Safari Retreats and the Functional Plant Test: Rethinking Blocked Credits under GST

Introduction

From its inception, the Goods and Services Tax (GST) was sold politically and constitutionally as a “good and simple tax” premised on seamless input tax credit (ITC) and tax neutrality. Yet some of the most litigated provisions in the regime are precisely those that block ITC, especially Section 17(5)(c)/(d) of the Central Goods and Services Tax Act, 2017 (CGST Act). The Supreme Court’s judgment in Chief Commissioner of Central Goods and Service Tax & Ors. v. Safari Retreats Private Ltd. & Ors. (2024) is therefore a crucial constitutional and interpretive moment in GST jurisprudence.

In Safari Retreats, the Court rejected a broad constitutional attack on blocked credits while carving out a doctrinally significant “functional plant” test that may allow ITC for certain commercial buildings used for leasing. Subsequent legislative and judicial developments, including a retrospective amendment to Section 17(5)(d) and dismissal of the Union’s review petition in 2025, have converted the case into a subtle site of dialogue, and tension, between Parliament and the Court.

This blog argues that Safari Retreats reflects a characteristic Indian compromise: strong deference to legislative tax policy on the one hand, and an interpretive innovation that partially vindicates GST’s neutrality promise on the other. It also suggests that the subsequent retrospective amendment raises difficult questions about the limits of legislative override when credits have crystallized in reliance on judicial precedent.

Factual and statutory backdrop

The business model of letting out units on a lease basis saw Safari Retreats Private Ltd. constructing a shopping mall whereby the ITC on inputs and input services used in construction amounted to nearly ₹34 crore. Although the rental service of these premises was subject to taxation as a “supply of service” under Schedule II of the CGST Act, the Department rejected the set off of construction stage ITC of rent against output tax on the rent, relying on the bar in Section 17(5)(d) of the Act.

Section 17(5)(c)/(d) excludes ITC on works contracts and commodities or services used in the construction of property “on his own account”, with the exception of “plant and/or machinery” (under clause (c)/(d)). The Orissa High Court read down Section 17(5)(d) to permit ITC where the immovable property is built for letting out and rental income is taxed, holding that denying credit in such circumstances defeats GST’s anti‑cascading design and violates Articles 14 and 19(1)(g). The Revenue appealed, and several writ petitions directly questioning the constitutionality of sub-clause (c) and (d), and Section 16(4) were designated and heard jointly by the Supreme Court.

Supreme Court’s holding: validity preserved, interpretation re‑tooled

The Supreme Court (Abhay S. Oka and Sanjay Karol, JJ.) framed two clusters of issues: first, the constitutionality of Section 17(5)(c)/(d) and 16(4); and second, the proper interpretation of the expression “plant or machinery” in Section 17(5)(d).

On constitutionality, the Court affirmed clauses (c) and (d) as a valid legislative classification between some categories of immovable property and other inputs under the Article 14’s jurisprudence by paying substantial attention to economic and tax policies. Drawing on R.K. Garg v. Union of India & Ors., the Court once again made clear that ITC is only a statutory right of Section 16, which is not a constitutional right under Articles 14, 19(1)(g) or 300A. It has thus refused to strike down the clauses on the grounds of vagueness or arbitrariness, rejecting the Orissa High Court’s approach that had been rooted in the judgement of Eicher Motors Ltd. & Anr. v. Union of India & Ors. and the tax neutrality rhetoric.

On interpretation, however, the Court made a decisive move: it stated that the definition of the phrase “plant and machinery” in the Explanation to Section 17 is irrelevant to the phrase “plant or machinery” in the sentence in clause (d). Noting that “plant and machinery” is used several times in Chapters V and VI, but "plant or machinery” is used in Section 17(5)(d) once only, thus the Court regarded this to be a conscious action on the part of the legislation, and not a drafting mistake. It therefore refused the Revenue’s invitation to read “or” as “and” or to extend the Explanation’s exclusion of “land, building or any other civil structure” to the word “plant” in clause (d).

The functional plant test under GST

To resolve this interpretive void, the Court imported the “functional test” from income‑tax jurisprudence on what constitutes a “plant” in provisions dealing with depreciation. Relying on Commissioner of Income Tax, Andhra Pradesh v. M/s Taj Mahal Hotel, Commissioner of Income Tax, Karnataka v. Karnataka Power Corporation and Commissioner of Income Tax v. Victory Aqua Farm Ltd., the Court held that a building or structure may be a “plant” provided it is an apparatus or tool with which business is conducted as opposed to being a mere setting in which business is conducted.

The Court presented a three-part functionality test to recognize whether a building constitutes “plant” under Section 17(5)(d): (a) the character of the business of the registered person; (b) the function which the building plays in the business; and (c) whether construction of that building is essential to perform the taxable activity, such as renting or leasing. If this test is satisfied, the building can be regarded as a “plant” and, thus, can be subjected to the exception to blocked credit in clause (d), subject to other statutory conditions.

Importantly, the Court stopped short of declaring the Safari Retreats mall itself a “plant” as a matter of law. Rather, it stayed the decision of the Orissa High Court and re-examined the case for a factual determination of whether the shopping mall, by evidence, satisfies the functionality test. The same tact was applied to the other petitioners challenging Section 17(5) with the Court stating that different cases have to be determined based on their own factual matrix.

Deference versus neutrality: a doctrinal compromise

Safari Retreats therefore represents a subtle trade off. On the one hand, by upholding clauses (c) and (d) and Section 16(4), the Court affirmed the legislature’s broad purposive freedom to design a GST regime that is not seamless in ITC terms. The judgment acknowledges that the GST model could justifiably trade off some level of neutrality to contain what would be seen to be abuse or loss of revenue in the real estate and works-contract industries.

Contrastingly, when assigning independent meaning to the term “plant or machinery” as also by assuming a functional interpretation of the word “plant”, the Court also limits the effect of blocked credits to cases in which the immovable property, itself, is the instrumentality by which taxable services are provided. Commercial malls, warehouses and certain specialized facilities used exclusively for taxable leasing or renting may now, at least in theory, qualify for ITC if they pass the functional test, even though the generic category of “building” is still barred under the Explanation for clause (c).

This is an interesting approach from a doctrinal standpoint, because the Court is unwilling to constitutionalize ITC, yet engages in a strict textual and functional approach to secure a handful of taxpayers, whose business models squarely fit the GST’s value added logic. This, in effect, constitutionalizes method over outcome: the legislature may block credit, but courts will police the accuracy of drafting and oppose interpretive and inferential short-cuts that expand exclusions beyond their statutory language.

Legislative override and the retrospective amendment

The story does not end with this judgment. The parliament rectified Section 17(5)(d) (via the Finance Act 2025, based on the Union Budget 2025) with effect from 1 July 2017, substituting the term “plant or machinery” with “plant and machinery”. This amendment clearly agrees with the narrower definition of clause (d), and thus attempts to legislatively neutralize the functional plant route, which Safari Retreats had opened up for buildings used for leasing.

Several commentators have interpreted this as an effort to “close the Safari Retreats route” by ensuring that civil structures like malls and warehouses cannot be treated as “plant”, and receive ITC services following the amendment, even where they are essential to the supply of taxable services. Meanwhile, in May 2025, the Supreme Court dismissed the review petition filed by the Union against its 2024 ruling, and held that there was no error apparent on the face of the record and thereby affirming the correctness of the initial rationale.

The coexistence of a binding judicial precedent and a retrospective statutory amendment is a challenging consideration. On one view, the amendment would have a prospective and retrospective effect in changing the law, but cannot undo credits that have already crystallized on the basis of Safari Retreats during the window between October 2024 and the enactment of the Finance Act 2025. On another note, the express retrospective date of effect can allow the Revenue to suggest that no vested rights were performed under the old terminology, especially since ITC is a statutory right as opposed to a constitutional one.

Although such matters remain yet to be decisively adjudged by a bigger bench, they foreshadow a significant normative problem, namely how far can the parliament use retrospective amendments to undo the practical impact of a judicial interpretation that taxpayers have structured their affairs around, especially in a tax system built on predictability and neutrality.

Practical implications and open questions

For developers and commercial lessors, even as it is in part overruled, Safari Retreats will be a vital precedent in at least three aspects. First, during time, before the 2025 amendment, taxpayers can claim that buildings which are actually used as instruments of taxable leasing, can be considered to be a “plant” and hence fall outside blocked credit, especially in cases where assessments are still open or under dispute. Second, in cases where the constitutional validity of retrospective amendment itself is subject to challenge (such as due to an allegation of obvious arbitrariness or unreasonable impact on legitimate expectations), the Court’s earlier recognition of GST’s anti‑cascading philosophy in Union of India & Ors. v. Mohit Minerals Pvt. Ltd and its interpretive strictness in Safari Retreats may provide doctrinal hooks.

Third, even under the amended regime, the functional‑plant reasoning may be transplanted to other GST contexts where the statute uses the term “plant” without importing exclusions for buildings, thereby offering taxpayers an interpretive advantage beyond Section 17(5). This possibility has already received academic commentary, with some suggesting that Safari Retreats can live a longer life as an expression of functional interpretation of indirect tax, than as a direct route to ITC on immovable property.

Nevertheless, serious doubts and uncertainties remain. The interplay between the retrospective amendment, the dismissed review petition, and ongoing cases, is likely to create a legal tussle over limitation, vested rights, and the proper use of retrospective tax legislation. Moreover, questions such as whether proportionate ITC can be permitted in cases where some portion of a complex functions as a “plant”, or the treatment of mixed-use premises, are still far from settled. In that sense, Safari Retreats offers less of an endpoint, and more a constitutional waypoint in the developing text of GST ITC.

Conclusion

Safari Retreats is a classical example of how the Supreme Court navigates the tension between tax‑policy deference and the structural assurances offered by a constitutionalized GST. In refusing to constitutionalize ITC but insisting upon a very strict and functional interpretation of the term "plant or machinery" the Court safeguarded a highly restricted and yet normatively significant taxonomy of leasing based businesses, which occupy a very comfortable position within the value-added logic of GST. Parliament’s prompt retrospective response via the 2025 amendment is evidence of the economic interests of that interpretive step, and sets up an important future debate on the rule of law limits of legislative overrides in tax.

The real meaning of the Safari Retreats may however differ to scholars and practitioners not just in terms of its direct effect upon ITC for commercial real‑estate leasing, but in its articulation of a functional, business-reality‑sensitive approach to interpreting GST provisions at the boundaries of tax neutrality and statutory exclusion.

Author: Eshan Garg, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

1. Chief Commissioner of Central Goods and Service Tax & Ors. v. Safari Retreats Private Ltd. & Ors., Civil Appeal No. 2948 of 2023 etc., judgment dated 3 October 2024 (2024 INSC 756).

2. NLF Tax & Legal Advisory, “Supreme Court judgment redefines ‘plant or machinery’ under GST, potentially allowing ITC for shopping malls.

3. Taxsutra, “SC: 15 Key Takeaways from SC Judgment in Safari Retreats on Blocked Credit/ITC Availment.

4. Taxguru, “SC on ITC for Construction Under GST: Safari Retreats Case.”

5. Indian Journal of Integrated Research in Law, “Chief Commissioner of Central Goods and Service Tax v. Safari Retreats Private Ltd. - A Critical Analysis.”

6. Business‑Standard report and allied tax reports on dismissal of the review petition and the 2025 retrospective amendment to Section 17(5)(d) CGST Act.