Transfer of development rights would be considered as service under GST Law

The Hon'ble Telangana High Court in the case of M/s. Prahitha Constructions Private Limited v. Union of India and Ors. [Writ Petition No. 5493 of 2020 dated February 09, 2024] dismissed the writ petition and held that transfer of development rights would be considered as service and is, therefore, subject to levy of GST.

Facts

M/s. Prahitha Constructions Private Limited ("the Petitioner") is engaged in the business of conceptualizing, planning, constructing and developing commercial real-estate projects. The Petitioner entered into a Joint Development Agreement ("JDA") with the land owners for the development of land by constructing towers in the first phase with common facilities.

The Petitioner has filed a writ petition for declaring that the transfer of development rights of land owner to the Petitioner by way of JDA should be treated as sale of land by the land owners and hence the execution of JDA should not be subject to levy of GST. The Petitioner also prayed for declaring Notification No. 4 of 2018-Central Tax (Rate) dated January 25, 2018("the Impugned Notification") as amended by Notification No. 23 of 2019 dated September 30, 2019, imposing GST on transfer of development rights of land by the land owners under JDA is ultra vires to the Constitution of India.

The Petitioner contended that, the execution of JDA is almost like sale of the land which is developed by the Petitioner. The Petitioner further contended that, the Revenue Department ("the Respondent") cannot compel the Petitioner to pay GST by treating JDA as a transaction of sale of the land.

Issue

Whether the transfer of development rights would be considered as service under GST Law?

Held

The Hon'ble Telangana High Court in Writ Petition No. 5493 of 2020 held as under:

• Noted that, the JDA comprises of two parts i.e. one is the agreement between the landowner and the Petitioner and other is supply of construction services by the Petitioner to the land owner and thereafter, the sale of constructed area to third-party buyers.
• Further Noted that, there is no automatic transfer of ownership to the Petitioner at the time of execution of JDA. The Petitioner gets the right on the developed property only after the completion of the project and issuance of completion certificate, the Petitioner derives the right to sell the area of property, which is allotted to him for the realization of the amount of money invested in the course of execution of JDA.
• Further Noted that, under no circumstance, does the execution of JDA or transfer of development rights indicate an automatic transfer of ownership or title rights over any portion of land belonging to the landowner in favour of the Petitioner.
• Opined that, the services rendered by the Petitioner in the execution of JDA were supplied prior to issuance of JDA and therefore, would fall within the purview of GST.
• Further Opined that, the aforesaid supply would attract GST as the said supply would fall within the purview of construction services as per Entry 5(b) of Schedule II of the Central Goods and Services Tax Act ("the CGST Act").
• Further Opined that, the services rendered by the Petitioner the transfer of development rights cannot be brought within the purview of Entry 5 of Schedule-III of the CGST Act.
• Further Opined that, the challenge to the Impugned Notification is devoid of merits
• Held that, the grounds raised by the Petitioner are not sustainable and the writ petition is devoid of merit. Hence, the writ petition is dismissed.

Relevant Provisions

Entry 5(b) of Schedule II of the CGST Act

"Activities or Transactions to be treated as supply of goods or supply of services

5. Supply of services

The following shall be treated as supply of services, namely:-

(a) renting of immovable property;

(b) 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, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.-For the purposes of this clause-

(1) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:-

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; (20 of 1972.) or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;"

Entry 5 of Schedule III of the CGST Act

"Activities or Transactions which shall be treated neither as a supply of goods nor a supply of services

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building."