FEBRUARY 15, 2021

By K Srinivasan (IRS)

IN AAR Haryana ruling In re: Informage Realty Private Ltd - 2018-TIOL-328-AAR-GST, it was held that

1. No GST on sale of plots (whether before completion of development or after)

2. In case of JDA, GST @ 18% shall be applicable on the development services offered by the Developer to the landowner.

3. Value of such service, shall be equal to the value of share of land received by the Developer in return.

Whether development of plot amounts to works contract service?

The definition of works contract needs to be traced to Sec 2(119) to understand its purport, which is excerpted below for a ready reference;

'works contract, means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract'.

Thus, from the above it can be seen that the term works contract has been restricted to contracts for building construction, fabrication and so on of any immovable property only.

As per Para 6 (a) of Schedule II to the CGST Act, 2017, works contract is a composite supply and as per Section 2(119) of the CGST Act, 2017 it shall be treated as a supply of services. Thus, works contract is categorized further as a Composite supply of service under GST.

A peep into the Past amendment to the Constitution

All that has happened in law after the 46th Amendment of the Constitution is that the division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not by contracts where the transfer in property takes place as an incident of contract of service.

The amendment, referred to above, has not empowered the State to indulge in a microscopic division of contracts involving the value of materials used incidentally in such contracts.

What is pertinent to ascertain in this connection is what the dominant intention of the contract is?

Every contract, be it a service contract or otherwise, may involve the use of some material or the other in execution of the said contract. The State is not empowered by the amended law to impose sales tax on such incidental materials used in such contracts as a deemed sale on that score without understanding the full tenor of the 46th Amendment.

What does development of plot actually mean?

Development of plots, involve leveling of the land, construction of boundary wall, construction of roads, laying of underground cables and water pipelines, laying of underground sewerage lines with sewer treatment plant, development of landscaped gardens, drainage system, water harvesting system, demarcation of individual plots, construction of overhead tanks, other infrastructure works.

Performing on the land the said activities, some of which are as required by the Municipal Plan sanctioning Authorities while rest of them are as per one's own scheme to find a ready market for the Plots, by which action as soon as completion of construction, one could move, plug in and use the plots readily as one liked.

Going by the dominant intention test, development of a plot is largely a contract for employing a specialized skill and Labor and the transfer of property in goods (whether as goods or in any other form) involved in the execution of such contracts would clearly appear to happen by accretion or accession and not by a contract for the primary transfer of those materials involved in the development of the plots which are incidental.

What is 'works contract'?

The above interpretation of sub-clause (b) of Article 366(29-A) whose definition of works contract has been adopted in GST Law under Sec 2(119) is a fair reflection of the law laid down by the West Bengal Taxation Tribunal in  Studio Kamalalaya  v.  CTO.

In Para 46, the Tribunal has observed that only those transactions where vesting of property occurs not by contract but on the theory of accretion and accession are covered by the constitutional amendment in question.

Article 366(29-A)(b) envisages those works contracts where the contractor works on the property of the Contractee and affixes his own materials to that property in the execution of the said contract and in the process passing of property in such materials takes place resulting in deemed sale.

Development of plots being a Labor contract and materials/ property in goods transferred (in whatever form)in the execution of the contract of development will be composite supply of Labor and hence the same would be a job work and not works contract chargeable to tax under that logic.

Further, it fails to fulfill the criterion of Sec 2(119) of the CGST Act in so far as the property in goods (or in any other form) used in the execution of the contract does not transfer by that contract but by a process of accretion or accession by which it gets transformed into the property of the plot owner in the instant case.

Accordingly, it fails to qualify as a works contract but a mere labor work/job work which stands merged in the property in goods and in turn in the developed plot which results in transfer of land with certain amenities but stands excluded from the scope of supply and tax under GST by virtue of being part and parcel of land.

Land whether exempted supply?

Under section 2 (47) exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.

Plotted development involves two activities, development activity land and sale of plots. Sale of land is not supply in terms of schedule III entry 5. Activity of sale of land cannot be considered as exempt supply for the reason it is not at all supply hence the question of exemption under section 11 does not apply.

Plotted development is a composite supply 

In terms of definition under CGST, the analysis show that the activity of development of land and sale of sites does not fit in to the definition of composite supply because land is not a supply under GST, much less a taxable supply.

Two or more taxable supplies are to be involved to make it fit in to the definition. Leading an argument that land is predominant supply in plotted development and sale of plots is bound to fail on that count.

Section 2(30) composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

The plotted land sold to customers is in the nature of composite supply, the main component being land and the development services are only incidental to the same.

Land being not with in ambit of GST (neither goods nor services) the related services fall outside the definition and stand isolated. The issue arises whether such services are taxable.

Land is not exempted under section 11 of CGST Act. By virtue of inclusion under schedule III, it is outside GST. In such a situation the composite supply concept fails to save the development services from being taxed.  

GST liability on land owner

The land owner is not liable under GST under any circumstances. There is no construction of building is involved. Unless building construction is involved entry no. 5(b) under schedule II does not come in to picture in the case of land owner.

The construction may be out of own funds or may be out of advance money received and used in development. Schedule III entry 5 mention Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building is neither supply of goods nor services.

GST liability on contractor/Promoter/developer

Developer is rendering services in terms of the agreement. The consideration may be in the form of money or a portion of developed land.

Irrespective of the fact whether the materials used are part of facilities to be vested with the local authority or the owner, there is only a rendering of a development /labor work there.

Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, exempts services of 'pure labor contract' from GST which may be also tested against entries 10 and 11 therein for claiming the above exemptions as it is essentially a supply of Labor.

Rights arising out of land are immovable property

On an understanding of the law laid down by various Courts, of the term 'immovable property, it can be safely stated that Development rights are the benefits arising out of the land and the same is an immovable property. However, immovable properties are not liable for GST, as supply of service under GST Law. [Shantabai V. State of Bombay AIR 1958 SC 532/Bibi Sayeeda v. State of Bihar (1996) 9 SCC 516 Refers]

Title and ownership

Title to land is the evidence of right or the extent of interest. The apex Court in the case of Sunil Siddhartha Bhai v. CIT - AIR 1986 SC 368 = 2002-TIOL-186-SC-IT-LB observed that in its general sense, the expression 'transfer of property' connotes passing of the entire bundle of rights from the transferor to the transferee.

A title which is subordinate to an owner and which need not be created by reason of a registered deed of conveyance may at times create title.

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

Conclusion

The development of land into fully developed plots fails to qualify as works contract service.

Transfer of development rights involved, if any, in the above transactions of development, being in the nature of immovable property, is also squarely outside the purview of GST.

But the services rendered by the contractor/developer to the Land owner results in a composite supply of materials dominantly with labor and remain inseparably embedded into the Land as developed plots.

It thus gets subsumed fully in developed plots on their transfer back from the developer to either the owner or a third party as the case may be and thus falls outside the ambit of GST levy, is the considered view of the Author.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)

[Editor - Also read the author's related Article 'Sale of developed plots - taxed under GST as construction of complex service'.]