NATIONAL LAW UNIVERSITY ODISHA, CUTTACK
A PROJECT WORK ON INDIRECT TAXES
TOPIC: A Critical Analysis of the Supreme Court Judgment in M/S Safari Retreats Private Limited
UNDER THE GUIDANCE OF:
Dr. Mayank Mishra
(Associate Professor of Law, NLUO)
SUBMITTED BY:
Subham Rathee (2020 / BALLB / 102)
B.A. LL.B. | Semester
Batch 2020 – 2025
A Critical Analysis of the Supreme Court
Judgment in M/S Safari Retreats Private
Limited
The Supreme Court's landmark judgment in the Safari Retreats case, delivered on
October 3, 2024, represents a significant development in Indian taxation jurisprudence,
particularly concerning the interpretation of Input Tax Credit (ITC) provisions under the
Goods and Services Tax (GST) regime. This analysis examines the judgment's reasoning,
implications, subsequent developments, and its broader impact on tax law and policy in
India.
Background and Legal Framework
Genesis of the Dispute
The case originated when Safari Retreats Private Limited, a company primarily engaged
in constructing shopping malls for leasing purposes, challenged the denial of Input Tax
Credit (ITC) on goods and services used in the construction of immovable property. The
company contended that such denial created a cascading effect of taxes contrary to the
fundamental purpose of the GST regime[1]. Safari Retreats had procured various
construction materials including cement, steel, aluminum, electrical equipment, and
specialized services while developing commercial properties intended for renting [2]. While
the company paid GST on these inputs, tax authorities denied ITC claims citing
restrictions under Section 17(5)(d) of the CGST Act [3].
Legal Provisions Under Scrutiny
The central provisions under examination were Section 17(5)(c) and 17(5)(d) of the CGST
Act, which restrict ITC for:
"(c) Works contract services when supplied for construction of an immovable property
(other than plant and machinery) except where it is an input service for further supply of
works contract service;
(d) Goods or services or both received by a taxable person for construction of an
immovable property (other than plant or machinery) on his account including when such
goods or services or both are used in the course or furtherance of business." [4]
The pivotal question was whether buildings constructed specifically for commercial
leasing could qualify as "plant" under the exception provided in these clauses, thereby
making them eligible for ITC claims[5].
Journey Through the Courts
The dispute first reached the Odisha High Court, which in April 2019, ruled in favor of
Safari Retreats. The High Court held that a narrow interpretation of Section 17(5)(d)
would "frustrate the very objective of the Act" by creating a cascading tax effect [6]. The
court reasoned that denying ITC to a business paying GST on rental income from
properties on which GST had already been paid during construction was inequitable and
contradicted GST's foundational principles [1].
Challenging this interpretation, the tax authorities appealed to the Supreme Court,
leading to Civil Appeal No. 2948 of 2023 [7]. Senior legal professionals represented both
sides: Mr. Tushar Mehta, Solicitor General of India, for the tax authorities (appellants) and
Mr. Arvind Datar and Mr. Harish Salve, Senior Advocates, for Safari Retreats
(respondents)[7].
The Supreme Court's Reasoning and Decision
Constitutional Validity Assessment
The Supreme Court affirmed the constitutional validity of Sections 17(5)(c) and (d) of the
CGST Act, rejecting the challenge that sought to have these provisions declared
unconstitutional[4]. The Court found no constitutional defect in the legislature's power to
restrict ITC in certain cases, including for construction of immovable property [3].
The "Plant or Machinery" Interpretation
A critical aspect of the Court's analysis was the distinction between "plant or machinery"
used in Section 17(5)(d) and "plant and machinery" used elsewhere in the Act. The Court
determined this was not a mere drafting error but a deliberate legislative choice,
especially noting that the Model GST Law circulated in November 2016 had used "plant
and machinery" consistently, but the final enacted version specifically used "plant or
machinery" only in clause (d)[8][9].
This distinction was significant because:
1. The disjunctive "or" potentially broadened the scope of the exception
2. It suggested that either "plant" or "machinery" could individually qualify for the
exception
3. It created a distinction from the conjunctive phrase "plant and machinery" used
elsewhere in the Act[9]
Introduction of the "Functionality Test"
The Court's most influential contribution was establishing what can be termed a
"functionality test" to determine whether buildings might qualify as "plant" for ITC
purposes. The Court held:
"If the construction of a building was essential for carrying out the activity of supplying
services, such as renting or giving on lease or other transactions in respect of the
building or a part thereof, which are covered by clauses (2) and (5) of Schedule II of the
CGST (Central Goods and Services Tax) Act, the building could be held to be a plant." [5]
In developing this test, the Court distinguished its approach from previous jurisprudence,
particularly the judgment in Anand Theatres, which had held that buildings used as hotels
or cinema theaters could not be considered "plant" [8]. Instead, the Court aligned with
Karnataka Power Corporation's judgment, which adopted a more functional approach,
holding that whether a building constitutes "plant" depends on its specific design and role
in the business[8].
The Court emphasized that this determination must be made case-by-case, looking at
whether the building has been specifically designed and constructed to serve special
technical or business requirements rather than applying a blanket classification based
merely on the type of structure[3][4].
Final Disposition
While upholding the constitutional validity of the provisions, the Supreme Court
remanded cases to the High Court for factual analysis using the functionality test it had
established[4]. Rather than providing a universal ruling that all buildings constructed for
rental purposes qualify as "plant," the Court directed that each case must be examined
individually to determine if the building served as "plant" in the specific business
context[5][3].
Critical Evaluation of the Judgment
Textual and Purposive Interpretation
The judgment represents a sophisticated balance between textual and purposive
interpretations of tax statutes. The Court's detailed analysis of the linguistic distinction
between "plant or machinery" and "plant and machinery" demonstrates rigorous textual
analysis[9]. Simultaneously, by linking the "plant" categorization to the functional role of
buildings in generating taxable supplies, the Court embraced a purposive approach
aligned with GST's value-added tax principles [3].
This dual approach is particularly noteworthy in tax jurisprudence, where courts typically
favor either strict textual construction or broader purpose-based readings. The Safari
Retreats judgment suggests an evolving judicial philosophy that seeks to respect both
textual integrity and legislative purpose.
Balancing Competing Interests
The Court effectively balanced multiple competing interests:
1. Revenue protection vs. taxpayer rights: While acknowledging the legitimacy of
ITC restrictions, the Court opened a pathway for certain taxpayers to claim ITC
where denial would create cascading taxation [5].
2. Legislative authority vs. economic reality: The Court respected legislative
boundaries while recognizing economic realities that buildings can functionally serve
as "plant" in certain business models [3].
3. Categorical rules vs. case-specific analysis: Rather than establishing a bright-
line rule, the Court opted for a nuanced approach requiring case-by-case
assessment, trading administrative simplicity for economic fairness [4].
Advancement in Tax Jurisprudence
The judgment advances Indian tax jurisprudence in several ways:
1. It reinforces that GST is fundamentally a value-added tax designed to minimize
cascading effects[6].
2. It introduces a functionality-based approach to classifying assets for tax purposes,
moving beyond formalistic categories toward economic substance [3].
3. It demonstrates judicial willingness to interpret technical tax provisions in light of
commercial realities and business models[5].
4. It establishes precedent for considering the interdependence between input
procurements and output supplies when determining ITC eligibility [4].
Potential Weaknesses and Uncertainties
Despite its strengths, the judgment leaves several areas of uncertainty:
1. Implementation challenges: The case-by-case functionality test may be difficult
to apply consistently across diverse business contexts, potentially creating
administrative complexity and litigation[4].
2. Scope ambiguity: The judgment doesn't clearly delineate the exact criteria for a
building to qualify as "plant," leaving room for varied interpretations [5].
3. Sector-specific questions: While the judgment addressed shopping malls, its
application to other sectors like hotels, warehouses, and co-working spaces remains
less defined[10].
4. Retroactive application: The judgment doesn't explicitly address whether its
interpretation applies retroactively to past tax periods, creating uncertainty for
taxpayers who previously paid tax without claiming ITC [5].
Economic and Sectoral Implications
Impact on Real Estate and Construction
The judgment potentially provides significant economic benefits to the commercial real
estate sector. Developers can now potentially claim ITC on construction inputs for
properties intended for leasing, reducing their effective tax burden and improving project
economics[5].
This relief is particularly meaningful given the capital-intensive nature of real estate
development and the substantial GST costs associated with construction materials and
services. By allowing these costs to be offset against output GST on rental income, the
judgment improves cash flow and potentially enhances project viability [6].
Benefits for Commercial Tenants
The judgment could indirectly benefit tenants occupying commercial spaces. As landlords
become eligible to claim ITC on construction costs, they may face less pressure to pass
these costs through to tenants in the form of higher rents [5]. This potential reduction in
occupancy costs could benefit retailers, office tenants, and other businesses leasing
commercial space.
Extended Impact on Infrastructure and Specialized Sectors
Beyond shopping malls, the judgment has potential implications for:
1. Warehousing and logistics: Specialized warehouses and distribution centers
could qualify under the functionality test [4].
2. Hotels and hospitality: While earlier precedents (Anand Theatres) had excluded
hotels from "plant" categorization, the new functionality test might allow
reconsideration in certain cases[8].
3. Co-working and flexible office spaces: Buildings specifically designed for these
modern working arrangements might qualify under the functionality test [10].
4. Special purpose industrial buildings: Structures designed for specific
manufacturing or processing activities could more easily qualify as "plant" [4].
Aftermath and Government Response
GST Council's Retrospective Amendment
In a significant development that underscores the judgment's impact, the GST Council in
its 55th meeting proposed a retrospective amendment to Section 17(5)(d) of the CGST
Act, replacing "plant or machinery" with "plant and machinery," effective from July 1,
2017[11]. The CBIC Chairman characterized this as correcting a "drafting error," noting
that the term "plant and machinery" appears at 11 places in the GST Act but was written
as "plant or machinery" only in one place [12].
This amendment would effectively nullify the Court's interpretation by eliminating the
distinction between "plant or machinery" and "plant and machinery" that formed a crucial
part of the Court's reasoning[11].
Filing of Review Petition
Beyond seeking legislative amendment, the Finance Ministry filed a review petition in
January 2025, seeking reconsideration of the Safari Retreats judgment [13][12][9]. This dual
approach—pursuing both judicial review and legislative amendment—highlights the
government's determination to limit the judgment's impact on revenue collections.
Constitutional and Legal Questions Raised
These post-judgment developments raise several complex constitutional and legal
questions:
1. Separation of powers: The use of retrospective amendments to effectively
override judicial interpretation raises questions about the boundaries between
judicial and legislative functions[11].
2. Legislative supremacy vs. judicial review: While Parliament has authority to
amend laws, using this power specifically to nullify judicial interpretations creates
tension in constitutional governance[9].
3. Retroactive impact: Retrospective amendments that increase tax burdens or
eliminate benefits previously recognized by courts raise concerns about fairness,
certainty, and legitimate taxpayer expectations[11].
4. Drafting error vs. deliberate choice: The characterization of "plant or
machinery" as a drafting error contradicts the Court's finding that it represented a
deliberate legislative choice, creating an interpretative conflict [12][9].
Broader Implications for GST Framework
Testing Foundational Principles
The Safari Retreats case tests fundamental GST principles, particularly whether
restrictions on ITC that create cascading effects are consistent with GST's design as a
value-added tax. The judgment reinforced the principle that GST aims to tax only value
addition at each stage of the supply chain, preventing "taxation on tax" [6][14].
However, the government's swift move to reverse the judgment suggests that revenue
considerations may sometimes override theoretical purity in GST design. This creates
tension between GST's conceptual foundation and its practical implementation [11].
Interpretation of Blocking Provisions
The case provides valuable guidance on interpreting ITC restriction provisions. Rather
than reading such provisions expansively to maximize revenue, the Court adopted a
more balanced approach that considers business realities and the fundamental nature of
GST[3]. This approach may influence how other ITC blocking provisions are interpreted in
future cases.
Judicial Role in Tax Policy
The case highlights the judiciary's role in shaping tax policy through interpretative
decisions. While respecting legislative authority, the Court demonstrated willingness to
interpret technical provisions in ways that promote economic efficiency and fairness [3].
However, the subsequent legislative response suggests limits to judicial influence on tax
policy[11].
Conclusion
The Safari Retreats judgment represents a significant milestone in Indian tax
jurisprudence, particularly regarding GST input tax credit provisions. Through nuanced
statutory interpretation and the introduction of a functionality test, the Court provided a
pathway for commercial real estate developers and potentially other sectors to claim ITC
on construction costs for properties intended for leasing.
The judgment reflects a sophisticated balancing of competing interests—revenue
protection versus avoiding cascading taxation, textual fidelity versus purposive
interpretation, and categorical rules versus economic realities. By focusing on the
functional role of buildings in generating taxable supplies rather than their physical form
alone, the Court advanced a substance-over-form approach to tax classification.
However, the government's swift response through both a review petition and proposed
retrospective amendment suggests these benefits may be short-lived. This response
highlights ongoing tensions between revenue considerations and GST's conceptual
foundations as a value-added tax system.
Regardless of its ultimate fate, the Safari Retreats judgment has already made a lasting
contribution to tax jurisprudence by demonstrating how courts can navigate complex
technical provisions while respecting both legislative text and economic substance. It will
likely influence future interpretations of ITC provisions and shape ongoing debates about
the proper design and implementation of India's GST system.
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