JULY 15, 2019

By Lakshmi Ratna Kancherla

IN this article, the author seeks to dwell on the taxability of "development rights" under the GST law in the light of the recent decision in the case of DLF Commercial Projects Corporations v. Commissioner of Service Tax, Gurugram, - 2019-TIOL-1514-CESTAT-CHD.

What are Development Rights?

"Development rights" as a concept finds mention in the real estate sector.

"Development rights" have not been defined under the erstwhile Service Tax Law or under the Goods and Services Tax Law as such. Explanation to Section 14B of The Karnataka Town and Country Planning Act, 1961, as amended from time to time, defines "development right" to mean the right to carry out development or to develop land or building or both. Therefore, the development right is a right empowering a person to undertake the activities of development of land, including construction of buildings.

Some of the most common situations in which the development rights are monetised in residential projects and commercial projects are

- In case of Joint Development Agreements between Land Owners and developers/builders, the land owners part with the development rights in lieu of a portion of constructed property (residential/commercial) or in lieu of percentage of the revenue.

- In certain other cases, there are various companies who are engaged in acquiring only the right to develop the property and thereafter pass on the said right to various builders/developers. The companies who are engaged in acquiring the development rights from the landowners are also engaged in obtaining the necessary approvals.

Taxability of Development Rights-Under Service Tax Law

Under the erstwhile law, the question was whether the activity of transferring the development right qualifies as a "service" as defined under Section 65B(44) of the Finance Act, 1994 or is excluded as a transfer of title in immovable property by way of sale or in any other manner.

The question which arises is whether the transfer of development rights/transfer of undivided share in land are covered as "immovable property" Section 3(26) (b) of the General Clauses Act, 1897 defines the term 'immovable property' to include benefits to arise out of land.

Reference may be made to the recent judgment in the case of DLF Commercial Projects Corporations v. Commissioner of Service Tax, Gurugram reported in, ('DCPC case'). - 2019-TIOL-1514-CESTAT-CHD.

In the recent judgment in the case of DCPC supra, the issue before the Tribunal was whether the Appellant has transferred any land development rights in favour of DLF or not and the same is exigible to Service Tax under the Finance Act, 1994. The demand was raised for the period from 01.07.2012 to 31.03.2016. In this case, on basis of various agreements, it was alleged that the appellant has transferred development rights to DLF Limited/other builders, therefore, are liable to pay service tax on the said activity.

The appellant argued that the transfer of development right can be equated to a 'benefit arising out of immovable property' and thereby equated to an immovable property. In effect, excluded from the purview of Service Tax.

DLF as per agreement gave business advance to DCPC from time to time for purchase of land development rights. In turn, DCPC transferred the same amount as Refundable Performance Deposit to various companies to enable them to purchase land.

It was held that,

- Reference was made to the following decisions, which have examined and held that transfer of development rights is a benefit arising from land and hence an immovable property itself.

1. Chheda Housing Development Corporation vs. Bibijan Shaikh Farid 2007 (3) MhLJ 402nd, the Bombay High Court observed that Transferable Development Rights (TDR) being a benefit arising from the land must be held to be an immovable property.

2. Shadoday Builders Private Limited & Ors. v. Jt. Charity Commissioner & Others

- The activity in question is only acquisition of land, therefore, no service tax is payable by the appellant in terms of Section 65B (44) of the Finance Act.

- The land owning company had not transferred any development right in favour of the appellant and therefore, it cannot be said that the appellant has transferred any development right of land to M/s. DLF Ltd.

Reliance was also placed on the decision in the case of Premium Real Estate Developers v. Commissioner of Service Tax, - 2019-TIOL-725-CESTAT-DEL.

Hence, for the cases under the erstwhile law this decision can serve as a precedent by which the assesses can contest that there is no Service Tax payable on the transfer of development rights.

In the light of this, the question which arises is whether the said activity of transfer of development rights is a taxable supply under the GST Law.

Position under the GST Law

The question which looms large is whether the judgment in the case of DCPC supra, can be applied even under the GST Law?

Interestingly, under the GST Law, the definition of supply includes supply of goods/services/both, which can be in the nature of sale, barter, transfer etc, for a consideration in the course or furtherance of business. Among others, under the GST Law, the term service has been defined as anything other than goods. In terms of Entry 5 of Schedule III of the CGST Act, "sale of land" is neither a supply of goods nor a supply of service and thereby excluded from the purview of the GST Law itself.

Among others, the Karnataka Advance Ruling Authority, in the case of In Re: Patrick Bernardinz D'sa - 2018-TIOL-292-AAR-GST. Also refer the Ruling in the case of In Re. Nforce Infrastructure India Pvt. Ltd - 2018-TIOL-290-AAR-GST, has ruled that the applicant who is the land owner is a supplier of a taxable service by way of transfer of undivided share of land and hence is liable to register himself and discharge the tax accordingly.

After the GST Council Meetings (33rd Meeting & 34th Meeting) various changes were introduced by way of a Notification with respect to the development rights.

- The promoter was identified as the person liable to discharge GST for receipt of development rights.

- Where the development rights are transferred by the land owner in case of residential projects, the supply of the said service was nil rated to the extent it is for residential purposes and subject to certain conditions.

- The time of supply was also identified in cases where the landowner and the promoter/developer are engaged in a barter in case of JDA.

It is noteworthy that, prior to the above changes, vide Notification No.4/2018-Central Tax dated, 25.01.2018 ('Notification No.4/2018'), only the time of supply was indicated in those cases where construction service was provided to the land owners by the developers against transfer of development rights. Interestingly, at that point in time, the constitutional validity of Notification No.4/2018 was challenged before the Bombay High Court, in the case of Nirman Estate Developers Private Limited v. Union of India & Ors., - 2018-TIOL-2935-HC-MUM-GST on the ground that the said notifications seek to bring the tax an activity which does not qualify as a supply of service and that it's is ultra vires the CGST Act. However, the said Writ was withdrawn subsequently. Hence, as such till date the judiciary has not yet taken a view on "development rights" under the GST Law.

Questions to Ponder & Way Forward

To sum up, the question which persists even under the GST Law is whether supply of development rights qualifies as a "supply of service" or "an immovable property" (which is to be excluded from the purview of GST Law").

Considering that the Legislature had already identified development rights as a service in the recent amendments, it needs to be evaluated whether the analogy adopted in the case of DCPC supra, can also be applied to the transactions under the GST Law as well?

However, only judicial interpretation or clarification by the Revenue will bring to light whether, development rights remain taxable under the GST Law despite the position under the erstwhile law.

(The author is Advocate/Joint Partner, Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)