[Madhura Karanth is a fourth year student at NALSAR University of Law, Hyderabad. The author is thankful to Mr. Mihir Naniwadekar for valuable inputs]
A Joint Development Agreement (“JDA”) is common in the Indian construction industry. A landowner and a developer enter into such an arrangement, where the developer undertakes to develop the owner’s land. Usually, the constructed area is shared between the two parties in an agreed ratio, and each party is entitled to market their respective share. The developer is providing a service through such development/construction to his buyers as well as to the landowner for his part of the share. Hence, the developer is liable to pay GST with respect to such services provided by him.
However, what has been a contentious issue since the advent of the GST regime is the treatment of Transferable Development Rights (“TDR”). According to the CBIC, the developer is liable to pay GST on the service provided by the landowner in the form of TDR. The consideration for such service is in the form of constructed area from the developer for whom, the receipt of development rights acts as the consideration.
In this post, I examine the relevant provisions and notifications on this issue, followed by a look at prevailing jurisprudence. This will be juxtaposed with the position of tax implications on TDR under the pre-GST regime to understand the reason behind the dissatisfaction and the confusion among developers under the current regime.
GST Implications in Relation to TDR
Section 148 of the CGST Act (“Act”) empowers the government to notify “certain classes of registered persons and the special procedures to be followed by such persons”. Accordingly, a notification dated September 25, 2018 was issued – firstly, persons supplying “development rights to a developer, builder, construction company” for consideration in the form of construction service and secondly, persons supplying construction services against consideration in the form of TDR were notified as registered persons liable to pay central tax on supply of the respective services. Thereby, it was affirmed that GST was applicable to service by the landowner in the form of TDR to a developer. Further, the Government through Notification No. 4/2019 – Central Tax (Rate) sought to exempt GST payable on TDR for transfer effected after April 1, 2019 only for construction or development of residential apartments the consideration for which was received before the issue of completion certificate.
In Re Maarq Spaces Pvt. Ltd., the Karnataka Authority for Advance Ruling (“AAR”) was faced with the question of whether an activity of development as well as sale of land would attract GST. Here, the applicant involved in property development had entered into a JDA with landowners for development of a piece of land into a residential layout, under which the consideration was agreed to be on revenue sharing basis.
It was the contention of the applicant that “sale of land” could neither be treated as a supply of goods nor as that of services as it is one of the entries under Schedule III of the Act. It further relied on sections 2(30) and 2(90) that define composite supply and principal supply respectively to submit that in case of two supplies of which one constituted the predominant element while the other was only ancillary or incidental to it, the supplies were to be regarded as a single supply. Accordingly, it was contended that the predominant supply in this case was land and the development activity was only ancillary to such sale. Sale of land being out of the purview of GST on account of falling under Schedule III meant that the development service would remain so too (being naturally bundled with sale of land).
Upon close examination of the contents of the agreement between the developer and the landowner, AAR found that the agreement did not intend to pass on the title to the developer and hence, it did not ‘own’ 25% of the plot. Therefore, it could not be claimed that there was sale of land to be falling under Schedule III. The agreement did allow the developer to enter into sale agreements but that was only incidental to its principal activity of developing the land. Without relying on any notification or provision, it was held that the activities undertaken amounted to supply of service.
In January 2020, the Maharashtra AAR was faced with a similar situation in Re Vilas Chandanmal Gandhi, wherein the applicant being the landowner presented arguments that were similar to the treatment of TDR in the pre-GST era. It was submitted that service through TDR “being in nature of transaction of sale of land/immovable property” was not to be taxed on account of being covered under Schedule III. Referring to various definitions of immovable property from allied laws, the applicant arrived at the conclusion that immovable property included land and benefits arising out of land. The observations of the Maharashtra AAR stemmed from the direct reading of Notification No. 4/2018 – Central Tax (Rate) and an answer regarding GST on TDR in a compilation of FAQ put forth by the Finance Ministry. Therefore, it held GST to be applicable without getting into the immovable property/sale of land discussion.
Section 65B (44) of Finance Act, 1994 in its definition of service specifically excluded “a transfer of title in goods or immovable property, by way of sale, gift or in any other manner”. Section 3 (26) of the General Clauses Act, 1897 defines immovable property to include land as well as benefits that arise out of land. Similar phraseology has been used to define immovable property under section 2(6) of Registration Act, 1908. TDR was recognized as a benefit arising out of land and thereby, an immovable property under the pre-GST regime. Hence, it was exempt from service tax.
Firstly, the Department has long contested the exclusion of TDR from the definition of services under section 65BB (44). Such contestation was based on the fact that the words “transfer of title in … immovable property” connote a transfer in ownership and TDR could not be construed as transferring ownership in any manner. However, there is sufficient support in law for the contention that title is not always construed as ownership. For instance, the Supreme Court in Syndicate Bank v. Estate Officer and Manager held that a title to a property in the legal sense need not be a title of ownership but one that is a limited title. The observation that title in property means a bundle of rights as held in Canbank Financial Services Ltd. v. The Custodianwill hold good for TDR as being title in property in as much as it is one such right in the bundle.
Secondly, one needs to observe the different words used under the two regimes. Under the service tax regime, immovable property was excluded from the ambit of services. This would then cover land as well as benefits arising out of land. However, under the GST regime, Schedule III to the Act which lists the entries outside the purview of supply contains sale of land as its fifth entry. Hence, it may be argued by the Department that it was the deliberate intention of the drafters to maintain such specificity, so as to include everything that came under the ambit of transfer of title in immovable property except sale of land.
However, the definition of the word “land” has not been defined under GST. To understand whether land in itself could cover ‘benefits arising out of land’ under its ambit, reference may be made to several statutes like Land Acquisition Act, Bombay Land Revenue Code etc. that hold land to include benefits arising out of land. However, it would be pertinent to examine the Income Tax Act to ascertain the treatment of ‘land’ in taxing statutes. The Mumbai ITAT in Prem Rattan Gupta v. Department of Income Taxheld that the words ‘land’ and building’ did not have as wide a meaning asthe words ‘immovable property’ to include benefits arising out of land. This was said in the context of section 50C of the Income Tax Act which uses the specific words ‘land and building’.
Further, the words used in Schedule III refer to saleof land as opposed to transfer of titlein immovable property. While it has been suggested above that transfer of title need not necessarily be construed as transfer ownership, the same may not be said about the word ‘sale’. Section 54 of the Transfer of Property Act defines sale as the transfer of ownership. Hence, a strict transfer of ownership has been envisaged as sale of land under Schedule III and nothing below that threshold. Accordingly, TDR will then stay out of the purview of Schedule III.
Given the above observations of the replacement of ‘immovable property’ with ‘land’ and that of ‘transfer of title’ with ‘sale’, the Revenue will be able to justify its stance of there being a deliberate change in the legal position. It can then argue successfully that TDR is indeed within the purview of GST.
– Madhura Karanth