Amount forfeited on cancellation of sale of land will also attract GST

GST as a whole having vast coverage, it sometimes gets really strenuous to figure out the classification of services provided, what rates will apply so as to there is certainty in tax liability. 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.

According to Section 7(1) of the CGST Act, the expression “supply” includes:

all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business
import of services for a consideration whether or not in the course or furtherance of business
the activities specified in Schedule I, made or agreed to be made without a consideration; and
the activities to be treated as supply of goods or supply of services as referred to in Schedule II

According to Clause (5)(e) of Schedule-II, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be considered as supply

Let us refer to the case of M/s. Fastrack Deal Comm Pvt Ltd (AAR), where the issue raised before the AAR was whether forfeiture of advance pertaining to sale of land will be treated as supply and accordingly attract GST or not.

Facts of the Case:

The applicant wanted to sell factory land to Mr. B for Rs.1 crore.
Mr. B showing acceptance to the sale agreement, gave advance money amounting to Rs. 20 lakhs which is 20% of the total sale amount.
Now for some reasons Mr. B could not complete the transaction upon which Fastrack forfeited the amount of Rs. 20 lakhs.

Applicant sought advance ruling before the Authority of Advance Ruling (AAR) on the following questions:

Whether the amount forfeited by Fastrack will attract GST?
Who will be considered as Service Receiver and Service Provider?
When sale of land is not treated as supply as per Schedule III of GST Act, 2017, whether forfeiture of advance pertaining to sale of land will be treated as supply and accordingly attract GST?

Observations of AAR on contention of the applicant

The main issue here was to decide whether the amount forfeited on account of breach of agreement of sale of land was liable to GST or not.
The applicant’s contention was that the amount of Rs. 20 lacs forfeited was on account of sale of land and as per Schedule III of CGST Act, 2017, sale of land is an activity or transaction, which is treated as, neither supply of goods nor service.
Therefore, they claimed that such transaction was not liable to GST.
The applicant’s contention was not tenable because he was of the view that the forfeited amount received by him was on account of sale of land.
However, it was clear from his own submissions that he had not received the said amount on account of sale of land but received the same on account of nonfulfillment of conditions of agreement of purchase of factory land by the customer.
The applicant had submitted the copy of agreement/contract, where it was mentioned that if purchaser failed to give remaining amount on or before 31/12/2019 along with 18% interest per annum, then amount paid by the customer to the applicant would be treated as forfeited.
In view of the said terms and condition of contract, it could be stated that Mr. B i.e. customer had agreed that in case he failed to give full payment as per the dates mentioned in the contract, the amount paid to the applicant would be forfeited by him.
It was clearly seen that aforesaid transaction/ activity of forfeiture nowhere involved sale of land.
Applicant had received money not on account of sale of land but on account of non-fulfilment of conditions as stipulated in the agreement by the prospective customer.
Hence the said income of Rs. 20 lacs of the applicant were not due to sale of factory land but it was due to breach of condition of contract by Mr. B.
It could be termed as a consideration to the applicant for “refraining or tolerating or doing an act” of Mr. B to not complete the transaction, which Mr. B had agreed in terms of contractual obligations

Observation of the AAR on Provisions of Law

As per the contract, the provider of service here agreed to refrain or tolerate or to do an act.
There was specific agreement by the provider to carry out obligation specified in the contract.
In case obligation/condition of the contract is not fulfilled by the recipient, then such act was squarely covered under clause 5(e) of Schedule-II.
Therefore, this activity constituted supply in terms of Section 7(1) of CGST Act, 2017 and accordingly was taxable.
As per Section 7(1) of the CGST Act, 2017, activities referred to in Schedule II were covered under the scope of supply of goods and service.
Clause 5(e) to Schedule II to CGST Act 2017, declared that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ shall be treated as supply of service.
The amount, which was received from Mr. B and forfeited by the applicant, was a part of the terms and condition of an agreement held between the applicant and Mr. B (customer).
This meant that while entering into the agreement, Mr. B was well aware about the terms and condition of the contract that in absence of breach of agreement or nonfulfillment of terms and condition of payment as per the contract, the amount given as an advance would become forfeited by the applicant being settlement of exit of the contract.
In other words, Mr. B had understood and accepted the condition that in the contingency of his inability to fulfil the transaction, applicant could exercise the option of forfeiting the amount received as an advance to agree to the obligation of letting him go, which Mr. B was bound to do as it was part of the terms and conditions of contract already agreed to and settled between them.

Thus, the appellant has refrained from taking subsequent action/ tolerated an act of the Mr. B, for which consideration was received by hm.
The purpose of payment of amount was an act of tolerance in the sense that when there was breach of the contract, the appellant was put to certain hardships, which he tolerated in return of the payment received as advance being forfeited.
Therefore, the impugned transaction was also a ‘supply’ under the provisions of the CGST Act and therefore taxable.

In AAR’s view, therefore, this transaction of the applicant agreeing to the obligation of refrain or tolerate or to do an act (exiting from the contract) on the part of Mr. B (customer), for payment of a sum, would be covered under Clause 5(e) to Schedule II to CGST Act 2017, as a declared service. Hence, AAR held that the GST was leviable on the amount forfeited by the applicant in terms of clause 5(e) of Schedule II to CGST Act 2017.

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