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September 22, 2020

Supply for construction service to prospective lessee is taxable under GST – Maharashtra AAAR

by CA Shivam Jaiswal in GST, Legal Court Judgement

Supply for construction service to prospective lessee is taxable under GST – Maharashtra AAAR

Under GST, Supply is considered a taxable event for charging tax. The liability to pay tax arises at the time of supply of goods or services. Thus, determining whether or not a transaction falls under the meaning of supply is important to decide GST’s applicability. The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18% and 28% under GST. Certain supplies which are covered under Notification No.12/2017- Central Tax (Rate) Dated 28-06-2017 as amended by the Notification No.02/2018-Central Tax (Rate) dated 25-01-2018 are exempted from the levy of GST (i.e no GST will be charged on such supplies).

According to Entry 12 of the above notification, Services by way of renting of residential dwelling for use as residence were exempt from the levy of GST. Let us refer to the case of Nagpur Integrated Township Pvt. Ltd. (GST AAAR Maharashtra) where the issue under consideration was whether the activity of granting long term lease of the residential apartments would amount to “transfer of immovable property” and hence not liable to GST or would the same be taxable under GST?

Facts of the Case:

  • Maharashtra Airport Development Authority (MADC) (registered under the Companies Act) is a special planning authority under the Maharashtra Regional and Town Planning Act, for the Multimodal International Hub Airport, Nagpur Project (MIHAN) which included development of Nagpur Airport as an international hub, development of a Special Economic Zone and other facilities around the Nagpur Airport.
  • M/s. Chourangi Builders and Developers Pvt Ltd (formerly known as M/s Reatox Builders and Developers Pvt Ltd) formed a Special Purpose Vehicle (SPV) along with M/s IJM Realty (Mauritius) Ltd under the name of M/s Nagpur Integrated Township Pvt Ltd (appellant).
  • MADC and the appellant entered into a Development Agreement.
  • By virtue of the agreement, the appellant was granted the right to design, finance and develop a township project, comprising of residential apartments, commercial complexes, etc in the land owned by MADC.
  • As per the agreement, the appellant was permitted only to grant long term lease of the residential apartments and commercial buildings and the same could not be sold outright in favour of the buyers.
  • The land in which the construction was undertaken was a leasehold land, which could not be transferred.
  • Therefore, the appellant intended to grant long term lease of the residential apartments being constructed and a sample “Agreement for Lease” was proposed to be entered with prospective lessees.
  • The identified apartment unit in the residential complex was proposed to be given on long term lease for 99 years, against payment of lease consideration by the lessee to the appellant.

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Appeal to Authority for Advance Ruling (AAR)

  • The appellant filed an application for advance ruling before the AAR, seeking a ruling as to whether the activity of granting long term lease of the residential apartments would amount to “transfer of immovable property” and hence not liable to GST?
  • If not, what was the appropriate classification and applicable GST rate for the said activity?
  • The appellant pleaded that the activity would amount to transfer of immovable property and hence not liable to GST levy at all.
  • In the alternative, it was also claimed by the appellant that the activity was classifiable under Service Accounting Code 997211, as “Rental and leasing services involving own or leased residential property” and as per Entry No. 12 of Notification 12/2017 Central Tax (Rate) Dt. 28.06.2017, “Services by way of renting of residential dwelling for use as residence” and was exempted from payment of GST.
  • The department claimed that the activity of the appellant was in the nature of works contract for construction of the apartment for the prospective lessee.
  • The AAR held that the activity would be in the nature of “works contract” as defined under Section 2(119) and would fall under SAC 9954 and attract GST @ 18%.
  • The AAR had not examined the claim of the appellant that the activity is classifiable under SAC 997211 (Rental or Leasing Services Involving own or leased residential property) and entitled for exemption.
  • The AAR also held that the appellant’s first claim that the activity is not at all liable to levy of GST being a transaction in immovable property was not sustainable.
  • Aggrieved by the decision of the AAR, the appellant filed an appeal before the Appellate Authority for Advance Ruling (AAAR).

Observations of AAAR that it was sale transaction projected as a lease transaction

  • AAAR agreed with the findings of the AAR.
  • Though the appellant in the draft agreement had projected the transaction as a lease transaction of residential unit in an apartment/building and had also drafted agreement in such a way to project it as a lease transaction, the said transaction could not be a lease transaction but it was an agreement for construction of residential flats.
  • AAAR said so because the clauses in the agreement though purported to be a lease agreement, were in complete disharmony with a normal lease transaction.
  • Under the CGST Act, services by way of renting of residential dwelling used as residence, is exempted from GST.
  • Therefore, when a flat/apartment was given on lease it was always a complete unit which was immediately handed over to the Lessee for use.
  • The appellant had argued that the transaction purported to be undertaken by him would come within the purview of renting of residential dwelling for used as residence.
  • However, in the present case, the agreement had taken place during the construction of the project and the lease payments were made slab wise before the completion of the project. This almost never happened in the lease of a flat or a unit.
  • The appellant has got the land on a long-term lease from MADC.
  • The residential flats being booked by the appellant were flats with agreement to construct and cannot be coloured by the ‘lease agreement’ word being used throughout the agreement under consideration.
  • It was also seen from the payment schedule for the prospective lease that the lessee had to give 0.5% of the lease consideration before signing and 9.5% within 30 days of booking. The rest of the amount was to be paid by him on completion of certain milestone in the construction of the project.
  • As lease never came under construction project, the above payment schedule was only seen when an agreement was entered into by a prospective buyer with a builder/developer for the construction of a building or complex.
  • Therefore, it was seen that almost 95% of the amount comprising the lease consideration was paid before the possession of the apartment.
  • It was difficult to believe that a Lessee will commit such amount before moving or enjoying the flat.
  • All these led the AAAR to believe that this was nothing but a sale transaction projected as a lease transaction.
  • As per the draft agreement, the prospective Lessee also had to pay advance maintenance charges for the operation and maintenance of the common facilities in the township project.
  • As per the Agreement, the developer would facilitate formation of Society/Association of the prospective lessee of the flat.
  • All prospective lessee of the flats would be entitled to join the said Association or Co-operative Society.
  • This Agreement also proved that the appellant had built a complex or residential unit and the same was to be given on outright supply and not as a lease.
  • AAAR said so because it was only in the case of transfer of ownership where the flat owner was entitled to form an association or a Co-operative Society.

Reference to the case decided by the Bombay High Court in the case of Lavasa Corporation Limited

  • The appeals were preferred, under Section 58 of the Real Estate (Regulation and Development) Act, 2016, (RERA), by Lavasa Corporation, which was developing a Township Project to construct ‘Lake Views’.
  • The question raised was whether the provisions of the RERA would apply in case of an ‘Agreement to Lease’?
  • The Appellate Tribunal had set aside the orders passed by the ‘Adjudicating Authority’ and held that, the provisions of RERA were applicable even in case of ‘Agreement of Lease’ of the present case.
  • Therefore, the Adjudicating Member of the Maharashtra RERA had jurisdiction to entertain the complaints filed by the Respondents.
  • It was held so, despite the fact that, according to the Appellant, relationship between the Appellant and Respondents was of ‘Lessor’ and ‘Lessee’ and there was no sale and/or absolute transfer of right, title and interest in favour of the Respondents with respect to their respective apartments.
  • In the said case, the ‘Agreements of Lease’ came to be executed between Lavasa Corporation and the buyers of the property.
  • As per the said ‘Agreements’, the Respondents booked the apartments on the basis of lease for 999 years in the Township Scheme of the Appellant.
  • They had paid most of the consideration amount, which was, approximately 80% of the sale price. They had also paid substantial amount towards the stamp-duty and the registration charges.
  • As per the ‘Agreements of Lease’ executed between the parties, the project was to be completed and the possession of the apartments was to be handed over to the Respondents within 24 months.
  • The High Court went through the clauses of the agreement and held that though the agreement was shown to be of lease, but it was an agreement of sale. HC observed the the ‘Agreement’ provided that:
  • under its Township Development Scheme, Lavasa proposed to construct ‘Lake Views’ on the ‘Lots’ identified by it and grant on lease, the apartments constructed therein for a period of 999 years on the notionally divided pieces of land termed as “Lots”
  • Lavasa agreed to grant to the customer a lease for a period of 999 years for the said apartment against the lease premium that the customer expressly agreed to pay
  • the ‘Lease Deed’ was to be executed only after the development and construction of the said apartment was fully completed and all the lease premium amounts were paid by the customer to Lavasa.
  • the lease term was to commence from the date of execution of the registration of the ‘Lease Deed’ by Lavasa in respect of the said apartment in favour of the customer
  • the ‘Schedule of the Payment’, which showed that the payment was to be made as per the progress in the construction and except for some nominal amount, entire consideration was to be paid before possession was to be delivered. This clause was a typical clause, which was normally found in the ‘Agreement of Sale’.
  • the possession of the apartment was to be handed over within 24 months, on the customer depositing the entire lease premium instalments.
  • Further clauses in the ‘Agreement’ pertaining to Common Amenities and Facilities, Charges and Contributions towards the Maintenance and Amenities, Statutory Payments and even other clauses were more or less the same like the ones which were necessarily found in the ‘Agreement of Sale’.
  • Even though these Agreements were titled as ‘Agreements of Lease’, they were just the replicas of the ‘Agreement of Sale’, except for the words ‘lease’ and ‘rent’ used therein.
  • Thus, if the entire ‘Agreement’ was examined, then it became apparent that it could not be treated as an ‘Agreement of Lease’, but should be treated as an ‘Agreement of Sale’.
  • The law is well settled that the nomenclature of the document cannot be a true test of its real intent and the document has to be read as a whole to ascertain the intention of the parties.

Similar clauses were found in the agreement of the present case

The Payment Schedule found in the Agreement also showed payment made as per the stages in the completion of the construction. The Agreement also stated that:

  • the lessee shall also be liable to bear and pay all stamp duty and registration charges.
  • the developer had also agreed to facilitate the process of obtaining loan from the financing agency
  • the lessee also had to pay advance maintenance charges for operation and maintenance of the common facilities
  • The developer was to give the possession on or before the completion dates as decided.
  • if the developer failed to complete the construction within the period the developer has to pay interest to the lessee
  • it was agreed between both that the limited common areas and amenities are for common usage by the prospective lessee together with all the residents/ prospective lessee together.

Thus, clauses similar to the one in the case of Lavasa were found in the present case and thus the judgement was also applicable.

This fact and the interpretation by the Bombay High Court in the case of Lavasa also shows that the said transaction is not a lease.

Therefore, AAAR also agreed with the findings and order of the Advance ruling authority.

In conclusion, the transactions entered into by the parties was not in nature of lease. The same was rather in the nature of construction of complex services being provided by the Appellant to its customers, and hence the activity would be in the nature of “works contract” as defined under Section 2(119) and would fall under SAC 9954 and attract GST @ 18%.

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