GST is leviable on Sale of TDR/FSI @ 18%

Transferable Development Rights or TDR can be considered as an important raw material in the real estate industry as it allows the developer to build over and above the permissible Floor Space Index (FSI) under the prevalent rules of the respective locations. Floor Space Index (FSI), also referred to as Floor Area Ratio (FAR), is the ratio of total floor area of a building (Built up area) to the total Plot area (land). This numeric value indicates the total amount of area (on all floors) you can build upon a plot.

When the Government undertakes compulsory acquisition of individual land parcels for creating infrastructural projects, it is required to compensate the land owners. The compensation provided by the Government is usually lower than the market rate, and hence they introduced the concept of Transferable Development Rights. These rights are obtained in the form of certificates, which the owner can use for himself or can trade in the market for cash. However, is GST applicable on the sale of TDR or is the same exempt by considering the transaction as sale of land/ immovable property?

Let us refer to the case of Vilas Chandanmal Gandhi (GST AAAR Maharashtra), to understand the same in detail.

Facts of the Case:

• The Appellant, M/s Vilas Chandanmal Gandhi, was an owner of the land situated within the limits of Pune Municipal Corporation (PMC).
• The Appellant, with an objective to develop the land, owned by him entered into an agreement with a developer, M/s. Amar Builders and Developers, a Partnership Firm, to develop the said land jointly and share the profits through distribution of sale proceeds after development of the land by way of construction of residential/ commercial project.
• The Appellant agreed to assign/ transfer the development rights in land to the M/s. Amar Builders and Developers (Developer).
• The said assignment/ transfer of rights in land was for the purpose of construction of residential/ commercial project on the land
• The Developer agreed to pay consideration in the form of 45% of the sale proceeds of the project to be developed.
• The Appellant and the Developer, were enjoying the rights in the land jointly.
• Thereafter, both the parties tried to vacate/remove the reservation of the land in light of Draft Development Plan for Pune City sanctioned by PMC.
• However, later they realized that vacating/ removing reservation may not be possible and was adversely impacting the financials of the Appellant as well as the Developer.
• Hence, the rights in the said land were required to be surrendered. However, as the PMC was not paying compensation in cash and TDR’s/ FSI were given as consideration for surrendering the joint rights in land to PMC in terms of Development Control Regulations.

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• Consequently, the Appellant and the Developer entered into a supplementary agreement, the terms of which are as under:
  • The Appellant and developer agreed that the reservation on land could not be removed/ vacated. This could result in financial losses
  • Hence, the rights in the land (of the Appellant as well as of the Developer) would be surrendered to PMC and TDR/ FSI would be obtained as consideration
  • The TDR/ FSI to be obtained would be shared between the Appellant and the Developer in the ratio of 73:27
  • The proportionate TDR/ FSI would be transferred by the Appellant in favour of the Developer or the Appellant would transfer the proportionate sale proceeds (out of the sale of TDR/ Additional FSI) to the Developer.
• Accordingly, the Appellant surrendered the rights in the said land in favour of the Pune Municipal Corporation. In consideration of the same, the PMC awarded TDR’s/ FSI to the Appellant.
• Both the parties later decided to sell a part of the TDRs/ FSI to Vamona Developers Pvt. Ltd. (VDPL) and share the sale proceeds in the agreed ratio. Consequently, the Appellant entered into agreement/ deed of assignment with Vamona Developers Pvt. Ltd.

Order of Authority for Advance Ruling (AAR)

• In order to obtain clarity on the applicability of GST on the transaction of sale of TDR, the Appellant filed theAdvance Ruling applicationbefore the AAR. The Appellant applied for advance ruling on the following questions:
  • Whether GST was leviable on sale of TDR/FSI received as consideration for surrendering the joint rights in land in terms of Development Control Regulations and granted in light of the article of agreement entered between the Appellant and PMC read with Development Control Regulations.
  • If yes, what would be the classification and the applicable rate of GST?
• The AAR, vide their Advance Ruling Order, held that GST was leviable on the sale of TDR/ FSI.
• The said transaction would fall under the Heading 9972, i.e. at SI. No.16, entry (iii) of Notification No. 11/2017-C.T. (Rate) dated 28.06.2017, attracting GST at the rate of 18 % (9% CGST + 9%SGST).
• Being aggrieved by the aforesaid Advance Ruling Order, the Appellant have filed an appeal before the AAAR

Observations of the AAAR on the issue raised by the Appellant that the Sale of TDR/ Additional FSI does not amount to taxable supply

• According to the appellant the Sale of TDR/ Additional FSI did not amount to taxable supply under GST being in nature of transaction of sale of land/ immovable property, covered under Clause 5 of Schedule III of CGST Act.
• Appellant had taken support of the definition of the term “goods” as defined in the CGST Act, 2017 and has submitted that the said definition included the word ‘moveable property’ which was not defined in the CGST Act.
• The Appellant referred to the other statutes for the definition of the term “land” as “land” was not defined under the GST Act. One such reference was made to Bombay Land Revenue Code, 1879 wherein the term “Land” was defined.
• According to the said definition, “Land” included benefits arising out of land and things attached to the earth or permanently fastened to anything attached to the earth and also shares in or charges on the revenue or rent of village or other defined portions of territory.
• As per the Appellant’s submission, in view of the above definition of the term ‘land’, the Development rights in the land can be construed as land only and therefore, any transaction pertaining to the sale of the TDR would be sale of land and will be a “no supply” transaction being covered under Clause 5 of Schedule III of CGST Act,2017 and out of the purview of the GST law.
• The question for decision before AAAR was whether TDR in itself was “land and Building” or “Immovable property other than Land & Building”?
• This issue was decided by ITAT in case of Income-tax Officer v. Shri Prem Rattan Gupta, in relation to Section 50C of the Income Tax Act 1961.
• In the judgment it was held in clear words that Transferable Development Right was not land, but a right arising out of land and hence it is an immovable property. Thus, on the basis of above judgments the contention of the Appellant that the Development rights in the land can be construed as land only and therefore, any transaction pertaining to the sale of the TDR would be sale of land only and will be no supply transaction being covered under Clause 5 of Schedule 111 of CGST Act wasnot acceptable.

• The Appellant referred to various definitions of the term ‘land’ occurring under other legislations where the term land was defined to include ‘benefits arising out of land’ and as TDR was a benefit arising out of land it would also come under Clause 5 of schedule III to the CGST Act. 2017.
• AAAR did not agree with the argument of the Appellant as the Clause 5 spoke only of ‘land’ and ‘building’. Neither the GST Act nor the schedules define ‘land’ or choose to do that.
• In that case there was no need to qualify the term land by ascribing any meaning to it or defining it by borrowing definitions from other laws. The CGST law did not make a reference to any other law while mentioning ‘land’ in Schedule III.
• Also, if it had wanted to widen the scope of ‘land’ to include ‘benefits arising out of land’ it could have very well done so.
• Schedule III to the CGST Act 2017 is like an exemption notification and exemption notifications had to be strictly interpreted.
• The Supreme Court in the case of “Dilip Kumar and Company” clearly laid down the law that the exemption notification should be interpreted strictly and the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption notification.
• Also, when there is ambiguity in an exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.
• The words of the Supreme Court are clear. The term ‘land’ has to be interpreted strictly and cannot be extended to cover ‘benefits arising out of land’.

Observations of the AAAR on whether supply of “TDR” was supply of “service” or supply of “Goods”

• According to Article 366(12) of the Constitution of India, goods includes all materials, commodities, and articles
• According to Article 366(26A) of the Constitution of India, Services means anything other than goods
• According to Section 2(52) of the CGST Act,“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.
• According to Section 2(102) of the CGST Act,“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
• Schedule III of the CGST Act pertains toActivities or transactions which shall be treated neither as a supply of goods nor a supply of services. According to Clause 5 in Schedule III Sale of land and sale of building shall be treated neither as a supply of goods nor a supply of services.
• After going through the above definitions, it was seen by the AAAR that, TDR is an immovable property and hence not covered under the definition of goods.
• But the TDR which was an immovable property was covered under the definition of service as the definition of service was wide and it covered anything other than goods under its ambit.
• Hence as per the definition of supply under Section 7 of the CGST Act, 2017 the transfer of TDR made for consideration in the course or furtherance of business was supply of service and taxable as per the provisions of CGST Act, 2017.
• It was again made clear that levy of a tax is not on land but levy of tax is on the benefits arising out of the land, which were in the nature of service.

Observations of AAAR on Taxability of TDR

• The definition of service was broadened to c over all commercial transactions within its ambit and sale of TDR was a commercial transaction.
• There is no section under the Act which explicitly prohibited the taxation of TDR. The Schedule III to the CGST Act. 2017 only mentioned ‘land’ to be outside the ambit of GST and not ‘benefits’ arising out of land. TDR is a benefit arising out of land and not land itself.
• Therefore, it was liable to tax.
• AAAR did not agree with the submission of the Appellant that TDR was money.
• It was given in lieu of money and just because it was given in lieu of money it did not get the status of money.
• Money was already defined under the CGST Act and it did not include TDR.
• Under the GST Act, “Money” means Indian legal tender or any foreign currency, cheque, promissory note, hill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognized by the RBI when used as consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.
• It was clear from the definition that TDR was not money.
• As the Act casted a liability on the supplier to pay tax on supply or transfer of TDR, the Central Government, in exercise of the powers conferred by section 9(1), section 11(1), section 15(5) and section 16(1) of the CGST Act on the recommendations of the GST Council notified the rate as 9% (CGST) covered under SI. No. 16. item (iii) of Notification No. 11/2017 – Central Tax (Rate), dated 28-06-2017 (heading 9972).
• Therefore, the effective rate of GST on TDR/FS1 was 18% (9% CGST + 9% SGST).

• Further, the Central Government issued Notification No. 4/2018 -C.T. (Rate) dated 25.01.2018, thereby postponing the time of supply till the time of supply of the developer arises.
• The Central Government also issued Notification No. 4/2019 -C.T. (Rate), dated 29.03.2019, which amended the Notification No. 12/2017-C.T. (Rate), dated 28.06.2017 where service by way of transfer of development rights/additional FSI were made exempt subject to the certain conditions contained therein.
• The Notification No. 5/2019 -C.T. (Rate), dated 29.03.2019 was issued amending Notification No. 13/2017 -C.T. (Rate), dated 28.06.2017, whereby service by way of transfer of development rights/Additional FSI by any person to the promoter were made taxable under reverse charge.
• Notification No. 6/2019-C.T. (Rate), dated 29.03.2019, provided that in case, promoter who received development rights against the consideration in the form of construction service or against the monetary consideration, GST liability shall arise on the date of issuance of completion certificate.
• All these aforesaid notifications revealed the intention of legislature to tax all the transactions of TDR/Additional FSI under GST.

Observations of AAAR on Appellant’s contention that the sale of TDR/FSI would not get covered under entry (iii) of the heading 9972 of the Notification No. 11/2017-C.T. (Rate) dated 28.06.2017 bearing the description “Real Estate Services”

• According to the appellant sale of TDR/FSI would not get covered under entry (iii) of the heading 9972 of the Notification No. 11/2017-C.T. (Rate) as the same was not appearing under the explanatory notes to the Heading 9972.
• Explanatory notes indicated the scope and coverage of the heading, group and service codes of the scheme of classification of services, and was merely a guiding tool for the assessee and tax administration for classification of services.
• Thus, the explanatory notes of the notification would not prevail over the notification itself, i.e. if a service was falling under any head of the notification by virtue of its nature and description, then merely non-appearance of the same in the explanatory notes to that notification would not mean that the services are not covered under that heading.
• AAAR referred to the Notification No. 4/2019-C.T. (Rate), dated 29.03.2019, which sought to amend the Notification No. 12/2017-C.T. (Rate), dated 28.06.2017 by inserting entries at SI No 41A in the aforesaid exemption notification, which stipulated that “services by way of transfer of development rights, i.e., TDR, or FSI (including additional FSI) on or after 1st April, 2019 for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required by the competent authority or after its first occupation, whichever is earlier, was exempted subject to certain conditions specified under the said Notification No. 4/2019-C.T. (Rate), dated 29.03.2019.

• It was noteworthy that the services described in the aforesaid Notification No. 4/2019-C.T. (Rate), dated 29.03.2019, was classified under the Heading 9972.
• Thus, on perusal of the aforesaid notification, it is evident that the subject transaction would adequately get classified under the Heading 9972.
• AAAR referred to the Notification No. 11/2017-C.T.(Rate) dated 28.06.2017 to ascertain the exact entry and the GST rate thereto. On perusal of the aforesaid Notification, it was observed that the subject transaction would be covered under entry at SI. No. 16 (iii) of the Notification No. 11/2017-C.T. (Rate), dated 28.06.2017, bearing description “Real estate services other than (i) and (ii) above”, and accordingly, would attract GST at the rate of 18% (9% CGST + 9% SGST).

In conclusion, sale of TDR/FSI would be leviable to GST under Heading 9972, at the rate of 18% (9% CGST + 9% SGST), as prescribed under the entry at SI. No. 16 (iii) of Notification No. 11/2017 – Central Tax (Rate), dated 28-06-2017.

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