2019 (3) TMI 924 - AAR - GST

AAR Tamil Nadu rules separate land sale and construction agreements constitute single supply of construction services under Schedule II with 2/3rd taxable value

The AAR, Tamil Nadu ruled that despite two separate agreements for land sale and construction services, this constitutes a single supply of construction ... Supply - Supply of services - construction of a complex, building, civil structure or a part thereof - Single supply principle where land transfer and construction are co-existent - Schedule II treatment of construction as service - Schedule III exclusion of sale of land - Value of supply - transaction value and Section 15(5) notified valuation - Notification No. 11/2017 - paragraph 2 deemed one-third value of land for valuationSupply of services - construction of a complex, building, civil structure or a part thereof - Schedule II treatment of construction as service - Schedule III exclusion of sale of land - Single supply principle where land transfer and construction are co-existent - Characterisation of the transactions (two agreements for undivided share of land and for construction) as a supply of service covered by Schedule II rather than a sale of land under Schedule III. - HELD THAT: - The Authority found that the applicant, having purchased the land and undertaking construction of apartment units, entered into two co existent and co terminus agreements which cannot be independently enforced and the sale deed is to be executed only upon completion and receipt of completion certificate. The agreements operate together as a single composite transaction for development and transfer of apartment units and associated undivided share of land. Entry 5(b) of Schedule II treats construction of a complex intended for sale, where consideration is received during construction, as a supply of service and Schedule III excludes sale of land. Given the contractual structure and the timing and conditionality of transfer, the transaction is not a sale of land under Schedule III but a supply of service under Schedule II. The applicant did not contest this position. [Paras 5]The transaction is a single supply of service (construction) covered by Schedule II and not a sale of land under Schedule III.Value of supply - transaction value and Section 15(5) notified valuation - Notification No. 11/2017 - paragraph 2 deemed one-third value of land for valuation - Measure of valuation for GST on the construction service where the supply involves transfer of undivided share of land - application of Notification No. 11/2017 (para 2) deeming one third of total amount as land value and taxable service value being total less deemed land value. - HELD THAT: - Section 15 prescribes transaction value as the general rule, while sub section (5) permits valuation by notification. Notification No. 11/2017 (as amended) applies to construction services covered by entry 3(i) and, by paragraph 2, directs that where the supply involves transfer of undivided share of land the value of the land shall be deemed to be one third of the total amount charged for the supply; the value of the service (and goods portion) is the total amount charged less that deemed land value. Applying this notified methodology to the applicant's composite transaction leads to valuation of the construction service at two thirds of the total amount charged for construction service plus amount charged for transfer of undivided share of land. [Paras 5, 6]The taxable value of the construction service is two thirds of the total amount charged (total consideration for construction plus amount charged for undivided share of land), the land being deemed one third as per Notification No. 11/2017 paragraph 2.Final Conclusion: The Authority ruled that the bundled agreements constitute a single supply of construction service (not a sale of land) and, for valuation, Notification No. 11/2017 para 2 applies: the undivided share of land is deemed one third of the total amount charged and the value of the taxable construction service is two thirds of the total consideration. Issues Involved:1. Determination of the value of supply of services provided from July 1, 2017, under the provisions of CGST Act 2017 read with Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 (as amended).Detailed Analysis:1. Nature of Agreements and Transactions:The Applicant, engaged in construction activities, has a residential project named 'One Crest' in Chennai. They enter into two separate agreements with customers: one for the sale of an undivided share in the land (Land Agreement) and another for the construction of a super-structure (Construction Agreement). These agreements are registered for stamp duty purposes and are intrinsically connected, meaning one cannot exist without the other.2. Supply of Services under GST:The Applicant's activity involves the construction of apartment units on land owned by them. When a customer purchases a unit, they also purchase a portion of the land. According to Section 7 of the CGST Act, 2017, the term 'supply' includes all forms of supply of goods or services for a consideration. Schedule II of the CGST Act specifies that the construction of a complex or building is treated as a supply of service except where the full consideration is received after the issuance of a completion certificate.3. Agreements' Co-existence:The agreements for the sale of undivided share of land and construction are co-existent and co-terminus, meaning they run concurrently and cannot be terminated independently. The Sale Deed is executed and registered only after the construction is completed and the completion certificate is received. This indicates that the transaction is not a sale of land as per Schedule III but a supply of service under Schedule II.4. Determination of Value of Supply:The value of supply is determined under Section 15 of the GST Act. Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended, provides the applicable rate of CGST and SGST for the construction of a complex or building. According to Paragraph 2 of the notification, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, deemed to be one-third of the total amount charged.5. Ruling:The measure of levy of GST on the supply of service of 'Construction' in the Applicant's project 'One Crest' shall be two-thirds of the total value charged for construction service and the amount charged for the transfer of undivided share of land. This is in accordance with entry No. 3(i) of Notification No. 11/2017-C.T.(Rate) dated 28.06.2017, as amended.Conclusion:The value of supply of services provided by the Applicant in the project 'One Crest' shall be calculated as two-thirds of the total value charged for construction service and the amount charged for the transfer of undivided share of land, as per the specified notification.