Functionality Test Under Siege: Legislative Override of Judicial Interpretation in Safari Retreats

The author is Shubhanshi Suman, a Fourth Year Student from Bharati Vidyapeeth (Deemed University), New Law College, Pune.

Abstract:

The Goods and Services Tax Act, 2017 (GST) seeks to eliminate the cascading effect of taxes in the previous service taxes regime through the Input Tax Credit (ITC) mechanism. The credit given to the businesses aims to lower the cost of running a business, thereby giving an impetus to the furtherance of business. The credit is utilized by the registered business to pay off the tax liability via electronic credit ledger. There are some prerequisites to avail such ITC enshrined under Section 16 of the Central Goods and Services Tax Act, 2017 (“CGST Act”). While, availability of ITC is a statutory right granted by the CGST Act, it is restricted or blocked in certain instances as mentioned under Section 17 of the CGST Act.

This paper focuses on Section 17(5)(d) of the CGST Act, that blocks ITC for goods and services procured for construction of immovable property for own use or even for the furtherance of business. This provision, however, gives an exception to goods and services procured for the construction of Plant or Machinery. The issue was raised in the case of Chief Commissioner v. Safari Retreats Private Ltd. as to whether the phrase “Plant and Machinery” and “Plant or Machinery” implies the same meaning. The Apex court ruled in the favour of the petitioner that the two are distinct phrases and the term ‘or’ in Section 17(5)(d) implies separation between ‘Plant’ and ‘Machinery’. Further, a functional test was established to ascertain the status of ‘Plant’ to claim ITC under the said provision. While this precedent provided a clarity as to the phrase “Plant or Machinery”, the Budget 2025-2026, amends the phrase ‘Plant or Machinery’ to ‘Plant and Machinery’ under Section 17(5)(d), thereby retrospectively overriding the judgement of the Hon’ble Supreme Court.

This paper critically evaluates the functional test for determining ‘Plant’ status, assesses the validity of the Supreme Court’s judgment in light of the amendment, and explores the broader implications of this legislative change on ITC claims and tax policy.

Keywords: Section 17(5)(d) CGST Act, Plant or Machinery, ITC claims, functionality test.

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Introduction

Every registered person under the GST Act having a proper invoice and falling under the eligibility criteria and other conditions under Section 16 of the CGST Act^[1] is entitled to credit. The availment of ITC is merely a statutory right that is conferred by the statute and can be carved out by the legislature. Section 17(5) of the CGST Act^[2] covers the instances when ITC will not be available for taxable supplies. Clause (d) of the provision explicitly excludes ITC on goods or services or both procured for the purpose of construction of an immovable property on own account and for the furtherance of business. This provision, however, excludes goods and services procured for the purpose of construction of Plant or Machinery. The catch in this provision is that the phrase used is Plant ‘or’ Machinery instead of Plant ‘and’ Machinery as is used everywhere else in the CGST Act. The Hon’ble Apex Court gave a disjunctive interpretation of the word ‘or’ used in the phrase ‘Plant or Machinery’, thereby assessing the functionality test for the word ‘Plant’ to claim ITC under the CGST Act. The recent amendment by the Budget of 2025-26 replaces the word ‘or’ with ‘and’ appending a conjunctive interpretation as against the judgement of the Hon’ble Apex Court. The repercussions of the amendment are to be analyzed as against the judgement.

Overview of the Judgement in Safari Retreats Case

1.1  Background of the case:

The petitioner, Safari Retreats, was engaged in building a shopping mall for letting out premises to different tenants, for which goods and services were procured. ITC on such goods and services were denied citing Section 17(5)(d) of the CGST Act. The petitioner contended that the property would be utilized to generate a fresh stream of GST revenue through rental income. The denial of ITC in the instant case would be in contradiction to the scheme of GST. The legal controversy particularly focused on the interpretation of the phrases “plant and machinery” in Section 17(5)(c) and “plant or machinery” in Section 17(5)(d), with the latter lacking a definition in the Act’s explanatory notes. The taxpayers contended that these differences led to inconsistent treatment, affecting their entitlement to ITC, while the revenue department maintained that the distinctions were deliberate and valid under the law.

1.2  Interpretation of “Plant or Machinery” by the Apex Court

The Supreme Court, in its ruling, emphasized that the terms “plant and machinery” (as used in Section 17(5)(c)) and “plant or machinery” (as used in Section 17(5)(d)) were deliberately chosen to signal different legislative treatments. The Court clarified that the conjunctive “and” in one instance and the disjunctive “or” in the other should not be conflated. Specifically, it held that the disjunctive reading in Section 17(5)(d) permits a taxpayer to claim ITC if the immovable property qualifies as either a “plant” or “machinery,” rather than requiring it to meet both conditions simultaneously. This interpretation aimed to align the statutory provisions with the underlying objective of avoiding the cascading effect of taxation.

1.3  Functional Test for determining the Status of a “Plant”:

Since, the term “plant” is not expressly defined in the CGST Act, the Supreme Court introduced a functional test in this case, to determine whether an immovable property could be considered a “plant” for ITC purposes. This test involves a fact-specific analysis where the intrinsic characteristics and the commercial utility of the property are evaluated. The commercial functionality of an immovable property was to be determined as to whether the property plays an essential role in the generation of output services (such as renting or leasing), thereby contributing to a continuous flow of GST revenue. Secondly, the usage of the property in business operations was to be assessed so as to ascertain the property business operations were beyond mere personal investment. The Court’s approach mandates a case-by-case evaluation, ensuring that only those properties that effectively function as a “plant” can benefit from ITC, thereby preserving the intended flow of credit.

1.4  Implications of the Judgement on ITC Claims:

The Hon’ble SC widened the scope of ‘Plant’ for availing ITC under the CGST Act by giving a disjunctive interpretation to Plant and Machinery. The decision also set a stage for further disputes as the ‘functionality test’ might be challenged by the revenue authorities on factual grounds. The judgment underscores the critical need for a consistent and clear interpretation of statutory language. The Budget 2025-26 amendment, replaced “or” with “and,” thereby narrowing ITC eligibility. While the judgment reinforces the principle that ITC is a statutory right subject to specific conditions, it also highlights the complexities in balancing legislative intent with judicial interpretation in the realm of tax policy.

LEGISLATIVE AMENDMENT AND ITS IMPACT

2.1  Analysis of the Budget 2025-26 amendment to Section 17(5)(d)

The Budget 2025-26 retrospectively amends the phrase “Plant or Machinery” to “Plant and Machinery,” from 1^st July, 2017 thereby overruling the interpretation of the Hon’ble SC in the case of Safari Retreats. This amendment was recommended by the 55^th Meeting of the GST Council. The revision aims to correct what was identified as a drafting error. By aligning the language with the broader legislative framework (where “plant and machinery” is consistently used), the amendment seeks to clarify ITC eligibility and curb potential misuse.^[3] The amendment seeks to restrict ITC claims strictly to those goods and services used in acquiring or constructing assets that clearly qualify as both plant and machinery. It has been acknowledged by the officials that have acknowledged that the earlier “or” connotation inadvertently broadened ITC eligibility, thereby potentially distorting the tax credit mechanism and increasing the risk of cascading tax effects.

2.2  Retrospective Impact on Businesses and Pending Litigations

This retrospective amendment burdens the taxpayers who relied on the judgement of the Hon’ble SC in the Safari Retreats case for availing ITC being qualified as ‘Plant’ under the functionality test established by the Court. The real estate industries that were reliant on ITC benefits for commercial properties shall experience adverse effects, potentially leading to a contraction in investment and operational challenges. When the amendment comes into force, the taxpayers shall face credit reversals with possible interest implications. This amendment will bring financial uncertainty with increased compliance costs and unpredictability in the tax treatment of capital expenditure.

The amendment could be challenged on the ground that ITC is a vested right that is accrued in the favour of the assessee, which cannot be retrospectively revoked through an amendment.^[4]  The retrospective amendment denying the benefit of ITC to assessee is against the spirit of stability and predictability.

2.3  Change from “Plant or Machinery” to “Plant and Machinery” – Legislative Intent and Rationale:

Under the earlier interpretation, businesses could claim ITC on construction costs of immovable properties if the assets (like shopping malls or commercial buildings) passed the functionality test qualifying them as “plant” in a wider sense. This test allowed a flexible, purpose-driven determination where a building integral to business operations could be deemed a plant, thereby qualifying for ITC. The revised language confines ITC claims to assets that unambiguously qualify as both plant and machinery. The amendment mandates that the definition of plant and machinery, as clarified in the Explanation to Section 17, uniformly applies across all provisions, thereby reducing interpretative discrepancies. The shift from a purposive, functionality-based approach to a literal interpretation significantly alters the ITC landscape, potentially reducing tax relief for many sectors and impacting the overall cost structure of business operations.

JUDICIAL VS. LEGISLATIVE INTERPRETATION: A CRITICAL ANALYSIS

3.1  Disjunctive and Conjunctive Interpretation:

Taxing statutes are to be strictly interpreted. A single word can alter the scope and implication of tax. Words such as ‘or’ and ‘and’ determine whether conditions are to be met independently or cumulatively. The term “And” requires that all connected conditions are fulfilled simultaneously, thereby narrowing the scope, while the term “Or” permits satisfaction of any one among multiple alternatives, thereby broadening eligibility or applicability.

The Allahabad High Court found in the case of Shree Sai Palace that “And” imposes a cumulative requirement, mandating that all linked conditions must be satisfied. Conversely, “or” creates alternatives, requiring compliance with any one of the listed conditions. Courts prioritize the ordinary grammatical meaning of these terms unless it leads to absurdity or contradicts legislative intent. In Shree Sai Palace, the disjunctive “or” in Section 75(4) U.P. GST Act ensured procedural fairness by mandating hearings in two distinct scenarios, reflecting the intent of the legislature to balance administrative efficiency with taxpayer rights. Misinterpreting “or” as “and” would have narrowed safeguards, violating principles of natural justice.

A similar interpretation was given by the SC in the Safari Retreats case, however, the amendment in the Budget 2025-26, shows that the ‘or’ used in the phrase “Plant or Machinery” used under Section 17(5)(d) was nothing but a drafting error. This amendment changes the entire paradigm of ITC claims and leads to reversal of credit with a retrospective effect giving a serious blow to the businesses that relied on the judgement of the SC in the Safari Retreats case in 2023 and thereby availed ITC.

3.2  Constitutional Validity of Retrospective Amendment in Taxation:

Legislature derives power to retrospectively amend the taxing statutes from the Constitution. However, this power is limited by two major exceptions. Firstly, the amendment must be within the legislative competence of the Parliament or the State legislature. Secondly, it must be reasonable and consistent with Article 13(2) of the Constitution of India. Through a plethora of judgements, the judiciary has reinstated the competency of the legislature to amend the tax laws retrospectively and retroactively. In the case of Chhotabhai Jethabhai Patel and Co. v. Union of India,^[5] the Hon’ble Apex Court found that “if there was a power to impose taxation conferred by a constitution, the legislature could equally make the law retroactive and impose the duties from a date earlier than that from which it was imposed.” Further, in the case of National Agricultural Co-operative Marketing Federation of India Ltd. & Ors. v. Union of India & Ors.,^[6] the Apex Court recognized the underlying limitations of the legislature in enacting a retrospective amendment to a taxing statute. It was highlighted that, “the power to amend the law with retrospective effect is subject to several judicial recognized limitations, one of which is that the retrospectivity just be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional.”

CHALLENGING THE AMENDMENT BY FINANCE ACT 2025.

The current amendment disguised as a ‘drafting error’, and effectively overruling the well-established law reinstated in the case of Safari Retreats, inadvertently strips multiple stakeholders in the said business of their ITC claims. This amendment could be challenged on various grounds.

4.1  The Amendment vitiates the vested right of the stakeholders.

The amendment seeks to reverse the ITC claimed by the relevant stakeholders, which is a vested right of the stakeholders. It was found in the case of Union of India v. Bharati Airtel Limited & Ors.,^[7] that the claim of ITC flows from Article 300A of the Constitution as vested right or a property. Further, in the case of Siddharth Enterprises v. The Nodal Officer,^[8] the Hon’ble High Court of Gujarat found that credit is a vested right and disallowing such right is offensive and Article 14 of the Constitution of India as it goes against the doctrine of legitimate expectation.

The amendment brought to Section 17(5)(d) of the CGST Act, with respect to the phrase “Plant or Machinery” to “Plant and Machinery”, inadvertently strips away the previous crystallized right of the stakeholders to ITC claims. In the case of Eicher Motors Ltd. v. Union of India,^[9] the Hon’ble SC found that credit once claimed and used in the manufacturing process, becomes a vested right. While the government can alter the scheme for future transactions, it cannot retroactively disturb rights that have already crystallized.

4.2  The retrospective amendment overrides the well-established rule of law.

The Hon’ble Apex Court found in the case of Govinddas and Ors. v. The Income Tax Officer and Anr.,^[10] that “retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.” In the instant scenario, the retrospective amendment creates a new liability to the stakeholders by giving a conjunctive interpretation of Plant and Machinery. While this interpretation can operate prospectively, a retrospective amendment would destabilize the industry imposing the taxpayers with the heavy burden of credit reversal. It was reinstated in the case of Commissioner of Income Tax (Central)- I, New Delhi v. Vatika Township Pvt. Ltd.,^[11] that any law that imposes an additional burden on the taxpayer should be prospective in nature. Retrospective meaning to a provision should only be made to correct some law to the benefit of the taxpayer.

The amendment overrules the decision of the Hon’ble Apex Court. When the after-effects of such retrospective amendment overruling the decision of the Court is analysed, it is seen that the amendment tends to encroach the vested rights of the stakeholders. The question whether the legislature could override the decision of the Apex Court by means of a retrospective amendment was answered in various cases. In the case of Virender Singh Hooda & Ors. v. State of Haryana & Anr.,^[12] the Hon’ble SC noted that “the Legislature though has the power to enact laws with the retrospective effect but has no power to change a judgment of the court of law either retrospectively or prospectively.” The amendment has created a situation of clash between the powers of legislature and judiciary. While the judicial arm had interpreted the law and gave a clear-cut principle, the legislative arm retrospectively encroached the established law. Now, the assessment and validity of the law framed by the legislature has to be again interpreted and reframed by the judiciary.

The amendment is in the nature of intentionally vitiating the well-established principle of law by the Judiciary. In various cases, the Hon’ble has stipulated guidelines regarding how a retrospective amendment should be made to validate an act that was invalidated by a judicial decision. Firstly, the validating or retrospective amendment must be made within the legislative competence. Secondly, it must not violate any fundamental right, and finally, the amendment should not be enacted with the primary intention of nullifying a judicial decision. It is clear in the instant scenario, that the legislature has framed a law deliberately nullifying the decision of the Hon’ble SC. In the case of Ujagar Prints Etc. v. Union of India & Ors. Etc.,^[13] the Apex Court noted that the legislature is competent to make retrospective amendments to validate the law that is invalidated by the court. However, in the instant case, the legislature has invalidated the law established by the Court. It not only encroaches upon the rights of the taxpayers, but also vitiates the well-established rule of law declared by the Hon’ble SC.

CONCLUSION

The instant scenario represents a tussle between legislature and the judiciary with respect to the retrospective amendment of “Plant or Machinery” to “Plant and Machinery”. The Safari Retreats case expanded the scope of ‘Plant’ by giving a disjunctive interpretation to the phrase separated by ‘or’. The Hon’ble SC appended a functional test to ascertain the qualification of an immovable property as a ‘Plant’ without having the need to have ‘Machinery’. This test widened the scope of availing ITC under Section 16 of the CGST Act. The Budget of 2025-26 retrospectively amends the meaning of the phrase by adding the conjunctive ‘and’ to the phrase “Plant or Machinery.” The impugned amendment by the legislature have made waves in the established principle of law. While the amendment is largely being criticized for encroaching upon the rights of the taxpayers crystallized via the judgement of the Apex Court, the constitutional validity of the amendment could be questioned on multiple grounds. The first major impediment is whether ITC is a vested right. While some judgements affirm such credit to be a vested right, others affirm it to be a concessionbe concession given by the legislature. The doctrine of legitimate expectation could be invoked as the legislature has deliberately encroached upon the established law by the judiciary, thereby curbing and retrospectively calling into question the credits availed by the taxpayers in the relevant industry.

The validity of such retrospective law is to be answered by the judicial arm of governance. A balanced resolution would not only uphold the objectives of the GST framework but also ensure that taxpayer rights and the principles of fairness and predictability in taxation are maintained.

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References:

[1] Central Goods and Services Tax Act 2017, s 16.

[2] Central Goods and Services Tax Act 2017, s 17(5).

[3] Ministry of Finance, 'Recommendations of the 55th Meeting of the GST Council' (Press Information Bureau, 21 December 2024) https://pib.gov.in/PressReleasePage.aspx?PRID=2086873 accessed 25 February 2025.

[4]2015 (326) ELT 26 (SC).

[5] 1961 (12) TMI 1 – SC.

[6] 2003 (3) TMI 758- SC

[7] (2021) SCC OnLine SC 1006

[8] AIRONLINE 2019 GUJ 355.

[9] AIR 1999 SC 892.

[10] 1975 (12) TMI 144 – SC.

[11] 2014 (9) TMI 576 - SC.

[12] 2004 (10) TMI 585 - SC.

[13] AIR 1989 SC 516.