Safari Retreats v. Union of India: how the Supreme Court read 'plant or machinery' to permit ITC on commercial leasing buildings — and how the Finance Act 2025 retrospectively undid the reading

The Supreme Court's judgment of 3 October 2024 in Chief Commissioner of Central Goods and Services Tax v. Safari Retreats Pvt. Ltd. — reported as 2024 INSC 756 — is one of the most consequential interpretive engagements with the GST input-tax-credit architecture since the regime's inception. A two-judge bench of Justices Abhay S. Oka and Sanjay Karol held that the textual choice of "plant or machinery" — rather than "plant and machinery" — in clause (d) of Section 17(5) was deliberate, and that the functionality test of pre-GST jurisprudence could open the door for commercial-leasing operators to claim input-tax credit on construction inputs.

The judgment is consequential on two related propositions — and is now operationally consequential for a third, supervening reason. The first proposition is the textual one: that the legislature's drafting choice in Section 17(5)(d) must be respected, and the "or" cannot be construed as "and". The second is the methodological one: that the functionality test — under which a building is "plant" if it is the apparatus by which the business is carried on, rather than merely the setting in which business is carried on — is the operative enquiry. The third — supervening — is that the Finance Act 2025, by substituting "and" for "or" in clause (d) with retrospective effect from 1 July 2017, has nullified the substantive consequence of the ruling for periods before and after the judgment. The judgment's doctrinal life now lies in the constitutional challenges to the retrospective amendment that are mounting in the High Courts.

The statutory architecture before the Bench

The substantive question arose under the input-tax-credit architecture of the CGST Act 2017. Section 16 of the CGST Act establishes the general entitlement to input-tax credit; Section 17 then carves out a series of restrictions. The restriction at the heart of Safari Retreats is in clause (d) of Section 17(5).

Clause (d) of Section 17(5), as it then stood, denied input-tax credit on "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." Clause (c) — the parallel restriction — denied credit on "works contract services when supplied for construction of an immovable property (other than plant and machinery)" except in specified contexts.

The drafting asymmetry was textual and visible. Clause (c) used "plant and machinery"; clause (d) used "plant or machinery". An Explanation to Section 17 defined the expression "plant and machinery" — apparatus, equipment, and machinery fixed to earth by foundation or structural support that is used for making outward supply — explicitly excluding "land, building or any other civil structures". The Explanation, on its terms, defined the conjunctive expression "plant and machinery"; it did not define the disjunctive "plant or machinery".

The substantive question — central to the case — was whether the textual difference between clause (c) and clause (d) was deliberate, or whether the legislature had used "or" in clause (d) as a casual variant of "and" with the same definition imported from the Explanation. The downstream consequence — for commercial-leasing operators who build shopping malls, hotels, and warehouses out of which to supply taxable rental or accommodation services — was whether the construction inputs (cement, steel, contracting services) attracted input-tax credit recoverable against the output tax on the leasing or accommodation supply.

The pre-GST line on the same conceptual question was the "functionality test" of Anand Theatres v. Commissioner of Income-Tax and the broader line of income-tax depreciation jurisprudence on the meaning of "plant" — under which a building can be "plant" if it functions as the apparatus by which the business is carried on. The functionality test had been applied in cases involving custom-built premises like dry-docks, refrigerated cold storage and specialised laboratories; the analytical move was to ask whether the building was "the means by which" the business was conducted, or "the setting in which" the business was conducted.

The factual matrix

Safari Retreats Pvt. Ltd. — the respondent in the lead appeal — was a developer of shopping malls. The lead matter concerned the construction of a mall in Bhubaneswar built out for letting on a long-term lease basis to retail tenants. The construction inputs — cement, steel, fixtures, contracting services — attracted substantial GST. The output supply was the taxable supply of leasing services to the retail tenants, attracting GST.

The Revenue's position was that Section 17(5)(d) denied input-tax credit on the construction inputs. The denial would produce a cascading effect — GST paid on construction would be a sunk cost, not recoverable against the output tax on the leasing supply — substantially eroding the commercial viability of the mall-development model.

The Orissa High Court, in a writ petition by Safari Retreats, had held in 2019 that Section 17(5)(d) should be read down to permit input-tax credit where the immovable property is constructed for use in the further supply of taxable services. The High Court adopted the functionality test — holding that a shopping mall is constructed as the apparatus by which the leasing business is conducted, not merely as the setting in which it is conducted. The Revenue appealed to the Supreme Court.

The matter accumulated companion appeals from similar disputes involving warehouses, hotels and other commercial-leasing operators. The Supreme Court heard the appeals together and delivered the judgment on 3 October 2024.

The Court's reasoning

The Bench's reasoning unfolded along three connected limbs.

The textual limb. The Court held that the textual distinction between "plant or machinery" (in clause (d) of Section 17(5)) and "plant and machinery" (in clause (c) and in the Explanation) was deliberate and must be respected. The Explanation defined the conjunctive expression and did so by exclusion of buildings and civil structures; it did not extend its definitional reach to the disjunctive expression in clause (d). The legislative drafting choice was, the Court held, a choice that the judiciary could not erase by reading "or" as "and". Where the legislature uses different expressions in proximate provisions, the prima facie inference is that the difference is deliberate.

The functionality limb. Having held that the Explanation's definition did not control clause (d), the Court turned to the substantive question of what "plant" in clause (d) means. The Court drew on the pre-GST income-tax depreciation line — Anand Theatres and its progeny — to hold that the functionality test is the operative enquiry. A building can be "plant" for Section 17(5)(d) purposes if it satisfies the functionality test: if it is the apparatus by which the assessee carries on the relevant business, rather than the setting in which the business is carried on.

The Court declined to articulate a universal answer to whether a mall, warehouse, or hotel is "plant". The functionality enquiry, the Bench held, is irreducibly fact-specific — depending on the nature of the business, the architectural specificity of the premises, the role of the building in the supply chain, and the relationship between the building's design and the output supply being made. The lead appeal was remanded to the High Court for fact-specific application of the functionality test on the Safari Retreats premises and the connected matters.

The read-down limb (declined). The Bench declined to strike down Section 17(5)(d) on the constitutional challenge that the assessees had advanced — that the provision, by denying input-tax credit on construction inputs for output-leasing supplies, violated the seamless-credit architecture that the GST regime was constitutionally designed to provide. The Court held that the textual reading — "plant or machinery" given the functionality test — already accommodates the constitutional concern; it was not necessary to strike down the provision. The constitutional challenge, on the Court's framing, was answered by the interpretive route rather than by constitutional invalidation.

The result, as it stood on 3 October 2024, was that mall, warehouse and hotel developers — whose constructions could satisfy the functionality test — were entitled to claim input-tax credit on construction inputs against the output tax on their leasing or accommodation supplies. The decision triggered substantial commercial reassessment of mall, warehouse and hotel development economics, and triggered substantial refund claim activity in respect of input-tax credit denied or reversed in earlier periods.

The Finance Act 2025 retrospective reversal

The substantive consequence of Safari Retreats did not survive the next legislative cycle. The Finance Act 2025, in the GST amendment provisions, substituted the expression "plant or machinery" in clause (d) of Section 17(5) with "plant and machinery" — the conjunctive expression as defined in the Explanation. The substitution was made retrospectively, with effect from 1 July 2017 — the date of the original commencement of the CGST Act.

The retrospective architecture is constitutionally and statutorily aggressive. The retrospective effect operates over the entire life of the CGST regime; the substantive entitlement that the Court had identified in Safari Retreats — the textual disjunctive that the Court had held was deliberate — was rewritten by Parliament to mirror the conjunctive expression, with definitional control passing to the Explanation. The exclusion of "land, building or any other civil structures" in the Explanation therefore now governs both clause (c) and clause (d), as if it had always done so.

The political and administrative narrative accompanying the amendment was that the original disjunctive in clause (d) had been a "drafting error" — a characterisation that the CBIC Chairman publicly endorsed in the weeks after the Finance Bill was tabled. The amendment was, in the Revenue's framing, a clarificatory restoration of the legislative intent rather than a substantive policy change.

The interpretive consequence of the amendment is that input-tax credit on construction inputs for malls, hotels, warehouses and similar commercial premises is once again denied — for all periods, including periods prior to 3 October 2024. Refund claims that had been crystallised in reliance on the Safari Retreats judgment have been impacted; reassessment proceedings invoking the retrospective amendment are now in train.

The review dismissal and the live constitutional terrain

The Department filed a review petition against the 3 October 2024 judgment. The review petition was dismissed by the same bench — Justices Oka and Karol — on 20 May 2025, with the Court holding that "no error apparent on the record" had been shown to justify review. The dismissal is doctrinally an affirmation of the substantive ruling, but its practical effect is muted because the Finance Act 2025 retrospective amendment had, by then, already overtaken the underlying ruling.

The live doctrinal terrain has therefore shifted from the input-tax-credit question to the constitutional question on the retrospective amendment. Writ petitions are now mounting in several High Courts — including the Bombay, Karnataka and Delhi High Courts — challenging the retrospective effect of the Finance Act 2025 amendment on three principal lines.

The first line is the doctrinal-presumption argument: that Commissioner of Income Tax v. Vatika Township Pvt. Ltd. — the Constitution Bench's authoritative restatement of the presumption against retrospective operation of tax statutes that impose new tax or increase burden — operates against the Finance Act 2025 amendment, which substantively denies input-tax credit that was, on the Safari Retreats reading, available. The amendment is, on this view, a substantive provision that imposes a new burden rather than a clarificatory restoration; the presumption of prospectivity should govern.

The second line is the Article 14 / Article 19(1)(g) argument: that the retrospective denial of input-tax credit substantively confiscates economic value that taxpayers had built into their commercial structures in good-faith reliance on the disjunctive text — and that the retrospective effect, in the absence of compelling fiscal necessity, is arbitrary and disproportionate. The arguments parallel — though in a GST setting — the constitutional debate that surrounded the Vodafone retrospective amendment of 2012, which was ultimately rolled back by the Taxation Laws (Amendment) Act 2021.

The third line is the doctrine-of-finality argument: that the retrospective amendment, in operating to disturb refund claims that had been crystallised by the Safari Retreats ruling, infringes the constitutional finality that the judicial process — and especially a Supreme Court ruling — must command.

The High Court proceedings are at varying stages; no consolidated view has yet emerged. The constitutional terrain is live, and the eventual constitutional disposition of the retrospective amendment will determine whether Safari Retreats survives as a doctrinal proposition with refund consequences for some pre-amendment periods, or whether the retrospective amendment closes the question for all periods.

What the judgment did not decide

Three limits should be flagged.

First, the Bench did not articulate a universal answer to whether a particular class of building — malls, warehouses, hotels, hospitals, data centres — qualifies as "plant" under the functionality test. The Court's framing was that the enquiry is fact-specific; the High Court was directed to apply the test on the Safari Retreats facts on remand. The remand position has now been overtaken by the Finance Act 2025 amendment, but the doctrinal point — that the functionality test is fact-specific rather than categorical — remains a feature of the ruling for whatever continuing relevance it retains.

Second, the Bench did not engage with the Explanation's exclusion of "land, building or any other civil structures" insofar as it might be read to extend, by inference, to the disjunctive expression in clause (d). The Court held only that the Explanation defined the conjunctive expression and did not extend by definition to the disjunctive; the question whether the exclusionary policy of the Explanation might, on some constitutional reading, be carried over to clause (d) was not addressed. The question may resurface in the constitutional challenges to the Finance Act 2025 amendment.

Third, the judgment did not engage with the broader architecture of restrictions on input-tax credit under Section 17(5). The other restrictions — clause (c) on works contracts, clauses (a) and (b) on motor vehicles and certain specified supplies — operate on their own statutory frame and were not before the Bench.

The doctrinal arc

The judgment sits in the line of GST input-tax-credit jurisprudence that has, since 2017, sought to give effect to the seamless-credit promise that the GST regime was constitutionally designed to provide. The line includes the High Court rulings — Bharat Aluminium, Chowgule Industries, and the original Safari Retreats Orissa High Court ruling itself — that had read down restrictive provisions to preserve the credit-chain integrity. The Supreme Court's Safari Retreats ruling was the first significant SC-level engagement with the seamless-credit architecture in the Section 17(5) setting.

The doctrinal arc has, however, been reset by the Finance Act 2025 amendment — which is the most aggressive legislative reversal of a Supreme Court interpretive ruling in the GST era. The amendment's retrospective effect repeats the architecture of the Vodafone 2012 retrospective amendment — in which Parliament reversed a Supreme Court ruling in tax-law with retrospective effect, to substantial constitutional controversy. The constitutional engagement that followed Vodafone — including the Cairn / Vodafone BIT arbitrations and the eventual Taxation Laws (Amendment) Act 2021 roll-back — supplies a relevant doctrinal precedent for how the Safari Retreats retrospective amendment may unfold.

The Vatika Township line — the Constitution Bench's articulation of the presumption against retrospective operation of tax statutes that impose new burdens — supplies the principal interpretive resource for the constitutional challenges that are now in train. Whether the High Courts (and, eventually, the Supreme Court) read the Finance Act 2025 amendment as a clarificatory restoration entitled to retrospective effect, or as a substantive imposition presumptively prospective, will be the defining constitutional question of the next phase.

What practitioners take from the judgment today

For indirect-tax practitioners advising commercial-leasing operators, the operative architecture is now substantively closed by the Finance Act 2025 amendment: input-tax credit on construction inputs for malls, hotels, warehouses and similar commercial leasing premises is denied, for all periods from 1 July 2017. The planning conversation has shifted from how to optimise the credit claim to how to structure transactions so that the construction is borne by the lessee (with the lessee taking the credit and recovering the cost through rent), or by single-purpose vehicles whose output supply is structured differently — though each alternative carries its own substantive risk.

For tax-litigation counsel, the live doctrinal terrain is the constitutional challenge to the retrospective amendment. The argument architecture must be built carefully — the Vatika Township presumption, the Article 14 / Article 19(1)(g) substantive challenge, and the finality-of-judgment arguments each carry weight, but each requires careful factual record-building, particularly on the reliance and confiscation dimensions.

For corporate clients with crystallised refund claims based on the original Safari Retreats ruling, the position is acutely precarious. Refund processing has been impacted by the amendment; reassessment notices have been issued; the constitutional challenges in the High Courts are the principal route to preserve the refund position. The administrative architecture for handling these claims pending the constitutional disposition is itself an active area of engagement with field formations.

For constitutional and statutory-construction practitioners, the judgment is a notable instance of textual fidelity yielding to legislative retrospective reversal, with the Supreme Court's review-dismissal preserving the doctrinal point but the Finance Act 2025 amendment closing the substantive consequence. The architecture of judicial-legislative dialogue in tax-law — with the Supreme Court ruling on textual lines and Parliament responding through retrospective amendment — is now a recurring feature of the GST doctrinal landscape.

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