These cases include Delhi International Airport Ltd. v. Union of India [W.P. (C) No. 134 of 2021, dated 20-10-2021], Kamal Cogent Energy (P.) Ltd. v. Union of India [D.B. Civil Writ Petition No. 15847 of 2019, dated 24-2-2019] and Hinganghat Integrated Textile Park (P.) Ltd. v. Union of India [CWP No. 6923 of 2019, dated 14-9-2019]. Since the matter of SafariRetreats is pending before the Hon’ble Supreme Court, all these matters before other High Courts are kept on hold.

In case the Apex Court uphelds the verdict of the Odisha High Court, it may lead to a peculiar situation. Let us understand how. Suppose there are two shopping malls being constructed in the same locality. The developer of the first one decides to let out the units in the shopping complex. Let us assume the Apex Court has upheld the decision of the Odisha High Court. In such a case, the developer will be eligible to claim ITC. However, on the other hand, the other developer sells the units in the shopping complex after receiving completion certificate. In such a case, GST will not be levied on outward supply and therefore ITC will become a part of the cost. Suppose the buyer lets out the unit in the shopping complex, his base price would be higher thereby making this renting of shopping complex less competitive.

In order to avoid such situation, the property will be bought either before receiving completion certificate or by way of acquisition of the developer company. Such a situation may create havoc in the real estate sector. Accordingly, it may be expected that the Supreme Court may dissent with the order of the Odisha High Court.

The decision of the Apex Court in the case of Safari Retreats is likely to open a pandora box of litigation.

Author: CA Manish Raj Dhandharia