SUPREME COURT’S DECISION IN SAFARI RETREATS CASE

SUBMITTED BY: VIDHI KANODIA (1958)

The Supreme Court's judgment in the Safari Retreat case (Civil Appeal No. 2948 of 2023
etc.) delves into the constitutional validity and interpretation of clauses (c) and (d) of Section
17(5) of the Central Goods and Services Tax (CGST) Act, 2017. This provision deals with the
denial of input tax credit (ITC) on certain goods and services utilized in the course of
business. To critically analyze the Court's findings, it is essential to examine the previous
CENVAT credit regime and the underlying jurisprudence behind the negative list of ITC
under Section 17(5) of the CGST Act.
The Supreme Court's Judgment in the Safari Retreat Case
Critical Analysis of the Judgment in Light of the CENVAT Credit Regime
The CENVAT credit system, introduced in 2004, aimed to mitigate the cascading effect of
taxes in the pre-GST era. Under this system, manufacturers and service providers could avail
credit for duty paid on inputs, capital goods, and input services used in the manufacture of
final products or provision of output services. However, the CENVAT Credit Rules imposed
certain restrictions, particularly on goods and services used in the construction of immovable
property.
The jurisprudence surrounding CENVAT credit for construction-related activities evolved
through various judicial pronouncements. In Commissioner of Central Excise v. Hindustan
Zinc Ltd., the Supreme Court held that CENVAT credit was not available on inputs used in
the construction of factory buildings, as they were not directly used in the manufacture of
final products.1 This restrictive interpretation was based on the principle that only inputs
directly used in the manufacturing process should be eligible for credit.
However, subsequent cases saw a more liberal approach. In Commissioner of Central Excise
v. Ultratech Cement Ltd., the Court allowed credit on inputs used in the construction of
storage tanks and other structures integral to the manufacturing process. 2 This shift reflected a
growing recognition that certain construction-related expenses were inextricably linked to the
production process and should therefore be eligible for credit.
The Safari Retreats judgment can be seen as a continuation of this liberal trend, but in the
context of the GST regime. By allowing ITC on goods and services used for the construction
of immovable property when such property is used for further supply of goods or services,
the Court has effectively broadened the scope of credit availability beyond what was typically
allowed under the CENVAT system.
This approach aligns more closely with the fundamental principles of GST, particularly the
aim of eliminating the cascading effect of taxes. The Court's interpretation recognizes that
denying ITC on construction expenses for properties used in furtherance of business
contradicts the core objective of GST to ensure tax neutrality throughout the supply chain.
However, the judgment also raises questions about the extent to which judicial interpretation
can modify legislative intent. While the Court's reading down of section 17(5)(d) achieves a
more GST-friendly outcome, it arguably goes beyond the plain language of the statute. This
approach contrasts with the typically strict interpretation applied to tax statutes in the
CENVAT era. The Court's distinction between construction "on its own account" and for
business purposes introduces a new dimension to ITC eligibility that was not explicitly
present in the CENVAT system. While this distinction aligns with the broader principles of
GST, it may pose implementation challenges for tax authorities accustomed to more clear-cut
rules under the previous regime.
Jurisprudence Behind the Negative List of ITC Under Section 17(5) of CGST Act
The negative list of ITC under section 17(5) of the CGST Act represents a legislative attempt
to balance the principle of free flow of credits with the need to prevent abuse and maintain
revenue stability. The jurisprudence behind this provision can be understood through several
key principles:
a) The primary objective of GST is to eliminate the cascading effect of taxes. However,
the negative list recognizes that in certain cases, allowing full ITC may not align with
this objective or may lead to unintended consequences.
b) By restricting ITC on certain goods and services, the government aims to protect its
revenue base. This is particularly relevant for items that may have both business and
personal use, where allowing full ITC could lead to revenue leakage.
c) The negative list provides clear guidelines on which credits are not allowed,
potentially reducing disputes and simplifying tax administration.
d) Some restrictions in the negative list reflect broader policy objectives, such as
discouraging certain types of expenditure or aligning with other regulatory
frameworks.
The Safari Retreats judgment engages with these principles in several ways: Firstly, the
Court's interpretation of "on its own account" in section 17(5)(d) reflects a nuanced

1
Commissioner of Central Excise v. Hindustan Zinc Ltd., (2005) 2 SCC 662.
2
Commissioner of Central Excise v. Ultratech Cement Ltd., (2010) 14 SCC 433.
understanding of the prevention of cascading principle. By allowing ITC when the
immovable property is used for further supply of goods or services, the Court ensures that the
provision does not inadvertently perpetuate the cascading effect it was designed to prevent.
Secondly, the Court's approach to interpreting "plant or machinery" in clause (d) as distinct
from "plant and machinery" in clause (c) demonstrates a willingness to look beyond revenue
considerations to ensure consistency with the broader objectives of GST. This interpretation
potentially expands the scope of ITC availability, which may have revenue implications but
aligns more closely with the principle of tax neutrality.
Thirdly, while the Court's reading down of section 17(5)(d) introduces some complexity into
its application, it arguably promotes a more principled approach to ITC eligibility. This may
lead to more disputes in the short term but could result in a more coherent and equitable
system in the long run.
The judgment also engages with international jurisprudence on value-added tax (VAT)
systems. In the European Union, for instance, the Court of Justice has consistently held that
input VAT should be deductible as long as there is a direct and immediate link between the
input transaction and one or more output transactions giving rise to the right to deduct. 3 The
Safari Retreats judgment aligns Indian GST jurisprudence more closely with this
international standard.
However, the Court's decision to uphold the constitutional validity of section 17(5) while
reading it down raises questions about the balance between legislative policy choices and
judicial interpretation. This approach echoes the Court's stance in cases like Jindal Stainless
Ltd. v. State of Haryana, where it emphasized the need to balance legislative policy choices
with constitutional principles.4
The Safari Retreats judgment represents a significant evolution in the jurisprudence
surrounding ITC in India. It demonstrates a shift from the more restrictive approach of the
CENVAT era towards a more principled, economically-oriented interpretation that aligns
closely with the fundamental objectives of GST. By reading down section 17(5)(d) to allow
ITC on construction expenses for properties used in furtherance of business, the Court has
potentially opened the door for a more liberal interpretation of other blocked credits under
section 17(5). However, this evolution is not without challenges. The judgment may require
legislative amendments to fully align the GST law with its stated objectives. It also poses
implementation challenges for tax authorities and may lead to increased litigation as
businesses seek to test the boundaries of this new interpretation.
The Safari Retreats judgment marks a significant milestone in the development of ITC
jurisprudence in India. It represents a departure from the more restrictive approach of the
CENVAT era towards a more nuanced, principle-based interpretation that better aligns with
the objectives of the GST system. While this evolution brings its own challenges, it
ultimately reinforces the fundamental principles of GST and provides a framework for future
interpretations of ITC provisions that balance revenue considerations with the broader
economic objectives of the tax system.

3
Case C-98/98, Midland Bank plc v. Commissioners of Customs and Excise, 2000 E.C.R. I-4177.
4
Jindal Stainless Ltd. v. State of Haryana, (2017) 12 SCC 1.