Analysis of the recent judgment of Orissa HC judgment on ITC of works contract in M/S Safari Retreats
The issue involved in the said case was regarding availability of ITC on construction of a commercial mall in terms of Section 17(5) of the CGST Act r/w OGST Act wherein a writ petition was preferred before the High Court of Orissa, Cuttack.
The said petition challenged actions of the revenue whereby use of credit accumulated by the petitioners through purchase of inputs for construction of the said immovable property intended for letting out on rent was being barred to be used by the petitioner for discharging its tax liability on such letting of the said property.
Issues raised by the petitioner
- In the said case, the business of the petitioner, inter-alia, consists of construction of shopping malls and letting them out to different persons on rental basis. The said rent income is subject to levy of CGST & State GST (OGST). The petitioner was desirous of availing input tax credit of GST charged on purchase/supply of goods & services which were consumed and used in the construction of the shopping mall, in order to utilize the said input tax credit for payment of CGST & OGST on rent received from the tenant of the said shopping mall. In this regard the Petitioner approached the revenue authorities.
- However, the revenue authorities advised the Petitioner to deposit the collected tax without taking input tax credit in view of restrictions placed as per section 17(5)(d) and warned of penal consequences if it did not do so.
- It was the contention of the petitioner that in view of various judgements of the Supreme Court such as Eicher Motors Ltd. v. Union of India and Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd. and that credit available in respect of the construction material cannot be denied where further provisions of taxable supply is been made in continuity. Thus, the petitioner preferred the current writ petition.
- It was the submission of the petitioner that by an interpretation which denies ITC in such a situation shall lead to absurdity as the intent of the GST law is to do away with double taxation and multiplicity of taxation and such an interpretation shall be opposed to the intention so referred. Such interpretation shall first lead to imposition of tax on the raw material and thereafter break the credit chain by disallowing the credit in respect of raw materials so purchased and further thereafter impose GST on outward supply of renting of immovable property. This shall lead to double taxation and impose higher costs for the ultimate recipient of service and the chain to follow.
- It was the submission of the petitioner that such interpretation was also in violation of Article 14 and 19(1)(g) of the constitution as it creates discrimination between the petitioner and other suppliers/ GST registrants who were engaged in business where continuous chain of supply exists.
Findings of the Court :-
- In the said order, the court accepted the submission of the petitioners that 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) of the CGST Act r/w OGST Act, 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.
- The Hon’ble Orissa High 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 High 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.
- In such case the petitioner’s prayer was that on this ground Section 17(5)(d) of the CGST Act and OGST Act has to be struck down as violative of Article 14 of the Constitution and if the said section is not read down by the court.
- The Hon’ble Court chose to read down Section 17(5)(d) of the CGST Act and OGST Act.
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.