Brief summary of the case
Court:Orissa High Court: Cuttack
Petitioner: Safari Retreats Private Limited
Respondent: Chief Commissioner of Central Goods & Service tax
Number: W.P. (C) No. 20463 of 2018
Date of decision:17.04.2019
Judges: Honourable The Chief Justice Shri K.S.Jhaveri and The Honurable Shri Justice K.R.Mohapatra
- The petitioner was engaged in the business of constructing shopping malls for the purpose of letting out for commercial purposes (tenants and lessees).
- Company has purchased huge quantity of construction materials (likes Cement, Sand, Steel, Aluminum, Wires, plywood, paint, Lifts, escalators, Air-Conditioning plant, Chillers, electrical equipments, special facade, DG sets, transformers, building automation systems etc) and has availed various services (likes consultancy service, architectural service, legal and professional service, engineering service and other services including services of special team of international designers) for which it desire to avail ITC.
- The petitioner is desirous of availing of the above said credit of input tax and approached the revenue authorities in this regard.
- However, the benefit of input tax credit has been denied to the petitioner by applying Section 17 (5) (d).
- The petitioner filed a writ petition challenging the vires of Section 17(5)(d) of the CGST Act and a separate prayer for allowing ITC.
- The very object of enacting GST law is to obviate the cascading effect of various indirect taxes and reduce multiplicity of indirect taxes. If the benefit of taking input tax credit is denied to the petitioner by invoking Section 17(5)(d), the said object will be frustrated, especially in view of the fact that the petitioner shall be required to pay GST on its rental services.
- Section 17(5)(d) of the CGST Act restricts the seamless flow of credit and that denial of ITC in is unjust, arbitrary, oppressive and contradictory to the basic rationale of GST.
- The sale of immovable property post issuance of completion certificate does not attract any levy of GST. Consequently, in such a situation, there is a break in the tax chain and, therefore, there is full justification for denial of input tax credit as, on the completion of the transaction, no GST would at all be payable and, therefore, no set-off of the input tax credit would be required or warranted or justified. But the position is totally different where the immovable property is constructed for the purpose of letting out the tenants and lessees, because the tax chain is not broken and, on the contrary, the construction of the building will result in a fresh stream of GST revenues to the Exchequer on the rentals generated by the building.
- The denial of input tax credit in such a situation would be completely arbitrary, unjust and oppressive and would be directly opposed to the basic rationale of GST itself, which is to prevent the cascading effect of multi-stage taxation and the inevitable increase in costs which would have to be borne by the consumer at the end of the day.
- The restriction under Section 17(5)(d) of the CGST Act should apply only in those cases where there is a break in the tax chain. However, in the present case, there is no breakage in the tax chain as the Petitioner would be liable to pay goods and services tax (GST) on letting out of such properties for commercial purposes.
- The treatment of these two different types of buildings as one for the purpose of GST is itself contrary to the basic principles regarding classification of subject-matter for the levy of tax and, therefore, violative of Article 14 of the Constitution.
- Further, such an interpretation of Section 17 (5) (d) of both CGST and OGST Act leads to double taxation, i.e., firstly, on the inputs consumed in the construction of the building and secondly, on the rentals generated by the same building.
- It is also a settled principle of interpretation of tax statutes, that interpretation should be adopted which avoids or obviates double taxation. This principle is also directly applicable to the present case.
- It would also be violative of the Petitioners’ fundamental right to carry on business under Article 19(1)(g) of the Constitution as it would impose a wholly unwarranted and unreasonable and arbitrary restriction which would render buildings now constructed for letting out uncompetitive, by imposing the burden of double taxation of GST on such buildings.
- Section 17 (5) (d) requires to be read down in order to save it from the vice of unconstitutionality.
- He has also relied upon the decision of the Honorable Supreme Court in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd.,
the right to the credit has become absolute at any rate when the input is used in the manufacture of the final product.
- The petitioners has relied upon paragraphs 67 and 87 the decision of the honorable Supreme Court in the case of Shayara Bano v. Union of India and others, which are reproduced below:
“We now come to the development of the doctrine of arbitrariness and its application to State action as a distinct doctrine on which State action may be struck down as being violative of the rule of law contained in Article 14.’’
- He has relied upon the decision of the Hon’ble Supreme Court in the case of Delhi Transport Corporation v. D.T.C. Mazdoor Congress and others, paragraph 118 of which are reproduced below:
“118. Legislation, both statutory and constitutional, is enacted, it is true, from experience of evils. But its general language should not, therefore, necessarily be confined to the form that evil had taken, Time works changes, brings into existence new conditions and purposes and new awareness of limitation.”
- The restriction prescribed in Section 17(5)(d) of the CGST Act, the petitioner was ineligible to avail ITC on aforesaid inputs and input services.
- The said provision should be given a literal interpretation and the restriction of Section 17(5)(d) of the CGST Act should apply accordingly to all circumstances.
- In the case of the Indian Oil Corporation Ltd v. State of Bihar, while dealing with the issue of set up of VAT against the entry tax the Honorable Court held that ‘no assessee’ claim set off as a matter of right and levy of Entry Tax cannot be assailed as unconstitutional only because set off clear that Article 14 of the Constitution can be said to be breached only when there is perversity or gross disparity resulting in clear and hostile discrimination practiced by the legislature, without any rational jurisdiction for the same”.
In view of the above, the taxpayer cannot claim credit of Input Tax without any authority of law. Further, restrictions with respect to availment of credit accrued under the existing law being reasonable, are equally applicable to all. As the suitability and requirement of taxpayer varies from person to person, rule/Act cannot be changed/ amended accordingly. It is mandatory for the taxpayers to adhere the restrictions prescribed in Act and Rule as such restrictions cannot be challenged by the tax payer under the plea of being violative of the Petitioner’s fundamental rights garmented under Articles 14 and 19(1)(g) of the Constitution of India.
- In view of the above, the taxpayer cannot claim credit accumulated due to supply of inputs (goods as well as services) used by them for construction of their project as a vested right for payment of GST on the output taxable supply of Renting of their said property.
- Powers to restrict flow of credit also exist under Section 16(1) of the CGST Act which empowers the Central Government to impose conditions and restrictions on availing input tax credit.
- Input tax credit provisions do not provide for that all the tax paid on inputs should be available as credit.
- GST is a new system of taxation which provides setting off of input tax credit against the output tax liability along the entire value chain till the final retail level. Under the earlier tax regime, credit of inputs was available for final product in respect of certain taxes/duties only. For e.g., Credit of duty of excise could not be utilized against VAT and vice versa. It can be therefore said that GST is applicable only on value addition along the entire supply chain and thus, cascading effect of taxes has been eliminated. Thus, under the GST regime, more input tax credit is available to tax payer along the entire supply chain as compared to the previous tax regime.
- It may be noted that Section 17(5)(d) of the CGST Act prescribes denial of credit for certain class of taxpayers with certain conditions and limitations. This would mean that legislature has decided in its wisdom the credit of taxes which would be allowed in credit as ITC and the tax that has not been allowed, as policy call of the Government, given effect through legislation, cannot be obtained through judicial review.
- In case of JCB India Ltd Vs. Union of India, the Hon’ble Court held- “CENVAT credit is a mere concession and it cannot be claimed as a matter of right- Credit on inputs under the existing law itself is not absolute but restricted or conditional right- if the existing law itself imposes condition for its enjoyment or availment, then, it is not possible to agree with the Counsel that such rights under existing law could have been enjoyed and availed of irrespective of the period or , time provided-therein.
- The very purpose of the Act (GST) 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.
- The contention which has been raised by 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 GST Acts, 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.
- In 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 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.
- Court held that a person engaged in letting out the property cannot be said to be using the property “on his own account”.
- The Hon’ble Court has rejected the narrow interpretation of the section 17(5)(d) of the CGST Act done by the department and held that the benefit of credit would be available to assessee on goods or services used in construction of immovable property. If the assessee is required to pay GST on the rental income arising out of the investment on which he paid the GST.
- The court duly noted the submission of the Petitioner that in case where immovable property is sold before issuance of completion certificate or first occupation (i.e.on payment of GST), the input tax credit is not denied u/s 17(5)(d). Whereas, in the current case when the petitioner has to pay GST on its rental income, the input tax credit is denied by invoking Section 17(5)(d). Thus, it has no reasonable basis underlying such classification when both categories of taxable persons are carrying on a continuous business without any break in the tax chain.
Implication in view of the judgement/ our comments:-
- The current judgement shall have long reaching implications in respect of various businesses which are getting/ have got civil construction done and are using such civil structures for further provisioning of taxable outward supplies.
- For instance, a very identical situation shall be in respect of the hotel industry wherein construction of building is done and the said building is rented out to individual recipients for specific period of time. In view of the current judgement credit of tax paid can be availed by the hotel in respect of raw materials used for construction of the civil structure.
- The current judgment shall also raise the question on validity of denial of credit relating to any civil structure in respect of an establishment for instance an office in a factory which is also ultimately leading to be used for taxable supply of goods and services.
- Loss of credit – It is pertinent to note that even in light of above judgment, benefit of credit under GST relating to the period of 2017-2018 cannot be availed as limitation for availing the credit for the said period has already expired.
- In view thereof the only benefit which can be availed is with respect to expenses incurred during the period 2018-19 as limitation for availing ITC for the said period is not yet over. Simultaneously, credit for future periods can also be availed in view of the discussed judgment.