SEPTEMBER 10, 2018

By A S Harihara Kumar

THE answer seems to be 'Yes' if one reads the Notification issued by CBIC a day before Republic day of 2018!

The Notification has been issued under Section 148 of CGST Act, 2017 which section empowers the government to notify special procedure for certain processes. The Notification says the liability to pay central tax on supply of the said services in the form of development rights shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter).

The consideration received by landowner for transferring developmental rights to the Builder under a Joint Development Agreement (Revenue Sharing model) is analyzed in this article in the light of the said Notification. Under this JDA model, a person owns land and enters into a JV agreement with Flat promoter. The landowner receives revenue sharing on quarterly basis. First let us examine w hether GST is applicable to land owners or not on Revenue Sharing under JV Development?

Section:7(1) of CGST Act, 2017 reads as follows:

"For the purposes of this Act, the expression "supply" includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business"

Subsection (2) of Section:7 reads as follows:

"Notwithstanding anything contained in sub-section (1),

–– (a) activities or transactions specified in Schedule III; or

(b)…………………………………………………………………………..,

shall be treated neither as a supply of goods nor a supply of services.

Schedule: III of Section:7 of CGST Act, 2017 carries the following entry at Sl. No.5:

"5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building."

Clause (b) of paragraph 5 of Schedule II reads as follows:

"5. Supply of services: The following shall be treated as supply of services, namely:-

(a)…………………………………….;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier."

Neither the CGST Act, 2017 nor IGST Act, 2017 has defined the term 'sale'.

The words 'goods' and 'services' have been defined under GST Law which is reproduced below:

'Goods' means every kind of movable property other than money and securities, but includes actionable claims, growing crops, grass and things attached to, or forming part of land which are agreed to be severed before supply or under a contract of supply [Section 2(52) CGST Act, 2017].

'Services' means anything other than goods, money and securities but includes transaction in money other than an activity 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. [Section 2(102) CGST Law].

Since the term 'sale' has not been defined, one has to refer to the term 'sale' as defined under Section:54 of Transfer of Property Act, 1882 which is reproduced below:

"Sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.

Sale how made: Such transfer, in the case of tangible immovable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.

In the case of tangible immovable property of value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property.

Delivery of tangible immovable property takes place when the seller places the buyer, or such person as he directs, in possession of the property.

Contract for sale: A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.

It does not, of itself, create any interest in or charge on such property."

Harmonious reading of the above provisions indicates that sale of Land & Building except in the case of construction of complex or building is not taxable under GST. In the case of JDA, there is no transfer of ownership by the landowner to the Builder under a registered instrument. The Undivided share of Land is registered in the name of an agreed buyer of the property by the Land owner or by the builder if he has "Power of Attorney". The taxable event under GST would be Supply. Whether granting developmental right of a land to a builder amounts to ` sale of land'?

As per various judicial pronouncements, sale of land means transfers of the ownership i.e., the title of the land and its physical possession. By sale, the buyers will enjoy absolute ownership of not only land's title but also all the rights and benefits arising out its use for any purpose and all other attendant benefits accruing from such land. Development rights means granting the rights to use the land for constructing buildings etc. It may or may not result in ultimate sale of land.

The honorable Supreme Court Apex Court in the case of 20th Century Finance Corp Ltd. v. State of Maharashtra [2000] 6 SCC 12 observed citing Corpus Juris Secundum that the common use of the word 'transfer' is to denote the passing of title in property or an interest therein from one person to another and in that sense the term means that the owner of the property delivers it to another person with the intent of passing the rights which he had in it. From the above judgment one can conclude that the word 'sale' denotes transfer of title which is irrevocable and permanent. Hence 'sale of land' denotes 'transfer of title in land'. However, this decision was with reference to sale of 'Goods' i.e. movable and not 'immovable'. As a result, if the decision of the Apex Court with reference to 'goods' could be extended to immovable property transfer of land development right irrevocably and permanently by land owners through JDA one can say the expression 'sale of land' appearing in entry no. 5 of Schedule III to CGST Act, 2017 is not taxable. From these judgments, one can conclude that the word 'sale' denotes transfer of title which is irrevocable and permanent. Hence 'sale of land' denotes 'transfer of title in land'.

The word 'land' has also not been defined in the CGST Act, 2017. Will the word 'land' only include full title in land or even other interest in land? One will have to rely on definition under other laws.

As per Sec. 3(a) of Land Acquisition Act (1 of 1894) the expression 'land' includes benefits to arise out of land and things attached to earth or permanently fastened to anything attached to the earth.

In the case of Safiya Bee v. Mohd. Vajahath Hussain - (2011) 2 SCC 94, Apex Court held that 'land' includes rights in or over land, benefits to arise out of land.

Hon'ble Guwahati High Court in the case of Nagen Hazarika v. Manorama Sharma - AIR 2007 Gau 62 held that the expression 'title' conveys different forms of a right to a property which can include right to possess such property.

As per Aiyar's Law Dictionary the expression 'title' in the general proposition that, when equities are equal that he has the legal title will be preferred, includes in its broadest sense all rights capable of being enjoyed and secured under the law. One holding a legal title of lands is certainly included but rights amounting to less than the full legal title are equally included with it. Title to land is the evidence of his right or the extent of his interest.

Apex Court in the case of Sunil Siddharthbhai v. CIT - 2002-TIOL-186-SC-IT-LB observed that in its general sense, the expression 'transfer of property' connotes the passing of rights in the property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which exclusive interest is reduced to a shared interest it would seem that there is transfer of interest.

From the above decisions, we can conclude that the word 'land' not just includes full title in land but also rights which gives benefits associated with it.

The Apex Court held that Land development right is a right to carry out development or to develop the land or building or both (Girnar Traders v. State of Maharashtra [2011] 3 SCC 1). It is thus a benefit arising out of land included within the word 'land'. Hence the expression 'sale of land' connotes 'transfer (irrevocably and permanently) of title in land including rights in the form of benefits arising from it'. But this decision was with reference to MRTP Act. It is notable the Court observed that Section 11A of the Land Acquisition Act being one of such provisions cannot be applied to the acquisitions under Chapter VII of the MRTP Act since MRTP Act is an independent code.

In the JDA, landowners have not only given the land development right but also right to sell the units constructed on their land. Hence possession of land is parted along with a general power of attorney executed in favor of developer. Said rights are given irrevocably and permanently subject to fulfilment of terms. As concluded above, right to develop a land is a benefit arising out of land and hence the same is squarely covered within the expression 'land'. Since the same right is given irrevocably and permanently it is covered within the expression 'sale of land'. The same is covered under entry number 5 of Schedule III to CGST Act, 2017 and hence the same shall neither be regarded as supply of goods nor supply of services or both.

Let us also examine the issue from the perspective of documentation. As per terms of JDA, developer has the right to sell the property constructed on the land. Developer shall incur all the expenses related to construction. At the time of executing the sale deed with the unit buyer, landowners along with developer shall convey the property. Against the same, landowners shall receive agreed percentage of sale proceeds. Thus, in effect landowners are receiving the consideration against sale of their interest in land. They have not borne any expense related to construction. Hence the same is squarely covered as 'transfer of property (viz. land)' and hence the same will fall in Schedule III. Notwithstanding the above conclusions, even as per Constitution of India, taxes on lands and buildings form part of State List (Entry 49 of List II). Hence once we conclude that land development right is nothing but land, GST cannot be levied on its transfer.

It is further to be examined whether granting of land development right amount to lease or license of land and hence the same is covered under Entry No. 2(a) of Schedule II.

A Joint Development Agreement (JDA), will specify the exact nature and methods of compensation to be given to the land owners. In some cases, the landowners will receive constructed buildings as their share and in some other cases they will receive monetary consideration either in lump sum or periodical payments.

In a typical development agreement, the land owners grant the right to construct buildings to the developers/builders and the developers/builders will either enter into a single agreement with buyers for sale of building with land or two separate agreements one for sale of land and another for construction of buildings.

Hence, the expression 'sale of land' connotes 'transfer (irrevocably and permanently) of title in land including rights in the form of benefits arising from it' and it is neither 'lease' or 'license'.

Before 01.07.2017 there were proposal to levy of service tax on such transactions where the builder agrees to transfer agreed number of dwelling units to the land owner since it is supply of works contract service and consideration is in the form of Land. Since the current issue pertains to the period on or after 01.07.2017, the levy is under different concept unlike Service tax levy. Section:7 read with Section:9 of CGST Act, 2017 imposes tax on all forms of supply of services or goods or both, the department may view that transfer of developmental right to builder is supply of service irrespective provisions under Schedule-III of CGST Act, 2017. In fact, there are decisions by CESTAT holding that granting developmental right is a taxable service.

Since Land is not to be subjected to tax as an immovable property whatever be the mode of supply it can be safely assumed that there will be no GST on the receipt of cash by the land owners. Though, there is no specific decision either under Finance Act, 1994 or under GST law regarding the liability to tax the developmental rights granted to Builder in revenue sharing model of JDA, considering the agreement is for sale of Land there cannot be any GST levy. However, it is cautioned that the Notification issued by the CBEC bearing No.4/2018-CT dated: 25/01/2018 convey that registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure there is a liability to pay central tax on supply of the said services. Though the legal sustainability of the said Notification is doubtful, the GST department may rely upon the said Notification and litigation cannot be ruled out.

Since the builder excludes Land value (1/3rd of contract price), the Land is not taxed at the hands of the Builder. If the revenue paid (shared) by the Builder to Landowner is subjected to tax indirectly, it taxes an immovable property i.e., 'Land'. T he constitution bench of honorable Supreme court of India held that excise duty cannot be levied indirectly on a product because it is impermissible under Constitution to levy tax indirectly [CCE v Acer India Ltd – 2004-TIOL-81-SC-CX-LB.

It seems the Notification No. 4/2018-CT (Rate) attempts to tax indirectly the supply of 'Land' in the land of law(s)!

(The views expressed are strictly personal)