Background:
In joint development agreement (JDA) on area sharing basis, the landlord/LL enters into arrangement whereby developer is allowed to enter into the land or the possession is handed over, and developer given an irrevocable right to do development works.[nomenclated here as “development rights”/”DR”] of construction of complex/building. Land ownership continues with the owner of the land. In consideration of the DR given by landlord, a portion of built up area is constructed by the developer and delivered over to landlord.
It would do well to remember that in GST law, tax is levied on supply of goods[moveables] or services[anything other than goods]. In the Third Schedule to GST Act sets out the activities which are treated neither as supply of goods nor as supply of services. There is an entry at sl no.5 as follows-5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
It maybe noted the sale of land and sale of building is excluded from GST levy. We would further discuss on sale of land in context of DR.
For this we examine definitions of “sale” and “land”. The word “sale” and “land” has not defined under the GST law. In the absence of the definition in the Act, we could look under other enactments and into Dictionary meaning [similarly held in Star Paper Mills case[1989 (43) ELT 178 (SC)]. by Apex Court].
Sale: In the Transfer of Property Act, 1882 Section 54. “Sale” is defined. ‘‘Sale” is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.
Definition of land: Black's Law Dictionary (Seventh Edition) defines that 'land' means an immovable and indestructible three-dimensional area consisting of a portion of the earth's surface, the space above and below the surface, and everything growing on or permanently affixed to land
P. Ramanatha Aiyar's Law Lexicon (Second Edition) observes that the word 'land' is a comprehensive term, including standing trees, buildings, fences, stones, and waters, as well as the earth we stand on. Standing trees must be regarded as part and parcel of the land in which they are rooted and from which they draw their support. The word 'land', in the ordinary legal sense, comprehends everything of a fixed and permanent nature and therefore embraces growing trees.
In Land Acquisition Act, 1894, 3. (a) the expression “land” includes benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth;
Next we look into definition of immoveable property, whether it can be considered to be same as “land? Definition of 'immovable property: In General Clauses Act. as given in 3(26) of the General Clauses Act, 1897 has to be taken as per which "immovable property" shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.
Apex court in the case of Safiya Bee v. Mohd. VajahathHussian (2011) 2 SCC 94, Pradeep Oil Corporation v. Municipal Corporation of Delhi (2011) 5 SCC 270 and in S.N. Chandrashekar v. State of Karnataka (2006) 3 SCC 208 as well as in Dena Bank v. B.B.P. Parekh & Co. (2000) 5 SCC 694 it is observed that land includes benefits to arise out of the land.
Hon. Gauhati High Court in the case of Nagen Hazarika v. Manorama Sharma AIR 2007 Gau 62 held that the expression ‘title’ is a broad expression in law which cannot always be understood as akin to ownership. It conveys different forms of a right to a property which can include the right to possess such property.
From the above definitions and decisions, clear as follows:
- Sale could be said to cover transfer of ownership.
- Land is defined to include trees, buildings.
- Immoveable property is defined to include land, benefits to arise from land.
In a JDA, landlord is giving away irrevocable right permanently to developer to enter into the land and to do development works on land. Such right to do construction on land maybe said to be benefit arising from land. Consequently DR which is benefit arising from land is also an “immoveable property”.
Consequently the view that DR are covered in sale of land[Schedule III entry 5] and excluded from tax levy, could be legally tenable, but disputed by dept.
However, the intention to cover benefit to arising from lands such as development rights in Schedule III-entry 5 is not clear/forthcoming in the said entry. The Apex court in many decisions has held that exemption need to be read strictly and intention cannot be read into the law. Revenue could dispute that there is no explicit exclusion for transfer of DR from tax net and demand GST.
In recent times, after the notification 4/2018-CT(rate) dated 25.1.2018, there has been controversy about the GST applicability on the DR given to developer under JDA. The notification 4/2018-CT(rate) is that tax is payable on DR parted by landlords. It sets out the tax liability on DR arises to be paid at time when the developer transfers possession or the right in the constructed complex/building to landlord by entering into a conveyance deed or allotment letter to the person transferring DR. Tax liability arises on the consideration received in the form of construction service.
Thereafter vide the new taxation regime for real estate sector wef 1.4.2019, the Developer has been made responsible to pay GST on DR for construction of project under Reverse charge mechanism (RCM] vide notification 13/2017-CT(R) r/w 6/2019-CT(R). The time of supply has been postponed to first occupancy or completion certificate whichever is earlier. Exemption was being given to extent of DR attributed to the units in residential apartments sold prior to first occupancy/CC whichever is earlier. It is significant that the RCM on DR on developer was introduced only wef 1.4.2019 onwards.
The GST levy on DR was challenged and in a decision of Prahitha Constructions WP No. 5493/2020 the Telegana HC dismisses writ petition by realtor challenging GST levy on 'transfer of land development rights' (TDR) on a Joint Development Agreement (JDA) for residential projects; The Bench remarks “the writ petition stands dismissed”; The matter was appealed to Supreme Court.
SC[Petition(s) for Special Leave to Appeal (C) No(s). 11079/2024] has Issue notice, returnable in the week commencing 09.09.2024. We have not stayed the operation of the impugned judgment/order and, therefore, taxes will have to be paid. In case the petitioner – Prahitha Constructions Private Limited is aggrieved, appropriate orders will be passed in accordance with the law.
In this backdrop, the paper writer in this article has examined DR and GST implications thereof.
Decision of Telangana High Court on taxing of DR
Facts: The Petitioner developer entered into a JDA dated December 2017 with landowners. The agreement contemplated transfer of land development rights to the developer to develop a commercial office project and eventual sale/conveyance of undivided share in land at the completion of said activity by the landowners. For consideration, the agreement envisaged a certain percentage of constructed area in the office project to the landowner and no other consideration was contemplated as payable by Developer to landowner for transferring land development rights and eventual land.
Vide the impugned Notifications No.4/2018–CT(Rate) dated January 25, 2018 and Notification No.4/2018– ST(Rate) dated February 28, 2018, the ‘supply of development rights’ by landowners to land developers was made taxable in the hands of landowners. Since the concerned JDA was entered on December 29, 2017 and contemplated supply of development rights from the said date, the Revenue alleged that same supply comes within the purview of the Notifications.
The petitioner is contending that the execution of JDA technically is almost like a sale of the land which was to be developed by the petitioner. It was in this context that the petitioner intends to assail the notification under challenge in the present writ petition.
Issue: In the given factual backdrop, the issues in the writ petition are:
a) Whether the transfer of DR is in the nature of transfer of immovable property or the nature of services would fall within the scope of GST?
b) Whether the transfer of DR can be safely brought within the purview of an outright sale of land?
Aggrieved by the notifications, the Petitioner submitted the following:-
(i) By virtue of the execution of the JDA itself there is a substantive transfer of development rights of property in favour of the petitioner which results in sale of land proportionate to the amount of investment made by the developer and hence, there is a statutory embargo on the levy of tax as the execution of JDA gives rise to an element of sale of land.
(ii) The said notification would not be tenable in the eye of law for the reason that levy of tax would not be made permissible by way of issuance of a notification and the same would also be unconstitutional. The notification under challenge cannot be brought within the purview of a delegated legislation and if at all it is a delegated legislation, it has to be one which has been issued within the four corners of the statute which in the instant case is silent.
(iii) Taxing areas under the GST law cannot be expanded only by way of issuance of a notification. In addition, there is no specific mechanism or machinery which determines the quantum of tax liability upon the transfer of development rights.
(iv)No specific provision under the GST law which determines the rate at which tax has to be levied on a JDA pertaining to transfer of development rights.
Submissions by respondent:
- Upon reading of the clauses of the JDA, it gives a clear indication that there is no outright sale of property in the name of the developer.
- There is no specific sale of land belonging to the owner reflected.
Held:
- The transfer of ownership from the landowner goes directly to the purchaser of the constructed property and not in favour of the petitioner unless and until the land stands transferred in the name, the same cannot be brought within the ambit of sale. Transferring of the development rights does not result in transfer of ownership rights.
- The notification 4/2018-CT(R) deals with the time of supply of services of transfer of development rights which was otherwise always taxable, since introduction of GST, has now been postponed to a time when the developer transfers the possession of the constructed/developed area to the landowner.
- On conjoint reading of the clauses under JDA it will clearly indicate that there is no automatic transfer of ownership given to the petitioner at the time of execution of the JDA. Thus, under no circumstances can the execution of the JDA or the mere transfer of development rights nor any of the clauses of the JDA indicate an automatic transfer of ownership or title rights over any portion of land belonging to the landowner in favour of the petitioner/developer.
- In the absence of any cogent and substantial material to establish right, title and ownership being created in favour of the petitioner/developer, the transfer of DR as it stands is amenable to GST and cannot be brought within the purview of Entry 5 of Schedule-III of the GST Act.
- The grounds and contentions raised by the petitioner in respect of the reliefs sought for is not sustainable and the writ petition sans merit and therefore deserves to be and is accordingly, dismissed;
- SC has not stayed the operation of this above judgement.
Way ahead and conclusion
The decision of Telengana High Court had not given reasons why development rights were taxable at all.
However in light of this recent decision, the taxing of DR under GST is once again under the scanner. It is significant that as on date there are no decisions from Higher Courts holding that DR are excluded/exempted from GST levy.
In this backdrop, the options available with tax payers are as under:
For JDA entered prior to 1.7.2017: No GST liability would arise, since the event of entering JDA was prior to GST period. Also service definition in section 65B(44) excluded transfer of title in immoveable property by way of sale, gift or in any other manner, wherein the DR which could get covered, in “immoveable property’ as benefit arising from land, and consequently excluded rom “Service” definition as “transfer of title”[ownership rights] to the immoveable property takes place in “any other manner”[vide JDA].
For JDA dated from July 2017 till 31.3.2019: Tax liability on the Landlord [not developer] under forward charge[FCM]
Landlord can take contention that DR is covered in Schedule III Entry 5 under sale of land, excluded from GST levy. Such stand to be judicially tested.
Also can contend that there is no supply in course/furtherance of business done by LL levy fails. There was no valuation mechanism prescribed either to arrive at value of DR, during period of July 2017 till 31.3.2019. In absence of such DR valuation being set out under GST Act/rules/notification, levy may said to fail.
Similarly it was held in CIT, Bangalore v. B C Srinivasa Setty reported in (2002-TIOL-587-SC-IT-LB) by Apex Court, that the computation methodology prescribed by the law fails and when the computation fails, so does the tax.
In such scenario when call is taken that DR are not offered to tax, intimate dept by ack letter to jurisdictional officer, with reasons why not liable and seek confirmation of understanding. This would ensure there can be no sustainable demands for extended periods citing suppression with interest and penalty.
GST implications under JDA dated post 1.4.2019: Tax liability on the developer under reverse charge[RCM].
When risk averse tax payer: JDA entered into post 1.4.2019:
For the DR pertaining to residential projects, on which output GST paid at 5%[with no ITC]-pay tax under protest to extent attributed to unsold units, under ack letter to jurisdictional officer; go for refund without time limit, when decision comes favourably holding non levy of tax on DR [if any] at future date from Apex Court.
For the DR pertaining to commercial projects on which output GST paid at 18%[12?fective tax rate with 1/3rd land value deduction] units sold prior to OC/CC[with ITC benefit]-pay tax and avail ITC to extent attributed to units sold prior to completion/LL share by developer.
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