Gujarat AAR Rules Against ITC Eligibility for Warehouse Construction in GST Regime

Introduction

In a significant ruling for the warehousing and logistics sector, the Gujarat Authority for Advance Ruling (AAR) has determined that input tax credit (ITC) remains unavailable on goods and services used in constructing a warehouse or shed, regardless of whether the structure is employed for providing taxable storage and warehousing services or is leased out for business purposes. This decision, delivered on December 23, 2025, in Advance Ruling No. GUJ/GAAR/R/2025/62, underscores the persistent application of blocked credit provisions under Section 17(5) of the Central Goods and Services Tax (CGST) Act, 2017, even after the Supreme Court's interpretation in the landmark Safari Retreats case. The bench, comprising CGST Member Vishal Malani and SGST Member Sushma Vora, addressed the application filed by Premlata Rakesh Jain, proprietor of M/s Sambhav Warehousing, a registered GST entity based in Gandhidham, Gujarat. The ruling clarifies the impact of recent legislative amendments, effectively limiting ITC claims for civil constructions like warehouses, which could influence tax planning strategies for businesses in real estate and logistics.

This advance ruling arrives at a pivotal moment in GST jurisprudence, where taxpayers have sought to leverage judicial interpretations to claim ITC on capital expenditures. By integrating the Safari Retreats precedent with the overriding amendments introduced via the Finance Act, 2025, the AAR has provided much-needed certainty, potentially curtailing aggressive ITC claims while reinforcing the revenue's position on immovable property constructions.

Case Background

Premlata Rakesh Jain, operating under the trade name M/s Sambhav Warehousing with GSTIN 24AEJPJ0437K2ZK, is engaged in providing storage and warehousing services. Located at Plot No. 124, Sector 4, Gandhidham, Kachchh, Gujarat, the applicant is in the process of constructing a dedicated warehouse facility. This construction involves procuring essential materials such as cement, steel, beams, and columns, as well as availing works contract services for the building's erection. The warehouse is intended to support the applicant's core business of offering taxable storage and warehousing services or, alternatively, leasing the space to third parties for business operations.

The legal dispute stems from the longstanding restrictions on ITC under Section 17(5) of the CGST Act, 2017, which blocks credits for goods and services used in constructing immovable properties, except in specific cases related to plant and machinery. Historically, such constructions fell under blocked credit, disallowing ITC even when the asset furthers business activities. However, the applicant sought an advance ruling to clarify eligibility post the Supreme Court's decision in Chief Commissioner of Central Goods and Services Tax v. Safari Retreats Pvt. Ltd. [2024 (90) G.S.T.L. 3 (S.C.)], which introduced a "functionality test" for interpreting "plant or machinery" in certain clauses.

The application, dated April 16, 2025, was filed under Clause (d) of Section 97(2) of the CGST/GGST Act, focusing on whether ITC is admissible for construction inputs used in a warehouse that generates taxable outward supplies like storage services or rental income. A personal hearing was conducted on December 4, 2025, where advocate Shri Mehul Pandya represented the applicant, reiterating the factual and legal grounds. The timeline reflects the evolving GST landscape: the Safari Retreats judgment in 2024 prompted optimism for ITC on functional buildings, but subsequent legislative changes in 2025 shifted the terrain, leading to this binding ruling under Section 103 of the CGST Act, applicable prospectively from the date of the transaction.

This case highlights broader challenges in GST compliance for capital-intensive sectors. Warehousing businesses, crucial to India's supply chain ecosystem, often invest heavily in infrastructure to meet growing e-commerce and logistics demands. The applicant's query encapsulates a common dilemma: balancing tax efficiency with statutory restrictions on capital goods credits.

Arguments Presented

The applicant's contentions centered on a progressive interpretation of Section 17(5), leveraging the Supreme Court's Safari Retreats ruling to argue for ITC eligibility. Premlata Rakesh Jain contended that the warehouse qualifies as "plant or machinery" under the functionality test outlined by the apex court. They emphasized that the structure's primary role is to facilitate taxable outward supplies—either through direct storage and warehousing services or by leasing to tenants for business use—thus advancing the registered person's business objectives. Drawing from Safari Retreats , where a shopping mall's integrated systems were deemed akin to plant due to their functional indispensability, the applicant argued that a warehouse similarly embodies specialized equipment for storage operations. Materials like cement and steel, along with construction services, were portrayed not as mere civil works but as integral to creating a "plant" that generates revenue. The applicant further asserted that pre- Safari Retreats , Section 17(5) rigidly blocked ITC, but the judgment's emphasis on functionality overrides this for buildings like warehouses used in taxable services. They urged the AAR to apply this test factually, considering the warehouse's role in their warehousing business, and allow ITC to avoid cascading taxes.

In response, the AAR bench, through its detailed discussion, countered that while Safari Retreats introduced nuance to Section 17(5)(d), legislative intervention has restored the original restrictive intent. The authority noted the applicant's agreement that ITC is inherently blocked under Section 17(5) but highlighted the Supreme Court's distinction: for clause (c) (works contract services), "plant and machinery" follows the strict statutory definition excluding buildings, while clause (d) (goods/services for own-account construction) initially allowed a broader "plant or machinery" interpretation via functionality. However, the bench pointed to the Finance Act, 2025's amendment under Section 124, effective from October 1, 2025 (notified via Notification No. 16/2025-CT dated September 17, 2025), which substitutes "plant or machinery" with "plant and machinery" in clause (d) and adds an explanation deeming all prior references to mean the defined term retroactively from July 1, 2017. This amendment, the AAR argued, nullifies Safari Retreats ' functionality test for clause (d), aligning it with clause (c)'s exclusion of land, buildings, or civil structures. Factually, the warehouse was classified as an immovable civil structure, not apparatus or equipment fixed for outward supply as per Explanation I to Section 17. The authority rejected the leasing argument, stating that even rental use does not transform the building into plant, as the credit blockage applies irrespective of business furtherance. Key factual points included the applicant's purchase of standard construction inputs without evidence of specialized machinery integration, reinforcing the immovable property classification.

Both sides engaged deeply with statutory language: the applicant focused on business utility and judicial expansion, while the AAR prioritized legislative override and plain meaning, ensuring the ruling's alignment with post-amendment GST framework.

Legal Analysis

The AAR's reasoning meticulously dissects Section 17(5)(c) and (d) of the CGST Act, 2017, which delineate blocked ITC scenarios to prevent credits on non-business or capital expenditures that do not directly contribute to taxable outputs in a chain. Clause (c) bars ITC on works contract services for immovable property construction, except when used as input for further works contracts or for "plant and machinery" as defined in Explanation I to Section 17. This definition explicitly excludes "land, building or any other civil structures," encompassing renovations, additions, or repairs to the extent capitalized. For the applicant's construction services, the AAR applied this plain meaning, ruling out ITC since the warehouse is a civil structure, not machinery fixed for supply-making.

Clause (d) addresses goods or services received for self-construction of immovable property, including those used in business furtherance, again excepting "plant or machinery." Here, the Safari Retreats precedent was pivotal. In that case, the Supreme Court examined a mall's construction, holding that clause (c)'s "plant and machinery" is confined to the statutory definition, but clause (d)'s "plant or machinery" (note the "or") warranted a functionality test: whether the building functions as plant in the taxpayer's business, akin to equipment indispensable for operations. The Court remanded for factual determination, suggesting malls or warehouses could qualify if integral to revenue generation, distinguishing from mere rentals.

However, the AAR distinguished this by invoking the Finance Act, 2025's amendment, which harmonizes clause (d) with clause (c) by replacing "or" with "and" and adding an overriding explanation: "for the purpose of clause (d), anything contrary contained in any judgment... any reference to 'plant or machinery' shall be construed... as a reference to 'plant and machinery.'" Effective retrospectively from the GST inception (July 1, 2017), this legislative clarificatory measure—upheld as valid under GST's evolution—nullifies Safari Retreats for clause (d), confining "plant and machinery" to the excluding definition. The bench explained that warehouses, like malls, fail this test post-amendment, as they are civil structures, not apparatus like lifts or transformers. Precedents like Safari Retreats remain relevant for historical claims pre-amendment but are overridden prospectively and retrospectively for interpretation.

This analysis clarifies distinctions: functionality applies only pre-amendment, while post-2025, all immovable constructions (barring pure machinery) are blocked, preventing abuse via business-use claims. Allegations of cascading taxes were dismissed, as Section 17 aims at equity in the GST chain. The ruling invokes no other precedents but reinforces GST notifications' role in statutory harmony.

Key Observations

The AAR's judgment is replete with incisive observations that illuminate the interplay between judicial innovation and legislative response. Key excerpts include:

• On the scope of Section 17(5)(c): "the expression ‘plant and machinery’ used in clause (c) of Section 17(5)... excludes land, building or any other civil structures and therefore the ITC of the works contract services supplied for the construction of an immovable property, which in the case of the applicant is warehouse/shed is not available."

• Regarding the Safari Retreats impact on clause (d): "the Supreme Court held that... the functionality test has to be applied. The Supreme Court further held that the question whether a mall, warehouse or any building... can be classified as a plant... is a factual question which has to be determined keeping in mind the business of the registered person and the role that building plays in the said business."

• Highlighting the amendment's effect: "The said provisions have come into effect from 01.10.2025... This amendment read with the new explanation has basically nullified the effect of the judgement of the Supreme Court in Safari Retreats as far as the interpretation of Section 17(5)(d) is concerned."

• On the warehouse's classification: "the applicant is not eligible to avail ITC on the Cement, Steel, beam, column etc. and construction services used for construction of their warehouse, which is used for providing storage and warehousing services, or given on lease to a tenant."

• Final emphasis on legislative intent: "for the purpose of clause (d), anything contrary contained in any judgment, decree or order of any court... shall be construed and shall always be deemed to have been construed as a reference to 'plant and machinery.'"

These quotes underscore the AAR's fidelity to post-amendment law, emphasizing factual immovability over functional arguments.

Court's Decision

The Gujarat AAR unequivocally ruled: "Whether ITC is admissible for the goods or services utilized for the construction of warehouse or shed from which storage and warehousing services are provided as furtherance of business or provided on rent. Ans: No, for the reasons mentioned aforesaid." Signed by Members Vishal Malani and Sushma Vora on December 23, 2025, this binding advance ruling under Section 103 of the CGST Act applies to the applicant for their ongoing and future transactions, precluding ITC claims on construction inputs.

Practically, this decision mandates that M/s Sambhav Warehousing absorb the full GST burden on cement, steel, and works contracts without credit offset, potentially increasing project costs by 18% (the standard GST rate on such supplies). It signals to similar taxpayers—warehousing firms, logistics providers, and lessors—that post-Finance Act, 2025, no ITC is available for civil constructions, even if leased or used for taxable services, unless proven as defined plant/machinery (e.g., specialized storage automation, excluding the building shell).

Broader implications extend to the GST ecosystem: it discourages ITC litigation on functionality, promoting compliance and revenue integrity. Future cases may see appeals to the Appellate AAR or High Courts challenging the amendment's retrospectivity, but the ruling fortifies the blockade on capital credits for immovable assets. For legal professionals, it highlights the need to advise clients on amendment timelines—claims post-October 1, 2025, are firmly barred—potentially reshaping investment models in infrastructure-heavy sectors. As India's GST matures, such rulings ensure equitable tax distribution, though they may prompt calls for policy tweaks to support warehousing growth amid economic expansion.