Sale of flats in a JDA are not liable to GST, if Consideration received after Completion Certificate

GST is an indirect tax which replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017. Section 7 of the GST act says supply include all form of supply of goods or service or both such as sale, barter, exchange lease, renting etc. and also include activities specified as supply of goods or supply of service as per schedule II GST act. But Section 7 does not treat activities listed in schedule III of the GST act, as supply of goods or service or both.

As per paragraph 5 of schedule III activities or transaction relation to sale of land and subject to clause b of paragraph 5 of schedule II, sale of building shall not be treated as supply. Let us refer to the case of Sri. B.R. Sridhar (AAR Karnataka), where the main issue under consideration was whether sale consideration of flats in terms of the Joint Development Agreement and the subsequent Area Sharing Agreement falls under GST or not?

Facts of the Case:

The Applicant, being the owner of an immovable property entered into a Joint Development Agreement with M/s Suprabhat Constructions, a partnership firm, authorizing them to construct residential flats by incurring the necessary cost together with certain common amenities and upon the development of the said property.
The applicant gets 40% share of undivided right, title and interest in the land proportionate to super built up area and 40% of car parking spaces.

Applicant sought advance ruling in respect of the following question

Whether the total amounts received by the Owner towards the advances or sale consideration of the flats fallen to his share of 40% in terms of the Joint Development Agreement and the subsequent Area Sharing Agreement, were not amenable for payment of GST, since Applicant had sold or agreed to sell or gifted, the flats after obtaining Occupancy Certificate and that Applicant had not received any part of the sale consideration prior to the said date of occupancy certificate, thus falling under Entry No. 5 of Schedule III of CGST Act read with Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and the corresponding provisions of SGST Act.

Observations of Authority of Advance Ruling (AAR) on the Provisions of the Law

The applicant sought advance ruling in respect of issue with regard to the eligibility of the amounts to GST, received towards sale of applicant’s share (40%) of residential flats, consequent upon the Joint Development Agreement with developer to construct 74 residential units as per sharing agreement, after the issuance of Occupancy/completion certificate by the Joint Director.
AAR observed on examination of the records that the applicant had entered into JDA, along with irrevocable general power of attorney with the Developer M/s Suprabhat Constructions.
Developer obtained necessary plan approval, Commencement Certificate and the Completion / Occupancy Certificate from the competent authority.
Applicant contended that their share of residential flats were handed over by the Developer to them only after the issuance of Occupancy certificate and the applicant had executed the sale deeds for sale of the said flats after the occupancy certificate and thus the transaction was not eligible to GST in terms of clause 5 to Schedule III of the CGST Act 2017, which specified certain transactions to be treated neither as a supply of goods nor a supply of services.

According to the said clause, Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building, shall be treated neither as a supply of goods nor a supply of services
Further Schedule II to the CGST Act 2017 specified certain activities / transactions to be treated as supply of goods / services.
Clause 5(b) of the said schedule stipulated that “Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly” shall be treated as supply of service except where the entire consideration was received after issuance of completion certificate, where required, by the competent authority or after its first occupation whichever is earlier.

Observations of the AAR on applicability of GST

In the instant case the applicant stated that that their share of residential flats was handed over by the developer after the issuance of completion / occupation certificate and also the Area Sharing Agreement restricted the right of the applicant to execute any sale agreement or any conveyancing deeds till the issuance of completion certificate and taking over of their share of units / flats.
Thus, the sale of said flats were not eligible to GST, if and only if they were sold after issuance of Completion / Occupancy certificate, in which case the said transaction was to be treated neither as supply of goods nor supply of services, in terms of clause 5 of Schedule III.
It was an admitted fact that the developer had the sole and exclusive right of marketing the entire project.

The applicant was silent about the fact that whether the developer had executed any sale deeds on behalf of the applicant in respect of the applicant’s share of units/flats.
Thus, if the applicant themselves or the developer on behalf of the applicant sold the applicant’s share of units/flats prior to issuance of completion certificate, then the transactions amounted to supply of “Works Contract Service” liable to GST.

Observations of the AAR on value of the supply

The value of the aforesaid supply was to be ascertained from open market and would be equal to open market value as per rule 27 of the CGST/SGST rules 2017.
Further it was also clarified vide Notification No. 4/2019 Central Tax (Rate) dated 29-03-2019 at paragraph (iii) IB, which stated that “Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be.”
The time of supply in the instant case would be the time at which the constructed flats are handed over by the developer to the applicant.
In the instant case the applicant contended that they received their share of units/flats after the issuance of Completion/Occupancy certificate by Bruhat Bengaluru Mahanagar Palike (BBMP) for 74 units (11609 Square feet). This would be thus considered as the time of supply.

In Conclusion:

The amounts received by the applicant, either by himself or through his agents, towards sale of their share of flats were not eligible to GST, if and only if the entire consideration related to such sale of flats is received after the issuance of Completion Certificate, as the said activities were treated neither supply of goods nor supply of service in terms of schedule III of the CGST Act 2017 subject to Clause 5(b) of the Schedule-II of the CGST Act, 2017.

If the applicant themselves or the developer on behalf of the applicant sold the applicant’s share of units/flats prior to issuance of completion certificate, then the transactions amounted to supply of “Works Contract Service” liable to GST. The time of supply would be the time at which the constructed flats are handed over by the developer to the applicant.

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