Background
In a joint development agreement (JDA) on an area-sharing basis, the landlord and LL enter into an arrangement whereby the developer is allowed to enter the land or the possession is handed over, and the developer given an irrevocable right to do development work. [nomenclated here as "development rights or DR"] of the construction of of a complex building. Land ownership continues with the owner of the land. In consideration of the DR given by the landlord, a portion of the built-up area is constructed by the developer and delivered over to the landlord.
It would do well to remember that in GST law, tax is levied on the supply of goods [moveables] or services [anything other than goods]. The Third Schedule to the GST Act sets out the activities that are treated neither as the supply of goods nor as the supply of services. There is an entry at SL No. 5 as follows: sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of buildings.
It may be noted that the sale of land and the sale of buildings are excluded from the GST levy. We would further discuss the sale of land in the context of DR.
For this, we examine the definitions of "sale" and "land." The words "sale" and "land" are 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 the definition of immoveable property and whether it can be considered the same as "land. Definition of 'immovable property: As given in 3(26) of the General Clauses Act, 1897, "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.
In the cases of Safiya Bee v. Mohd. Vajahath Hussian (2011) (2 SCC 94), Pradeep Oil Corporation v. Municipal Corporation of Delhi (2011) (5 SCC 270), S.N. Chandrashekar v. State of Karnataka (2006) (3 SCC 208), and Dena Bank v. B.B.P. Parekh & Co. (2000) (5 SCC 694), it is observed that land includes benefits that arise out of the land.
The 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 that cannot always be understood as akin to ownership. It conveys different forms of a right to property, which can include the right to possess such property.
From the above definitions and decisions, it is clear as follows:
- A sale could be said to cover the transfer of ownership.
- Land is defined to include trees and buildings.
- Immoveable property is defined to include land and the benefits that arise from land.
In a JDA, the landlord is giving the developer an irrevocable right to enter the land and do development work on it permanently. Such a right to do construction on land may be said to be a benefit arising from land. Consequently, DR, which is a benefit arising from land, is also an "immoveable property.".
Consequently, the view that DR are covered in the sale of land [Schedule III entry 5] and excluded from tax levy could be legally tenable but disputed by the department.
However, the intention to cover benefits arising from lands such as development rights in Schedule III-Entry 5 is not clear or forthcoming in the said entry. The apex court has held in many decisions that exemptions need to be read strictly and intentions cannot be read into the law. Revenue could dispute that there is no explicit exclusion for the transfer of DR from the 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 of the DR given to developers 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 that arises to be paid at the time when the developer transfers possession or the right in the constructed complex or building to the landlord by entering into a conveyance deed or allotment letter to the person transferring DR. Tax liability arises from the consideration received in the form of construction service.
Thereafter, under the new taxation regime for the real estate sector as of 1.4.2019, the developer has been made responsible for paying GST on DR for the construction of the project under the reverse charge mechanism (RCM). vide notification 13/2017-CT(R) r/w 6/2019-CT(R). The time of supply has been postponed to the first occupancy or completion certificate, whichever is earlier. Exemption was being given to the extent of DR attributed to the units in residential apartments sold prior to first occupancy or CC, whichever is earlier. It is significant that the RCM on DR on developer was introduced only from 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 dismissed a writ petition by a realtor challenging the 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 the Supreme Court.
SC [Petition(s) for Special Leave to Appeal (C) No(s). 11079/2024] has issue notice, returnable in the week commencing September 9, 2024. We have not stayed the operation of the impugned judgment or order, and, therefore, taxes will have to be paid. In the event that 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 the DR and GST implications thereof.
The decision of the Telangana High Court on the taxation of DR
Facts: The petitioner developer entered into a JDA dated December 2017 with landowners. The agreement contemplated the transfer of land development rights to the developer to develop a commercial office project and the eventual sale or conveyance of an undivided share of land at the completion of said activity by the landowners. For consideration, the agreement envisaged a certain percentage of the constructed area in the office project for the landowner, and no other consideration was contemplated as payable by the developer to the landowner for transferring land development rights and eventual land.
According to 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 the supply of development rights from the said date, the Revenue alleges that the 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 that 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 a transfer of immovable property or whether 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 favor of the petitioner, which results in the 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 the JDA gives rise to an element of the sale of land.
(ii) The said notification would not be tenable in the eyes 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 delegated legislation, and if at all it is delegated legislation, it has to be one that 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 the issuance of a notification. In addition, there is no specific mechanism or machinery that determines the quantum of tax liability upon the transfer of development rights.
(iv) There is no specific provision under the GST law that determines the rate at which tax has to be levied on a JDA pertaining to the transfer of development rights.
Submissions by respondents
- Upon reading 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 is not in favor of the petitioner unless and until the land is transferred in its name; the same cannot be brought within the ambit of sale. Transferring development rights does not result in the transfer of ownership rights.
- The notification 4/2018-CT(R) deals with the time of supply of services and transfer of development rights, which were otherwise always taxable since the introduction of GST, but has now been postponed to a time when the developer transfers possession of the constructed or developed area to the landowner.
- On a conjoint reading of the clauses under the 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, the mere transfer of development rights, or 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 favor of the petitioner or developer.
- In the absence of any cogent and substantial material to establish rights, titles, and ownership being created in favor of the petitioner or 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 are not sustainable, and the writ petition, sans merit, therefore deserves to be and is accordingly dismissed.
- SC has not stayed the operation of this above judgment.
Way ahead and conclusion
The decision of the Telengana High Court did not give 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 of date, there have been no decisions from higher courts holding that DR are excluded or exempt from the GST levy.
In this backdrop, the options available to taxpayers are as follows:
For JDA entered prior to 1.7.2017
No GST liability would arise since the event of entering JDA was prior to the GST period. Also, the 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 from the "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]
The landlord can make the contention that DR is covered in Schedule III Entry 5 under the sale of land and excluded from the GST levy. Such stands are to be judicially tested.
Also, we can contend that there is no supply in the course or furtherance of business done by the LL levy. There was no valuation mechanism prescribed to arrive at the value of DR during the period of July 2017 until 31.3.2019. In the absence of such DR valuations being set out under the GST Act, rules, or notification, the levy may be said to fail.
Similarly, it was held in CIT, Bangalore v. B. C. Srinivasa Setty, reported in 2002-TIOL-587-SC-IT-LB, by the Apex Court that the computation methodology prescribed by the law fails, and when the computation fails, so does the tax.
In such a scenario, when a call is made that DR is not offered to tax, the intimate department sends a letter to the jurisdictional officer with reasons why it is not liable and seeks 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 is paid at 5% [with no ITC]-pay tax under protest to the extent attributed to unsold units, under an ack letter to the jurisdictional officer, go for a refund without time limit when the decision comes favorably holding non-levy of tax on the DR [if any] at a future date from the Apex Court.
For the DR pertaining to commercial projects on which output GST paid at 18% [12% effective 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.
The author can also be reached at roopa@hnaindia.com.
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