By Rajkamal Shah, Chartered Accountant , Shailesh Sheth, Advocate
In Part-I, we discussed the taxability of
Development Rights and Re-development of Co-operative Housing Society
Buildings. In this part, we shall discuss the issue of taxability of
Transferable Development Rights, Slum Rehabilitation Projects and Land Development
Agreements, popularly known as Joint Development Agreements (‘JDA’) under GST.
Taxability of Transferable Development Rights
(‘TDR’)
Taxability of TDR can be examined in two
different situations:
– When
granted by a local authority
– When
sold by one developer to another
a. Taxability of TDR when granted by a local authority:
Let us examine the taxability of TDR granted
by a local authority in pursuance of Development Control Regulations (‘DCR’).
In lieu of the area relinquished or surrendered by the owner of the land, the
Government allows construction of additional built-up area. The landowner can
use extra built-up area, either himself or transfer it to another who is in
need of the extra built-up area for an agreed sum of money. TDR is, thus, an
instrument issued by the government authorities which gives the right to person
to build over and above the permissible Floor Space Index (FSI) within the
permissible limit of DCR. The TDR certificates can also be traded in the market
for cash. Developers purchase and utilise them for increasing their development
rights.
Against this factual background, it is to be
considered whether TDR is ‘goods’ or ‘services’ and whether the ‘supply’
thereof is taxable under the GST laws or not.
FSI vs. TDR
Not all development rights are TDR as grant
and use of FSI is development right, a specie of right in land embedded in the
same piece and parcel of land and cannot be divested to another piece of land
to load development potential on it. FSI is not transferable for use of
development on another piece of land unlike TDR which is transferable for use
on any other piece of land and therefore tradable by its very name and nature.
Secondly, TDR is initiated and issued by a local authority unlike FSI which a
private land owner also owns or possess as incorporeal right in his land with development potential as per prevailing town planning or DCR.
Is TDR an ‘Immovable Property’?
We shall now examine whether TDR or right to
obtain extra FSI is an ‘immovable property’ or not. The expression ‘immovable
property’ has not been defined under the GST law. It is, therefore, relevant to
note the definition of ‘immovable property’ under other enactments. Some of
these enactments are General Clauses Act, 1897, Transfer of Property Act, 1882,
Maharashtra Stamp Act, Registration Act, 1908, The Real Estate (Regulation and
Development) Act, 2016. The definition of ‘immovable property’ contained these
legislations are given in the previous article and hence not repeated here.
A perusal of the definitions in the
aforesaid enactments would show that they are more or less similar. Thus, the
definition of “immovable property” not only includes land but also the benefit
arising out of land and the things attached to the earth or permanently
fastened to anything attached to the earth. The scope of the term ‘immovable
property’ is not restricted to mere land or a building but extends even to the
benefits arising out of land.
The “benefit to arise of land” is that
benefit whose origin can be traced to existence of land. It owes its source to
land. Such benefit is inextricably linked to land.
The expression “development right” is not
defined in DCR issued under the Maharashtra Regional and Town Planning Act,
1966. However, a careful perusal and harmonious reading of various provisions
of the DCR as also various judicial pronouncements show the artificial manner
in which ‘development rights’ are carved out of the land. This would
establish that ‘development rights’ are the ‘rights in immovable property’.
In Chheda Housing Development
Corporation vs. Bibijan Shaikh Farid – (2007) 3 Mah LJ 402, the
Division Bench of the Hon’ble Bombay High Court has held that “FSI/TDR being
a benefit arising from the land, consequently must be held to be immovable
property and an Agreement for use of TDR consequently can be specifically
enforced, unless it is established that compensation in money would be an
adequate relief”.
After having explained that FSI / TDR is a
right in immovable property, the next issue to be addressed is whether the
transfer of such right is liable to GST or not.
Is TDR/FSI ‘goods’ or ‘service’?
GST is a levy on supply of goods or services
or both for a consideration by a person in the course or furtherance of
business.
Section 2(52) of the CGST Act defines
“Goods” as under:
“S.2(52)
“goods” means every kind of movable property other than money and securities
but includes actionable claim, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before supply or under
a contract of supply”
A perusal of section 2(52) would show that
it is an exhaustive definition. It includes every kind of movable property
including actionable claims. It also includes growing crops, grass and things
attached to or forming part of the land provided they are agreed to be severed
before supply or under a contract of supply. It does not include money and
securities.
Section 2(102) of CGST Act defines
“services” as under:
“S.2(102)
“services” means anything other than goods, money and securities but includes
activities relating to the use of money or its conversion by cash or by any
other mode, from one form, currency or denomination, to another form, currency
or denomination for which a separate consideration is charged”.
A perusal of the definition of “services”
would show that it is an exhaustive definition and it encompasses anything
other than goods. Just because it includes anything other than goods, does it
mean it can include anything which normally not understood as service? Can it
include living beings? Answer is no. Though the expression “services” means
anything other than goods, it cannot include anything which is not normally
understood as service. Service is never understood to include property. Though service is defined under indirect tax
laws, it is defined in certain other laws. These definitions were considered by
the Hon’ble Gauhati High Court in Magus Construction (P.) Ltd. vs. UOI
[2008] (11) STR 225, wherein it has explained the meaning of the word
“service”. After considering the definition of ‘services’ in various enactments
like MRTP Act, 1969, Consumer Protection Act, 1986, FEMA, 1999, amongst other
enactments, the Hon’ble High Court observed that “…one can safely define
‘service’ as an act of helpful activity, an act of doing something useful,
rendering assistance or help. Service does not involve supply of goods;
‘service’ rather connotes transformation of use/user of goods as a result of
voluntary intervention of ‘service provider’ and is an intangible commodity in
the form of human effort”.
Therefore, the expression ‘services’ as
defined in section 2 (102) of the CGST Act cannot include ‘immovable property’.
Therefore, transfer of immovable property or right in immovable property cannot
be treated as supply of service.
Section 7(2) of the CGST Act reads as under:
“S.7(2)
Notwithstanding anything contained in sub-section (1),––
(a) activities or
transactions specified in Schedule III; or
(b) such
activities or transactions undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities, as may be notified by the Government on the recommendations of the
Council, shall be treated neither as a supply of goods nor a supply of
services.”
Serial no. 5 of Schedule III of the CGST
Act specifying activities or
transactions which shall be treated neither as a supply of goods nor a supply
of service reads as under:
“5. Sale of land
and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
Therefore, by virtue of section 7(2) read
with Schedule III, sale of land and sale of building are treated neither as
supply of goods nor as supply of services. Issue is “can one state that as
serial no. 5 of Schedule III uses the expression “land” and “building”, the
benefit of this entry is not available to right in land or building?” The
answer is no. We have already explained that transfer of immovable property is
not liable for GST as it is neither goods nor service. Immovable property, by
definition, includes even right in immovable property. Therefore, just because right in immovable
property has not been specifically stated in Schedule III, it doesn’t mean that
they are liable for GST. It is a well-settled legal principle that exemption
doesn’t pre-suppose a charge.
Even otherwise, the expression “land” and
“building” in Schedule III includes even right in land/building. This is
evident from Entry 18 of List II of Seventh Schedule of The Constitution read
with Entry 49 of the same list.
It is, therefore, viewed that TDR/FSI is
neither ‘goods’ nor ‘services’ and hence, cannot be subjected to levy of GST.
Can TDR be considered as an ‘Actionable
Claim’?
The entire issue of the ‘taxability of TDR’
can be looked at from a different perspective also.
TDR is a right which has been conferred by
the Government. It is transferrable by endorsement and delivery. When it is
transferred and can be used on any other land, there is no connection with any
particular land. TDR can change many hands before it is used in a particular
land for availing construction right.
Section 3 of the Transfer of Property Act,
1882, defines ‘actionable claim’ as “a claim to any debt, other than the
debt secured by mortgage of immovable property or by hypothecation or pledge of
movable property or to beneficial interest in movable property.” It means
that any beneficial interest in a movable property is actionable claim if the
same is not in the possession of the claimant. ‘Movable property’ has been
defined in section 3 (36) of the General Clauses Act, 1897, as ‘property of any
description except immovable property’. TDR is not a right in respect of an
“immovable property” as defined in section 3 (26) of the General Clauses Act
1897, and, therefore, it is a beneficial interest arising out of a “movable
property” as per the section 3 (36) of the Act. This right is intangible, and
it cannot be said that it is capable of being in physical possession of anyone.
Any movable property that can be possessed, can be handed over by the owner to
another for use. But in case of intangible property, the right to use such
property can be transferred by an agreement and the transferee can enforce the
right, in case of dispute, by going to the Court. Therefore, TDR should be
construed as an actionable claim. Therefore, its arrangements are transactions
in actionable claims. Support can be taken from the Apex Court’s decisions in Sunrise
Associates vs. Government of NCT of Delhi, 2006 (145) STC 576 (SC) and
Vikas Sales ([1996] 102 STC 106 (SC)) (1996) 4 SCC 433.
Applying the ratio of Sunrise Associates’
case (supra), it can be construed that TDR is an intangible valuable
right which can be sold and purchased independent of land and should be
considered as an actionable claim. Actionable claim is also out of the scope of
supply in terms of paragraphs 6 of Schedule III of the CGST Act. Accordingly,
GST is not payable by any person when he transfers TDR to another.
In view of the above, TDR whether as
‘immovable property’ or ‘actionable claim’ remains outside the scope of
levy of GST.
Leviability of GST in case of Slum
Rehabilitation Authority (SRA) Projects
In case of slum encroached private land, the landlord approaches the Slum Rehabilitation Authority (SRA), a
governmental authority covered under Article 243W of the Constitution which
declares the land as slum land and issues order for rehabilitation of slum
dwellers (in pursuance of DCR 33(10) of Brihan Mumbai Municipal Corporation,
and similar regulations in other metropolitan cities). The landlord approaches
a developer to develop the land and SRA grant extra FSI to the developer for
construction of rehabilitation of slum dwellers as per DCR. The developer
constructs a building for slum dwellers and another for landlord including free
sale area and for himself to recover the cost of construction. As an incentive
to construct building for slum dwellers, SRA may issue TDR in form of DRC
(Development Right Certificate) which can be used on another plot or even may
be sold in open market by endorsement and delivery. Registration of document of
transfer of DRC with local authority is a regulatory requirement. Stamp duty is
paid for transfer of TDR as moveable property but is not required to be
registered under Registration Act as conveyance. Over and above this, the
developer may pay cash consideration to the landlord.
In another scenario, the land may belong
to the Government that has been encroached upon by
the slum dwellers. In such a case, the Developer may agree to develop the land,
construct the building for the slum dwellers and allotment of units therein
free of cost to the slum dwellers in terms of the agreement entered into with
SRA. As against this, the Developer would be granted TDR as may be permitted by
the town planning regulations on the recommendations of SRA which can be
exploited by the Developer to construct another building, the units in which
can be freely sold by him. The Developer may even decide to sell TDR in open
market.
A perusal of the regulations relating to
slum rehabilitation schemes would show that it is an integral scheme. The
developer is required to carry out the work of construction of tenements for
slum-dwellers. Some portion of the built-up area is also allotted to the Land
Owner as per terms of DA. The remaining constructed area belongs to the
developer which is freely saleable by the Developer to recover the cost of
construction of the entire project alongwith his margin for the risk and
reward.
Therefore, it is a single contract for
construction under an integral scheme. The entire supply involves
consideration. Just because the scheme states that certain share in the
built-up area is to be handed over free of cost to slum dwellers and land
owner, it is not free in the legal sense. There is consideration for the
built-up area handed over to all them. It is to be noted that the FSI / TDR
that is sanctioned to the developer would enable him to construct units out of
which portion of it is available to him as freely saleable area. Alternatively,
the developer would be able to sell TDR in open market and monetize the same.
Once an area is declared as slum area and SRA frames slum rehabilitation
scheme, Regulation 33(10) of DCR is required to be followed. Once the
redevelopment / construction is carried out in accordance with Regulation
33(10), there are various conditions to be fulfilled. Therefore, different
events cannot be broken to ascertain the GST liability. The supply is only one.
Section 2(31) of the CGST Act defines ‘consideration’, the relevant portion of
which is reproduced below:
“S.2(31)
“consideration” in relation to the supply of goods or services or both
includes––
(a) any payment
made or to be made, whether in money or otherwise, in respect of, in response
to, or for the inducement of, the supply of goods or services or both, whether
by the recipient or by any other person but shall not include any subsidy given
by the Central Government or a State Government;
(b) the
monetary value of any act or forbearance, in respect of, in response to, or for
the inducement of, the supply of goods or services or both, whether by the
recipient or by any other person but shall not include any subsidy given by the
Central Government or a State Government”.
The above would show that consideration is
linked to supply. The expression consideration should not be read in isolation
of supply and scope of supply should not be read independent of the word
consideration. Consideration can move even from third person as per the
definition of consideration as given in section 2(31). This concept is also
recognized u/s. 2(d) of the Indian Contract Act, 1872.
Whether the landlord can be considered to
have made any supply in the above case and whether the free of cost area
allotted by the developer to the landlord in the newly constructed building
(with or without additional cash payment to the landlord) would constitute
‘consideration’ in the eyes of law?
In the first scenario, the landowner whose
land has been encroached by the slum dwellers engages the developer to
construct a building for rehabilitation of the slum dwellers as mandated by the
authorities to make the rest of the land free from such encumbrance and another
building or buildings which is to be shared by the developer and landlord in
agreed manner. Effectively, the land owner is sharing his land with the
developer as against which the constructed area is being shared between them as
per the terms of DA. Hence, landowner is transferring his ownership right in
the land for area of construction of his share as well as construction of the
building required for rehabilitation of the slum dwellers. Transfer of land is
specifically excluded from the meaning of supply on which GST is not payable.
However, the building constructed by developer for landlord is in form of works
contract service, depending on the, terms of contract that whether the land is
transferred to the developer or mere development right is granted. In the first
case, the service may be termed as Construction Service covered in Entry 5(b)
of Schedule II of CGST Act and in later case, it may be termed as Works
Contract Service covered in Entry 6(a) of the same Schedule.
Alternatively, it can be argued that the
Developer constructing building for Landlord and slum dwellers is, in lieu of,
free sale area received by Developer. Viewed from this angle, the consideration
is the market value of land portion received by the Developer and GST is
payable. In this scenario, if the development right is considered taxable under
GST, the land owner may issue invoice for transfer of development right. Based
on this, the developer shall be entitled to avail ITC against under constructed
flats sold from free sale area.
In case of Government land, TDR is issued
against construction of building for slum dwellers which may be encashed by
selling the same in open market. In such a case, the realized value of TDR may
be liable as consideration for construction of SRA building.
In the case of Sumer Corporation vs.
State of Maharashtra – (2017) 82 Taxmann.Com 369 (Bombay), the Hon’ble
High Court has held TDR to be a valuable consideration equivalent to money.
However, we may here hasten to add that the Hon’ble High Court has, with due
respect, not examined certain broader issues as accepted by itself in the
judgment. The Hon’ble Court has confined itself only to finding out whether
consideration was present or not and have held that TDR is a consideration for
the Works Contract Services.
Nevertheless, one may be adopt a
conservative view and apply the ratio of the decision of the Hon’ble High Court
supra. If the TDR is used on the same plot of land to construct a
building for the land owner, slum dwellers and free sale area for the
developer, it can be said that the consideration received from free sale area
shall cover the consideration for the entire works contract for slum
rehabilitation and the landowner’s portion. It may be pointed out here that SRA
being covered by Article 243W of the Constitution, neither SRA nor the
Developer will be liable to GST in respect of issue of TDR by SRA.
In view of the entire transaction being
single supply, it is possible to avail full input tax credit on entire
construction and set off against the sale of under constructed flats.
Leviability of GST on Joint Development
Agreement (JDA)
JDA signifies a landlord entering into
Development Agreement with a Developer to develop his land having development
potential (FSI) and JV is formed. The landlord contribute his land into JV and
transfer the same by virtue of JDA or promise to convey the land to the society
of the purchasers of flats as may be formed by the JV. The landlord may have a
passive or active role in JV. In most of the cases, landowner is not having any
active role in the venture except giving his land for construction through this
arrangement. Contribution in form of land is a form of sale of land and outside
the scope of GST. Even when the development right is granted instead of
transfer of land per se, it is normally in form of available FSI of the
same plot of land on which it is consumed. Grant of FSI is certainly the right
arising out of the land and even on better footing than TDR which is
transferrable. Thus, grant of development right is outside the scope of GST.
We may, however, hasten to say here that the
joint control of the partners over a venture is the essential criterion for
considering such association as joint venture. The landowner has no role to
play after handing over the land to the developer for construction, whether the
revenue is shared or developed area is shared between the owner and the
developer. Hence, there is no joint venture between the landowner and the
developer. The landowner is giving up part ownership of the land to the
developer in exchange for getting share in revenue of constructed area.
Generally, two models are in vogue in case
of JDA between the landowners and a Developer, viz:
1. Revenue Sharing Model
2. Area Sharing Model.
a) Revenue Sharing Model:
In case of a landlord entering into Joint
Development Agreement with Developer wherein development right of the land is
granted to JDA for exploiting full potential of land on the following terms and
conditions:
– Value
of land (FSI value) is credited to the landlord’s capital account;
– All
expense from plan approval to construction cost, supervision, etc. is to be
borne by JDA to be funded by the Developer. In most of the cases landlord has
no further role to play;
– Upon completion of construction, net profit will
be shared between the Landlord and Developer in agreed ratio.
b) Area sharing Model:
Alternative structure of the transaction is
that the landlord appoints the developer by transfer of development right of
the entire portion of the land and in turn the developer agrees to give agreed
percentage of constructed area to the landlord. Balance area shall be retained
and sold in open market by the Developer.
Can the relationship between the landlord
and the developer in area sharing model be considered as ‘barter’ so as to
constitute ‘supply’ and attract the levy of GST ?
In area sharing model, the landowner is
giving development right to the developer in exchange for getting share of
constructed area (works contract service). This is a case of barter. Taking
conservative view, both the landlord and developer will be required to pay GST,
however albeit with entitlement of input tax credit.
However, in case the developer is obliged to
give constructed area to the landlord against the part ownership of land under
the terms of JDA, both the transactions are outside the ambit of GST.
In revenue sharing model, no service is
provided by the developer or JV to the landlord. In fact, the JV sell the flats
and the revenue is to be distributed between the developer and the landlord in
the agreed ratio. The amount received by the landlord is towards sale /
transfer of land which is outside the scope of GST as per Sch. III of CGST Act.
Hence, no GST liability can arise on revenue sharing model.
Time of payment of GST on supply of under
on development right – NN. 4/2018 CT (Rate) dtd. 25.1.2018
By virtue of this notification, the
liability of payment of CGST is deferred from the date of supply of development
rights, i.e. date of entering into DA/JDA to date of grant of possession or
right in the constructed complex by entering into conveyance deed or similar
instrument (eg. Allotment letter). However, the notification can be said to be
a facilitation measure. The developer is not prevented from making payment even
before grant of such possession and avail input credit of the same against the
sale of under constructed units.
Conclusion:
From the indirect tax perspective, the
issues plaguing the Real Estate/Construction Sector are varied and complex. We
have made an attempt to deal with certain crucial issues and shed light on the
legal position and principles set by the judiciary.
What is required is a very critical
examination of the issues and the interpretation of relevant statutory
provisions in light of the principles of the law settled by various judicial
pronouncements. Needless to say, the readers may apply the views expressed in
this article based on the fact of this case and after obtaining expert opinion.
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