In a move that could foster greater investment in the commercial real estate sector, the Supreme Court provided relief to the industry by allowing the benefits of input tax credits (ITC) on construction costs for commercial buildings intended for leasing.
This ruling is expected to alleviate the financial burden of rents on tenants of commercial spaces. Real estate players such as DLF, Max Estates, and Bharti Realty, among others, are likely to benefit, as buildings can now be classified as plant and machinery. This benefit extends beyond commercial real estate, as rentals for commercial properties paid by various industries will also be eligible for ITC.
The ruling indicates that the benefit of ITC will be available retrospectively. However, the industry is now seeking clarity from the government on whether similar relief should be extended to other sectors, including ports, airports, factories, warehousing, and data centers. Background of the case Safari Retreats filed a writ petition in the Odisha High Court, claiming eligibility for input tax credits on works contract services and other goods and services used in the construction of immovable property, excluding plant and machinery.
According to the judgment, several factors must be considered when determining eligibility, including the nature of the taxpayer’s business, the role of the building or structure in delivering output services, and the functionality test—assessing whether the building contributes to the operational capabilities of the business.
The Court clarified that these factors will help determine whether a building qualifies as a “plant” and, consequently, whether ITC should be allowed under Clauses (c) or (d). Importantly, the Court upheld the taxpayer's submissions regarding Clause (d). Experts believe that lower adjudicating authorities will now decide ITC eligibility based on the specific facts and circumstances of each case.
