The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has dismissed a resort’s appeal against denial of input tax credit (ITC) on goods and services used to construct its own building, holding that operating a taxable hospitality business from the premises does not remove the restriction under Section 17(5)(d) of the GST law.
The Bench of Prabhakaran P.M. (Judicial Member) and Ravi Jesuraj S. (Technical Member) upheld a demand of ₹9,32,177 for financial year 2019–20. The amount comprises tax of ₹8,45,972, interest of ₹1,607 and penalty of ₹84,598.
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The tribunal applied the retrospective amendment replacing “plant or machinery” with “plant and machinery” in Section 17(5)(d). It held that the resort building and its civil structures fall outside the statutory definition of plant and machinery.
The appellant/assessee is a partnership firm operating at Mallar, Kaup, in Karnataka’s Udupi district, provides room accommodation, restaurant and catering services. Its premises are also used for weddings, events and photo shoots.
Commercial tax enforcement officers inspected the resort on January 10, 2024. Following examination of its records, the department questioned ITC claimed through GSTR-3B returns for 2019–20 on goods and services procured for construction of the property.
A pre-notice intimation issued in April 2024 proposed tax of ₹9,93,894 and interest of ₹7,00,900. The subsequent show-cause notice dated May 20, 2024 also proposed a penalty of ₹99,390, taking the proposed liability to ₹17,94,184.
The resort disputed the proposed denial and submitted that several purchases were equipment or other items that had not gone into the building. It furnished an invoice-wise statement identifying eligible purchases.
The adjudicating authority accepted the identified exclusions and reduced the disputed tax to ₹8,45,972. It also accepted the resort’s contention that interest had to be calculated with reference to actual utilisation of the disputed credit, reducing interest to ₹1,607. Together with the penalty, the final demand stood at ₹9,32,177.
The Joint Commissioner of Commercial Taxes (Appeals), Mangaluru, upheld the demand on December 8, 2025. The resort then approached GSTAT.
The resort argued that its rooms, event spaces and installations were essential tools through which accommodation, weddings and banqueting services were supplied. It therefore claimed that the building qualified as “plant” under the functionality test discussed in the Supreme Court’s decision in Chief Commissioner of Central Goods and Service Tax v. Safari Retreats (P.) Ltd.
It also contended that construction undertaken to provide taxable services should not be treated as construction “on his own account”. According to the resort, the use of portions of the premises for weddings, events and photo shoots supported its claim.
The appellant further alleged that the authorities had failed to examine the disputed purchases invoice by invoice and had treated electrical goods, switchgear, sanitaryware, piping and specialised fixtures as civil construction without adequate scrutiny.
The department relied principally on the retrospective statutory amendment and submitted that the resort’s construction credit was blocked under the amended provision.
The tribunal explained that Section 16 grants ITC subject to statutory conditions and restrictions, while Section 17(5) specifically excludes certain categories of credit.
Under Section 17(5)(d), credit is blocked on goods or services received for construction of immovable property on the taxable person’s own account, including where they are used in the course or furtherance of business, subject to the exception for plant and machinery.
The bench noted that Section 124 of the Finance Act, 2025 substituted “plant and machinery” for “plant or machinery”, with deemed effect from July 1, 2017. The corresponding Karnataka amendment made the same change.
Consequently, the tribunal held that the amended wording governed the resort’s claim for 2019–20. The statutory definition expressly excludes land, buildings and other civil structures.
The bench reasoned that however central the resort building might be to its business, it remained a building and could not qualify as plant and machinery under that definition. It applied the same reasoning to the resort’s other civil structures.
The bench observed that Safari Retreats interpreted Section 17(5)(d) when it contained the expression “plant or machinery”, which differed from the defined expression “plant and machinery”.
The subsequent amendment required the tribunal to apply the provision in the form it was retrospectively deemed to have taken from July 1, 2017. The appellant had acknowledged the amendment’s retrospective operation, and its validity was not challenged before the tribunal.
As an additional ground, the bench held that the resort’s claim would fail even under the earlier wording. It interpreted the functionality test in Safari Retreats as addressing a mall, warehouse or building other than a hotel or cinema theatre.
Since the resort supplied accommodation and restaurant services, the tribunal treated its building as a hotel building in substance and held that it fell outside that test.
The tribunal rejected the argument that construction for taxable business activity necessarily falls outside the expression “on his own account”.
It noted that Section 17(5)(d) expressly includes construction inputs used in the course or furtherance of business. Accepting the resort’s interpretation would deprive those words of their effect.
Applying the explanation of “own account” in Safari Retreats, the bench distinguished a building used as the setting of the taxpayer’s own business from one intended to be sold, leased or licensed to another person.
The resort’s premises remained under its control and management while it provided accommodation, food and event services. A guest taking a room received the resort’s accommodation service; the room was not transferred to another person to operate that person’s business.
For weddings, events and photo shoots, the resort had produced no lease deed, licence agreement or invoice for renting immovable property to establish a separate letting arrangement. The tribunal held that merely describing these activities as “renting” did not determine the substance of the supply.
It therefore concluded that the resort had constructed the premises on its own account as the setting of its hospitality business.
The tribunal nevertheless clarified that Section 17(5)(d) does not block every purchase made while establishing a resort.
An item must be examined according to its nature and the purpose for which it was acquired. Furniture, movable fixtures or equipment purchased and used as such may fall outside the construction restriction, with eligibility then governed by the remaining requirements of Sections 16 and 17.
The bench also held that accounting treatment alone is not decisive. Separate capitalisation may be relevant, but it does not automatically establish that an item falls outside the blocked-credit provision.
In this case, the adjudicating authority had already allowed the entire ITC of ₹1,47,922.92 identified by the resort for 2019–20 as relating to electrical equipment, air-conditioners and purchases expensed off.
The resort did not identify any additional invoice, supplier or category within the remaining disputed credit that qualified for exclusion. Its general request for verification of movable assets, machinery, furniture and fixtures was insufficient.
Relying on Section 155, the tribunal held that the burden of proving ITC eligibility rested on the claimant. The resort had not discharged that burden for the balance credit of ₹8,45,972.
The tribunal observed that the first appellate authority ought to have addressed Safari Retreats, the statutory amendment and the appellant’s submissions concerning the remaining credit.
However, all these issues had been fully argued before GSTAT, and the relevant facts were available on record. Exercising its powers under Section 113(1), the bench examined the contentions afresh and supplied its own reasons for confirming the demand.
It held that the appellant had suffered no prejudice and decided the appeal without remanding the matter.
The tribunal separately examined interest under Section 50(3) read with Rule 88B, which concerns ITC wrongly availed and utilised.
No SGST interest had been imposed because the electronic credit ledger balance under that head had remained sufficient to cover the disputed credit.
Under CGST, interest was calculated only on the amounts treated as utilised after the ledger balance fell below the disputed credit. The tribunal upheld the resulting interest of ₹1,607.
It also sustained the penalty of ₹84,598 under Section 73(9). The resort had not paid the tax and applicable interest within thirty days of the show-cause notice and therefore could not claim the penalty relief under Section 73(8).
The bench clarified that the penalty arose under the non-fraud demand provisions; fraud or suppression had not been alleged.
GSTAT dismissed the appeal and upheld both the adjudication order and the first appellate order, confirming the total demand of ₹9,32,177. It made no order as to costs.
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