Is development and subsequent sale of land under Joint Development Agreement to be considered as sale of land on which GST will not be applicable?
Is activity of development of land leading to its consequent sale to be considered as ‘sale of land’ which is not taxable under GST? Or is development of land a supply of service which is taxable under GST. Let us find out the same in detail by referring to the case ofM/s Maarq Spaces Private Limited (GST AAAR Karnataka).
Impact of development and subsequent sale of land under Joint Development Agreement- GST applicability
In an interesting case of M/s Maarq Spaces Private Limited the AAAR Karnataka has thrown light on this concept
Brief Facts of the Case:-
- The applicant is a private limited company, registered under GST and is engaged in the business of property development.
- The Applicant submitted that he had entered into a Joint Development Agreement (JDA) with landowners for development of land into residential layout along with specifications and amenities.
- The consideration was agreed on revenue sharing basis in the ratio of 75% for landowner and 25% for applicant.
- Cost of the development is borne by Applicant.
- Pursuant to JDA, Applicant had entered into an agreement with customers for sale of developed plots for consideration.
Advance ruling was sought for the Authority of Advance Ruling (AAR) on the below issues:-
- Whether the activity of development and sale of land attract tax under GST?
- Whether provision of rule 31 (residual method for determination of value of supply) is applicable in ascertaining the value of land & supply of service, if GST is applicable?
Order passed by AAR:-
- The activities as envisaged in the agreement between the applicant and the landowners amount to supply of service and is liable to be taxed under GST
- Rule 31 applies in the instant case and the value of the supply is equal to the total amount received by the applicant, which is equal to 25% of the market value of each plot.
- The appellant being dissatisfied with the order of AAR further appealed to the Appellate Authorities for Advance Rulings (AAAR)
Contention of Appellant:-
- There is nothing in the JDA which gives rise to the contention that the appellant has agreed to supply services to the landowner which are in terms of Section 9 of the GST Law.
- Supply includes all forms of supply of goods, services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
- In order to constitute there should be person who supplies goods or service and there should be person who receives such goods or service and the contract should specify the intention of parties having agreed to the sell goods or provide service for consideration
- The parties had never agreed for supply of goods or service between them, rather it is agreed to contribute mutually in the form of land and development work by each other and share the revenues out of sale of developed plots.
- The law recognizes the “recipient” as the person who is liable to pay consideration. There is no such clause in the JDA, which fixes the responsibility on Land Owners to pay the consideration to the Appellant for development of land
- It was agreed by the Appellant that, irrespective of sale of plots, Appellant would complete the development work within the specified time
- The JDA is also silent about the consequences of unsold plots, as to whether Land Owners are liable to pay any consideration to the Appellant or not.
- Therefore, in the absences of consideration flowing from Land Owners, it cannot be construed that, Appellant had agreed to execute work to the Land Owners for consideration.
- In the case of sale of developed plots, the principal supply is land and development activity is incidental to the main principal supply, therefore sale of land does not attract tax under GST
- Sale of land is excluded from the scope of “supply” and by applying the provisions of ‘composite supply’ and ‘principal supply’ they submitted that, the predominant activity is sale of land and development activity is incidental to the sale of land.
- Moreover, the development activity is naturally bundled with sale of land. Therefore, sale of Developed Plot is nothing but sale of land, which does not attract tax under GST.
- As per Section 32(5) of Karnataka Urban Development Authorities Act, 1987, a person who forms lay-outs is required to transfer the ownership of the roads, drains, water supply mains, parks and open spaces, civic amenity areas to the authority, permanently without claiming any compensation thereof.
- In order to comply with the above provisions, Appellant had executed a relinquishing deed & Rectification deed in favour of Chikkaballapur Urban Development Authority.
- They argued that, where law requires the Appellant to transfer the ownership on the developmental works such as roads, drains, water supply mains, parks and open spaces, civic amenity areas.
- Appellant has no right in entering into an agreement for supply of service but can only enter into an agreement for sale of land.
- The Appellant relied on the decision of the Karnataka Appellate Tribunal in the case of Continental Builders and Developers Bangalore Vs State of Karnataka, 2009 wherein the court examined the issue whether development of plots and sale, is works contract or not. They submitted that the Tribunal had held that, “Civic amenities work done by land developer, subsequent to transfer of same to the local authority, there is no transfer of property in goods to the site purchasers either collectively or individually.”
- They submitted that the ratio of the above decision is squarely applicable to the supply of service under GST and therefore the consideration received for the sale of land does not attract GST.
- The Appellant further submitted that the ruling by the AAR that the Appellant has no title, right or interest in the property and thereby does not become owner of the property to claim as sale of land, is not acceptable under law.
- Ownership is the exclusive right and control over the property. Ownership involves multiple rights such as right to enjoy, right to use, right to dispose etc. There are absolute and limited, sole ownership, co-ownership, vested ownership, contingent ownership, corporeal, incorporeal. Since the Appellant has right in the project to the extent of 25% of total revenue (as per JDA), it can be considered that Appellant has ownership right in the property.
- Any right or interest in the immovable property is considered to be an immovable property therefore the Appellant share of revenue shall be treated as sale of immovable property and does not attract tax under GST Law.
Observations and Findings of the Hearing:
- The liability to GST arises when there is a supply of either goods or services or both. However, the activity of sale of land has been treated as neither a supply of goods nor a supply of service.
- It is the contention of the Appellant that they are primarily engaged in the sale of land which has been developed by them and the development activity is incidental to the sale of land and hence they are not liable to GST.
- However, a transaction shall be out of GST only if the activity is exclusively dealing with transfer of title or transfer of ownership of land, which is immovable property.
- If the transaction of sale of land is coupled with another activity such as infrastructure works, then this exclusion will not apply.
- The JDA authorised the Appellant-Developer to develop the scheduled property into a residential layout.
- The Appellant prepares the necessary plans/drawings/designs for the residential layout with the help of architects and other professionals and incurs expenditure for the development of the property.
- The plans drawn up by the Appellant-Developer will be submitted by the landowner to the Government Authorities for obtaining the necessary sanctions/permissions.
- The Appellant shall develop the project according to the sanctioned plan.
- All cost incurred by the Appellant recoverable from the purchasers of the plots in the project and the Appellant shall be responsible for the maintenance of the property till the project completion.
- The landowner has authorised the Appellant to sell the sites in the project and share the revenue out of the sale proceeds in the agreed upon revenue sharing ration.
- The revenue accruing from the sale of the plots shall be shared between the landowner and the Appellant in the ratio of 75% and 25% respectively.
- It is therefore, clear that the transaction between the landowner and the Appellant is not a sale of land but a transaction coupled with obligations for development of the land and provision of infrastructure/amenities.
- There is an element of service rendered by the Appellant in the form of plotted development of the land which is the dominant activity of the agreement
- Composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods, services or both, which are naturally bundled and supplied in conjunction with each other, one of which is a principal supply.
- In the instant case there are two activities involved – development of land and sale of plots.
- The transaction relating to the sale of land is not a supply of either goods or service under GST. This activity of sale of land cannot be considered as an ‘exempt supply’ for the reason that the activity is not at all a supply and hence the question exempting it under Section 11 of the Act does not arise.
- On the other hand, the activity of development of land is a supply in terms of Section 7 of CGST Act. A combination of two activities one of which is not a supply under GST cannot be said to be a composite supply.
- The Appellant had put forth the argument that under the Karnataka Urban Development Authorities Act, 1987, they are required to permanently transfer the ownership of the roads, drains, water supply mains, parks and open spaces, civic amenity areas to the Urban Development Authority and where the law requires them to transfer the ownership of the developmental works.
- In terms of Section 32 of the Karnataka Urban Development Authorities Act, any new layout can be formed only after getting the sanction from the Urban Development Authority.
- The JDA mandates that the landowner shall submit the finalised plans to the relevant governmental authorities to procure the sanctioned plan. The landowner shall obtain all required licenses, sanctions, consents, permissions, no-objections and such other orders as are required to procure the Sanctioned Plan.
- If the Appellant intends to modify the plans, the landowner shall obtain the required modifications to the sanctioned plan. Therefore, it is evident that the onus is on the landowner to comply with the provisions of Section 32 of the Karnataka Urban Development Authorities Act. The Appellant has no role to play in obtaining the sanctions and in transfer of ownership. Therefore, this argument of the Appellant does not hold good.
- In real estate transactions involving plotted development, one party owns the land and another party has the expertise to develop the land. The two parties come together with the common intention of developing the land and sharing the revenue accruing for the sale of the developed plots in the land.
- However, the landowners give the rights of using the land to the developer in exchange for which, the developer gives the service of developing the land of the owners.
- While the JDA is entered into for the two parties to jointly reap the benefits of the sale of the land to customers, there is a clear rendering of a service by the developer to the landowner in developing the land which belongs to the landowner.
Therefore, it was held that the activity of developing the land is a supply of service by the Appellant.
AAAR upheld the order passed by the AAR and the appeal filed by the appellant was dismissed.