Input Tax Credit for Commercial Buildings

Input Tax Credit for Commercial Buildings: Supreme Court Sets “Functionality Test” in Safari Retreats

By LawAcademy Editorial Team

Published on October 4, 2026

In a significant ruling addressing the interplay between infrastructure development and indirect taxation, the Supreme Court of India delivered its verdict in the long-debated Safari Retreats matter concerning the eligibility of Input Tax Credit (ITC) on goods and services used to construct commercial real estate meant for leasing.

Interpreting Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017, the apex court declined to strike down the statutory provision as unconstitutional, but ruled that whether a commercial building qualifies as a “plant” to avail ITC must be evaluated on a case-by-case functionality test.

The Legal Dispute & Section 17(5)(d)

Under Section 17(5)(d) of the CGST Act, Input Tax Credit is blocked for:

“goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”

• The Taxpayer’s Dilemma: Developers constructing shopping malls, commercial complexes, and technology parks incur massive GST expenses on raw materials (steel, cement) and construction services. While leasing these spaces attracts GST on rental income, revenue authorities routinely blocked ITC on construction expenses by classifying the buildings as non-exempt immovable property rather than “plant.”
• High Court Position: The Orissa High Court had previously read down the provision, holding that denying ITC when outward supplies are taxable breaks the core chain of credit and leads to cascading double taxation.

Supreme Court’s Key Findings

• Provision Held Constitutionally Valid: The Supreme Court upheld the constitutional validity of Section 17(5)(d), observing that the legislature enjoys broad leeway in classifying economic transactions and restricting tax credits.
• The “Functionality Test” for Plant: The Court clarified that the statutory exception for “plant or machinery” cannot be applied mechanically. The bench held that if a building is so specifically designed and integral that the business activity (leasing/hospitality/storage) cannot be carried out without it, such premises may satisfy the test of being a “plant.”
• Factual Evaluation Required: The Court declined to make a blanket declaration that all malls or leasing properties constitute a “plant.” Instead, it remanded matters to the High Court and factual adjudicating authorities to determine whether the real estate assets meet the functionality test based on technical evidence.
• Interpretation of “On His Own Account”: Clarified that where property is constructed for the purpose of letting out to tenants (generating an unbroken chain of output GST), it requires strict scrutiny to determine whether it is constructed “on own account” under the exclusionary clause.

Impact on Real Estate & Commercial Developers

The decision provides a viable legal pathway for developers of specialized commercial assets—such as data centers, logistics warehouses, cold storage chains, and modern tech parks—to substantiate that their built infrastructure functions as an operational “plant,” unlocking input tax credit claims running into hundreds of crores across the real estate sector.

Reference & Source

• Case Title: Chief Commissioner of Central Goods & Service Tax & Ors. v. M/s Safari Retreats Pvt. Ltd. & Ors. (Civil Appeal No. 2948 of 2023)
• Bench: Justices Abhay S. Oka and Sanjay Karol
• Date of Judgment: October 3
• Statutory Focus: Section 17(5)(c) & 17(5)(d), Section 16 of the Central Goods and Services Tax (CGST) Act, 2017.