GSTAT Bengaluru rules that the Safari Retreats functionality test does not apply to hotel and resort construction ITC after the retrospective amendment to Section 17(5)(d) of the CGST Act.
Introduction
The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has clarified that the functionality test laid down by the Supreme Court in Safari Retreats cannot be applied to claim Input Tax Credit (ITC) on the construction of hotel or resort buildings in the circumstances covered by the amended Section 17(5)(d) of the Central Goods and Services Tax (CGST) Act, 2017.
In its decision dated 30 September 2026, the Tribunal dismissed an appeal filed by Flora Kingdom Farm Resort and upheld the disputed GST demand relating to construction expenditure incurred for the resort. The ruling highlights the impact of the retrospective amendment introduced by the Finance Act, 2025, and its implications for businesses seeking ITC on immovable property used for commercial purposes.
Background of the Case
The dispute arose in the case of M/s Flora Kingdom Farm Resort v. Commissioner of Commercial Taxes, involving a partnership firm operating a resort at Kaup, Udupi, Karnataka.
The resort provides accommodation, restaurant and catering facilities, and venues for weddings, events and photography. During the financial year 2019–20, the firm claimed ITC on goods and services used in constructing its resort premises.
The GST authorities denied the credit under Section 17(5)(d) of the CGST Act, which restricts ITC on goods and services used for the construction of immovable property on one’s own account, subject to the exceptions prescribed by law.
The adjudicating authority confirmed the demand on 13 August 2024. The first appellate authority subsequently upheld the decision on 8 December 2025. Aggrieved by these orders, the resort approached GSTAT, Bengaluru.
Supreme Court’s Safari Retreats Judgment
In Chief Commissioner of CGST v. Safari Retreats (P) Ltd., the Supreme Court examined whether a building could qualify as a “plant” for the purpose of the exception under Section 17(5)(d).
The Court recognised the relevance of a functionality test to determine whether a particular building was essential to the business activity carried on by the taxpayer. Depending on the facts and circumstances, this approach could potentially support an ITC claim in cases involving buildings used for commercial letting.
However, the subsequent retrospective amendment to Section 17(5)(d) materially changed the statutory position. Consequently, taxpayers cannot assume that the functionality test under the original provision will automatically establish eligibility for construction-related ITC under the amended law.
Impact of the Finance Act, 2025
Section 124 of the Finance Act, 2025, retrospectively substituted the expression “plant or machinery” with “plant and machinery” in Section 17(5)(d), with effect from 1 July 2017.
The statutory definition of “plant and machinery” excludes land, buildings and other civil structures, subject to the terms of the applicable definition.
Applying the amended provision, GSTAT held that a hotel or resort building could not qualify for the exception merely because it was essential to the taxpayer’s commercial operations.
The Tribunal distinguished the functionality test discussed in Safari Retreats from the claim involving the construction of a hotel or resort. It concluded that the resort building in the present case fell outside the relevant exception and that the construction expenditure was subject to the statutory restriction on ITC.
The decision therefore emphasises that the eligibility of construction-related ITC must be examined under the law applicable to the relevant period, including retrospective amendments.
Tribunal Upholds GST Demand
The Tribunal dismissed the appeal and upheld the demand of ₹9,32,177, comprising:
- Tax: ₹8,45,972
- Interest: ₹1,607
- Penalty: ₹84,598
The resort had already received credit of ₹1,47,922.92 for certain items, including electrical equipment, air-conditioners and purchases treated as expenses. The Tribunal clarified that the restriction on construction-related ITC does not automatically disqualify every purchase made by a resort.
However, the appellant failed to establish the eligibility of additional items through supporting invoices and evidence.
The Tribunal also referred to Section 155 of the CGST Act, under which the burden of proving eligibility for ITC rests on the taxpayer claiming the credit.
Key Takeaways for Hotels, Resorts and Businesses
This ruling is significant for hotel operators, resort owners, real estate businesses and other taxpayers constructing commercial premises.
Businesses should carefully distinguish between expenditure on constructing immovable property and purchases that may independently qualify for ITC under the applicable provisions. Proper classification, invoice-level documentation and supporting evidence are essential when claiming credit for equipment and other items.
Taxpayers should also review earlier ITC claims in light of the retrospective amendment and assess the potential consequences of pending assessments, appeals and disputes.
Conclusion
The GSTAT Bengaluru ruling reinforces the importance of the amended Section 17(5)(d) in determining ITC eligibility on hotel and resort construction. While the Supreme Court’s Safari Retreats judgment introduced the functionality test under the earlier statutory framework, the retrospective amendment has significantly affected its application.
Businesses should therefore avoid relying solely on the commercial necessity of a building to justify construction-related ITC. Each claim must be evaluated against the amended statutory language, the nature of the expenditure and the supporting evidence available.
Case Details: M/s Flora Kingdom Farm Resort v. Commissioner of Commercial Taxes
Case No.: APL/05/BUR/2026
Forum: GST Appellate Tribunal, Bengaluru Bench
Decision Date: 30 September 2026