The interpretation of tax laws has always been a complex and evolving domain, particularly when it involves determining taxpayers’ rights and liabilities. Recently, the Supreme Court of India provided significant clarity on this matter in the case of Safari Retreats Pvt. Ltd. vs. the Central Goods and Services Tax (CGST) Act, 2017.
On October 3, 2024, the Supreme Court, through a bench comprising Justice Abhay Oka and Justice Sanjay Karol, outlined critical principles regarding the interpretation of taxation statutes, specifically under Section 17(5)(d) of the CGST Act.
The issue at hand involved the interpretation of Section 17(5)(d), which disallows Input Tax Credit (ITC) on goods and services used in the construction of immovable property, except for “plant or machinery.” The petitioner, Safari Retreats Pvt. Ltd., challenged this provision, seeking clarity on whether buildings constructed for rental purposes could be classified as “plant” under the Act, thereby qualifying for ITC benefits.
One of the foremost principles highlighted by the Court was that a taxing statute must be read as written, with no room for adding or subtracting from its explicit language. The Court emphasised, “A taxing statute must be read as it is, with no additions or subtractions on the grounds of legislative intendment or otherwise. If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result; it is for the legislature to step in and remove the absurdity.” This underscores the fundamental approach of strict construction in tax law, where courts are bound by the text, regardless of the outcomes.
In doing so, the Court reaffirmed a long-standing judicial stance that the judiciary’s role is limited to interpreting the law, not rewriting it to correct perceived flaws or anomalies. This approach ensures that any unintended consequences of poorly drafted provisions are rectified by the legislature, maintaining the separation of powers between the judiciary and the legislature.
Further, the Supreme Court reiterated that in cases where the statutory language permits more than one interpretation, courts should generally adopt the interpretation that favours the taxpayer. The bench stated, “While dealing with a taxing provision, the principle of strict interpretation should be applied. If two interpretations of a statutory provision are possible, the Court ordinarily would interpret the provision in favour of the taxpayer and against the revenue.” This aspect of tax interpretation aligns with the principle that the burden of clarity lies with the taxing authority, and any ambiguity should not disadvantage taxpayers.
This emphasis on favouring taxpayers in ambiguous situations also reflects a protective stance toward individuals and businesses against arbitrary or unfair tax claims. It creates an environment where taxpayers can operate with greater certainty and less fear of unexpected liabilities arising from ambiguous provisions.
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Another critical point discussed was the avoidance of presumptions or assumptions when interpreting tax statutes. The Court made it clear that tax laws must be interpreted strictly based on what is expressly stated, and no provisions or implications should be added to the statute. “A taxing provision cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in light of what is clearly expressed. The Court cannot imply anything which is not expressed. Moreover, the Court cannot import provisions in the statute to supply any deficiency.”
This approach is particularly important in taxation because of its implications for individual rights and the heavy penalties associated with non-compliance. By insisting on an interpretation based solely on the express language of the statute, the Court ensures that taxpayers are only held accountable for what is explicitly mandated by law, and not for vague or implied requirements.
Despite the strict approach generally applied to tax statutes, the Court acknowledged that there could be situations where a literal interpretation might lead to manifest injustice, which was not intended by the legislature. In such cases, the Court opined that it could modify the interpretation to prevent unintended consequences. This nuanced view allows for a degree of judicial intervention in rare cases where the application of the law, as written, would produce outcomes clearly at odds with legislative intent.
In the Safari Retreats case, this perspective played a crucial role. The Court pointed out that the determination of whether a building could qualify as “plant” must be made on a case-by-case basis, using a functionality test. This means that if a building plays an essential role in the supply of taxable services, such as renting, it may qualify under the “plant” exception, thereby allowing ITC. This interpretation seeks to balance the strict language of the statute with practical commercial realities, offering a fair outcome that aligns with both the letter and the spirit of the law.
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The Court also addressed how terms used in tax statutes should be interpreted, especially when they have not been explicitly defined. In the absence of statutory definitions, words should be interpreted in their commercial sense, according to trade practices and usage, rather than borrowing definitions from other unrelated statutes.
This approach helps ensure that the interpretation aligns with industry norms and practical realities, rather than imposing rigid definitions that may be irrelevant or inappropriate in the given context.
Regarding the interpretation of taxation statutes, the parties have relied on several decisions. The law laid down on this aspect is fairly well-settled.
The principles governing the interpretation of the taxation statutes were summarised by the Apex Court in the Safari Retreats Ruling as follows —
“a. A taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise;
b. If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result is not a factor to be considered when interpreting the provisions. It is for the legislature to step in and remove the absurdity;
c. While dealing with a taxing provision, the principle of strict interpretation should be applied;
d. If two interpretations of a statutory provision are possible, the Court ordinarily would interpret the provision in favour of a taxpayer and against the revenue;
e. In interpreting a taxing statute, equitable considerations are entirely out of place;
f. A taxing provision cannot be interpreted on any presumption or assumption;
g. A taxing statute has to be interpreted in the light of what is clearly expressed. The Court cannot imply anything which is not expressed. Moreover, the Court cannot import provisions in the statute to supply any deficiency;
h. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly;
i. If literal interpretation is manifestly unjust, which produces a result not intended by the legislature, only in such a case can the Court modify the language;
j. Equity and taxation are strangers. But if construction results in equity rather than injustice, such construction should be preferred;
k. It is not a function of the Court in the fiscal arena to compel the Parliament to go further and do more;
l. When a word used in a taxing statute is to be construed and has not been specifically defined, it should not be interpreted in accordance with its definition in another statute that does not deal with a cognate subject.
It should be understood in its commercial sense. Unless defined in the statute itself, the words and expressions in a taxing statute have to be construed in the sense in which the persons dealing with them understand, that is, as per the trade understanding, commercial and technical practice and usage.”
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The Supreme Court ultimately remitted the matter back to the High Court, directing it to apply the functionality test to determine if the petitioner’s case met the criteria for the “plant” exception under Section 17(5)(d). The Court rejected the challenge to the constitutional validity of Section 17(5)(d), stating that there was no need to read down the provision to exclude cases where the immovable property is constructed for renting purposes.
This judgement has broader implications for businesses involved in real estate and related sectors. By clarifying that ITC eligibility under Section 17(5)(d) depends on the functionality of the building, the Court has provided a framework that could potentially benefit businesses that construct buildings for commercial leasing. However, it also reinforces the importance of adhering to the specific language of tax statutes, highlighting the judiciary’s limited role in modifying statutory provisions.
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The Safari Retreats judgement is a landmark decision in the interpretation of tax laws, balancing the principles of strict construction with the need for practical fairness.
It reminds us of the importance of clarity in legislative drafting while also providing the reassurance, of room for judicial intervention to prevent manifest injustice. For taxpayers and tax professionals, this case will serve as a vital reference point in understanding how tax statutes will be interpreted and the boundaries within which they must operate.
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