GSTAT Bengaluru Blocks Resort Construction ITC, Rules Safari Retreats Functionality Test Inapplicable

The Bengaluru Bench of the GST Appellate Tribunal (GSTAT) on 30 September held that the functionality test laid down by the Supreme Court in Chief Commissioner of CGST v. Safari Retreats (P) Ltd. cannot be applied to claim Input Tax Credit (ITC) on the construction of a hotel or resort building, particularly after the retrospective amendment to Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017.

A Bench comprising Judicial Member Prabhakaran P.M. and Technical Member (State) Ravi Jesuraj S. dismissed an appeal filed by Flora Kingdom Farm Resort, upholding a demand of Rs. 9,32,177, comprising tax of Rs. 8,45,972, interest of Rs. 1,607 and penalty of Rs. 84,598. It said:

“By Section 124 of the Finance Act, 2025 and the corresponding State amendment, clause (d) of Section 17(5) must be read, for every period from 01.07.2017, with the defined expression “plant and machinery”. A building or other civil structure is excluded from that definition and cannot come within the exception in clause (d).”

Flora Kingdom Farm Resort, a partnership firm operating a resort in Kaup, Udupi, Karnataka, provides accommodation, restaurant and catering services and hosts weddings, events and photo shoots. The dispute concerned ITC claimed on goods and services used to construct the resort during the financial year 2019-20.

The tax authorities denied the credit under Section 17(5)(d) of the CGST Act, which restricts ITC on goods and services used to construct immovable property on one's own account, subject to statutory exceptions. The adjudicating authority confirmed the demand on 13 August 2024, and the first appellate authority upheld the order on 8 December 2025, prompting the resort to approach the Tribunal.

The Tribunal considered Section 124 of the Finance Act, 2025, which retrospectively substituted the expression “plant or machinery” with “plant and machinery” in Section 17(5)(d) with effect from 1 July 2017. The definition of “plant and machinery” excludes land, buildings and other civil structures.

It held that the amended provision governed the dispute and excluded the resort building from the definition of “plant and machinery” for claiming ITC on its construction.

Then, the Bench examined the Supreme Court's ruling in Safari Retreats, which considered whether a building could qualify as a “plant” based on its functionality under the unamended provision. It observed that the functionality test concerned buildings such as malls and warehouses and did not extend to hotels or cinema theatres. It observed:

“...A hotel or resort building, used to supply accommodation and food, was thus kept outside that test. Such a building could not claim to be a “plant” under the unamended clause (d), and credit on goods and services received for its construction on the taxpayer's own account was blocked then as it is now.”

Further, the Tribunal held that a hotel or resort constructing a building for its own business does so on its own account, attracting the restriction on construction-related ITC under Section 17(5)(d).

However, it clarified that the restriction did not disqualify every purchase made by a resort from ITC. The adjudicating authority had already allowed credit of Rs. 1,47,922.92 for certain items identified by the appellant, including electrical equipment, air-conditioners and purchases expensed off. The resort failed to identify any additional invoices or items eligible for credit outside the statutory restriction.

Lastly, the Bench held that Section 155 of the CGST Act places the burden on the taxpayer to establish eligibility for ITC on items claimed to fall outside the restriction.

Accordingly, the GSTAT dismissed the appeal and upheld the orders passed by the authorities below.

For Appellant: Sri Pradeep Jogi, Chartered Accountant

For Respondent: Dr. Ramya S., Departmental Representative