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May 20, 2021

Leasing of property along with basic amenities for use as residence considered as composite supply

by Mahesh Mara in GST, Legal Court Judgement

Leasing of property along with basic amenities for use as residence considered as composite supply

Fact and Issue of the case

The Applicant submitted that they are engaged in provision of services by way of leasing of residential units for use as residence to Tenants and furnished the following facts in relation to the questions on which advance rulings have been sought-

a) The Applicant provides residential dwelling along with basic amenities such as maintenance, security and housekeeping. The services are generally provided as a comprehensive bundle and are not available as separate components.

b) The charges are fixed for each month. The Tenant does not have the option to select individual supplies from the bundle. The Tenant would pay a fixed monthly rent which would cover the charges for entire bundle as a whole.

In addition to the said services specified under para 4.1, the Applicant is also engaged in provision of services of leasing of residential units to other service providers who are engaged in subletting the residential unit for use as residence. The flow of transaction in the said case is follows: –

a) The Applicant leases residential accommodations to commercial concerns. The premises are suitable only for residential purposes and are leased to the commercial concerns for use in the residential subletting.

b) The commercial concerns further sublet the subject property to tenants for use only as residence

The applicant, filed the instant application, in relation to classification of their services, applicability of a notification and determination of liability to pay tax on their services. Further the applicant has sought advance ruling in respect of the questions on the issues covered under Section 97(2)(a), (b) & (e) of the CGST Act 2017 and hence the application is admitted.

Observation of the AAR

The applicant submitted that they provide renting of immovable property service of residential dwelling along with basic amenities such as maintenance, security and housekeeping, for use as residence; the said services are generally provided as a comprehensive bundle and are not available as separate components; the charges are fixed for each month; the tenant does not have the option to select individual supplies from the bundle; the tenant would pay a fixed monthly rent which would cover the charges for entire bundle as a whole. The applicant on this basis contends that their service qualifies to be a composite supply and the renting of immovable property service is the predominant supply.

It is an admitted fact that the applicant takes a residential dwelling, having 3 or 4 BHK accommodation on lease /rent and gives the each bed room to an individual on lease / rent with a common kitchen for all the occupants. A residential dwelling is a unit with one or more habitable rooms constituting self-contained living quarters for use of 1 or more individuals including the provision of kitchen and sanitary facilities and sleeping accommodation for the exclusive use of such individual or individuals, and having a private entrance from outside the building or from a common hallway or stairway inside the building. Thus the applicant is not leasing/renting a residential dwelling on the whole but is leasing/renting the individual bed rooms to the occupants and hence the applicant’s service does not qualify to be a “Renting of Immovable Property” service as the property leased or rented is not a residential dwelling, but amounts to provision of accommodation as “Rooming House”.

A Rooming house is a residential house, of which most or some of the rooms are rented out to paying customers. It is a place where individuals who are living in rent in that house shares the bathroom and the kitchen. The Explanatory Notes to the Scheme of Classification of Services stipulates, at the exclusion clause to the SAC 997211, that accommodation services provided by rooming houses are covered under SAC 99631. Further SAC 996311 covers Room or unit accommodation services and includes accommodation services consisting of rooms or units, with or without kitchens & with or without daily housekeeping services, provided by Hotels, INN, Guest houses, Clubs & other similar establishments on a single or multi occupancy basis, for purposes of leisure or business or others.

In view of the above, the services of the applicant squarely get covered under SAC 996311 as accommodation services and hence the said services are not covered under renting of residential dwelling.

It could be seen from above that the house keeping service, if provided, becomes the part of accommodation service. Now the question before us is whether the maintenance and security services provided along with the accommodation services become composite supply or not. In this regard we invite the reference to the definitions of composite supply and principal supply under Section 2 of CGST Act 2017.

Section 2(30) & Section 2(90) of the CGST Act 2017 define the “Composite Supply” and “Principal Supply” respectively and on reading these definitions together it could be inferred that the following conditions have to be fulfilled for a bundle of services to qualify as a composite supply-

a) The supply consists of two or more taxable supplies;

b) The supplies are naturally bundled;

c) The supplies are made in conjunction with each other in the ordinary course of business; and

d) One of the supplies is a principal supply

In the instant case the applicant is supplying accommodation services, security services, & maintenance services as a bundle which all are taxable and hence the first condition is fulfilled. The second condition is these supplies must be naturally bundled. We proceed to examine whether these services are naturally bundled or not. The illustration given to the definition of composite supply reveals that the component services of a naturally bundled services are interdependent and are inseparable for a particular transaction i.e. the element of provision of one service is combined with the element / elements of provision of other services. In the instant case the component services are interdependent and are normally supplied together by the provider of accommodation services. Thus the impugned services are naturally bundled services.

The third condition is that the supplies are made in conjunction with each other in the ordinary course of business, which implies that it must be a normal practice followed by the service providers in this business. In the instant case the applicant contends that they provide their service along with maintenance & security services. Normally the providers of accommodation services do provide the maintenance and security services along with the accommodation services as the entire dwelling would be under their control, but not under the control of roomer. Thus in the ordinary course of business the maintenance & security services are supplied in conjunction with each other. Thus the third condition is also fulfilled. Thus we conclude that the impugned services of the applicant do qualify to be a composite supply. The second question is whether renting of property by Applicant is covered under entry 12 of the exemption Notification 12/2017 (Rate) dated June 28, 2017. The applicant, in this regard, contended that residential dwelling has not been defined in the Act, in terms of the normal trade parlance is any residential accommodation, but does not include hotel motel inn, quest house, camp-site, lodge, house boat, or like places and hence they are engaged in renting of residential dwelling, not meant for temporary stay. The applicant stresses upon two factors i.e. (i) residential dwelling is given on rent for use as residence and (ii) it is rented for long term and hence claims the exemption under SI.No. 12 of Notification 12/2017 (Rate) dated June 28, 2017. The services provided by the applicant are covered under accommodation services under SAC 996311, as held in the previous paras, the exemption under SI.No. 12 of Notification 12/2017 (Rate) dated June 28, 2017 is not applicable to the impugned transaction.

The third question is whether the activity of leasing of residential units for further residential leasing would qualify for exemption under entry 14 of the Exemption Notification. This question is subject to the condition that the answer to issue 2 is negative, in which case the applicant contends that they should be entitled to exemption under entry 14 of Notification 12/2017 (Rate) dated June 28, 2017 subject to satisfaction of conditions mentioned therein, irrespective of period of stay.

Notification 12/2017 (Rate) dated June 28, 2017 vide SI.No. 14 exempts the Services provided by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having value of supply of a unit of accommodation below or equal to one thousand rupees per day or equivalent. In the instant case the services provided by the applicant are covered under SAC 996311 as accommodation services and hence the exemption is applicable to the transaction of the applicant subject to the condition that the value of supply is less than or equal to one thousand rupees per day or equivalent. . Thus the applicant is entitled for exemption under SI.No. 14 of Notification 12/2017 (Rate) dated June 28, 2017, subject to fulfillment of the required conditions.

The last question is -whether the activity of leasing of residential units for further residential leasing would qualify for exemption under entry 12 of the Exemption Notification. In the instant case, the applicant has let out residential units to commercial entities who have further let out the same for use as residence and contends that the entry No. 12 of Notification 12/2017 (Rate) dated June 28, 2017 appears to give an absolute exemption to the activity of leasing for use as residence, irrespective of the legal status of the supplier or recipient of supply; the condition of ‘used as residence’ is satisfied even in this case also & hence the activity of leasing out residential units to commercial concerns for the purpose of residential leasing should be eligible for exemption under entry 12 of the Exemption Notification; the intention behind the said exemption is to provide relief from GST on residential dwelling. Accordingly, in order for the said objective to be fulfilled both legs of the transaction (i.e., renting of property by the Applicant to a business entity and further renting of the property by the entity to the Tenants for use as residence) should be covered under the exemption. They relied on the ruling passed by the Advance Ruling Authority of West Bengal in the case of M/s Borbheta Estate Put Ltd. It is pertinent to mention here that the “Goods and Services Tax” (GST) is a transaction based tax, with seamless input tax credit at each transaction level. In the instant case two transactions are involved. The first being a transaction between the applicant & the business entity and the second between the business entity & the actual tenant. Thus the two transactions are different and the taxability / exemption of these transactions need to be examined individually.

In the transaction between the applicant & business entity, the renting of residential dwelling is not for use as residence by the business entity but in the course ot furtherance of the business of the said entity and hence the exemption under entry No. 12 of Notification 12/2017 (Rate) dated June 28, 2017 is not applicable to the impugned transaction. On the other hand in the transaction between the business entity and the tenant, the service amount to renting/leasing of rooming house which falls under accommodation services that get covered under SAC 996311 and hence the exemption under entry No. 12 of Notification 12/2017-Central Tax (Rate) dated 28.06.2017 would not be applicable to the said transaction.

Conclusion

The AAR ruled as under:

1. “Leasing of property for use as residence along with basic amenities”, in the instant case, is covered under accommodation services, as ruled in the preceding paras, falls under SAC 996311 and hence would qualify as composite supply under Section 2(30) of the CGST/KGST Act, 2017

2. Renting of property by Applicant is not covered under entry 12 of Notification 12/2017-Central Tax (Rate) dated 28.06.2017, as their services are covered under accommodation services falling under SAC 996311.

3. The exemption under entry 14 of Notification 12/2017-Central Tax (Rate) dated 28.06.2017 is available to the transaction of the applicant.

4. Leasing of property for residential subletting would not be covered under the exemption for residential dwelling under entry 12 Notification 12/2017-Central Tax (Rate) dated 28.06.2017 as the two are different and individual transactions.

Read the full advance ruling order from below

Leasing-of-property-along-with-basic-amenities-for-use-as-residence-considered-as-composite-supply

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