2019 (11) TMI 994 - AAR - GST

Taxability of land development & sale under GST: Applicant's activities deemed development services, subject to GST

The case involved determining the taxability of development and sale of land under GST. The applicant, a property developer, contended that their ... Supply - Sale of land excluded from supply under Schedule III - Composite supply and principal supply - Ownership/title as sine qua non for sale of land - Consideration as transaction value under Section 15 - Residual method for determination of value (Rule 31) - Consideration payable in moneySupply - Sale of land excluded from supply under Schedule III - Composite supply and principal supply - Ownership/title as sine qua non for sale of land - Whether the applicant's activities under the joint development agreement constitute sale of land (excluded from GST) or a taxable supply of service. - HELD THAT: - The Authority analysed the agreement and concluded that the applicant does not enjoy ownership or title to the land or to any specific plots and therefore cannot be treated as the seller of land for the purpose of Entry 5 of Schedule III. The agreement characterises the applicant as a land developer engaged in converting raw land into marketable residential plots by undertaking surveys, construction of roads, drains and other amenities, and by incurring and recovering development costs. The revenue sharing mechanism (25% of sale proceeds) and escrow mechanism, the indemnity in respect of title, the requirement that landowners obtain statutory sanctions, and the explicit non vestment of possession/ownership all indicate that the applicant's role is that of a service provider to the landowners and not of an owner selling land. Consequently the exclusion for sale of land in Schedule III applies only to true owners; persons engaged in development and receiving a share of sale proceeds as consideration are supplying services and are taxable under GST. [Paras 9, 11]The activities envisaged in the agreement constitute a supply of service by the applicant to the landowners and are liable to GST; they do not qualify as sale of land excluded under Schedule III.Residual method for determination of value (Rule 31) - Consideration as transaction value under Section 15 - Consideration payable in money - If the activity is a taxable supply, whether Rule 31 (residual method) applies and how the taxable value is to be determined. - HELD THAT: - The Authority examined applicability of valuation rules. Rules 27 to 30 were found inapplicable: Rule 27 (consideration not wholly in money) is not attracted as the applicant receives consideration in money; Rule 28 (transactions between distinct/related persons) and other rules do not apply to the facts. Rule 31 therefore applies as a residual provision. Under Section 15 the value of supply is the transaction value - the price actually paid or payable. The applicant's remuneration is the 25% share of the sale value of each plot payable to it upon sale; that amount constitutes the consideration for the services rendered. The applicant's contention that only development cost (or cost plus reasonable profit) should be taxed excluding the land component was rejected: taxable value is the total consideration received by the service provider, not merely the provider's costs. [Paras 10, 11]Rule 31 applies; the value of the taxable supply is the total amount received by the applicant as consideration, i.e., 25% of the market value of each plot.Final Conclusion: The Authority ruled that the applicant's activities under the joint development agreement amount to a taxable supply of service (not sale of land excluded under Schedule III), and that Rule 31 applies to valuation: the taxable value is the applicant's total consideration, being 25% of the market value of each plot. Issues Involved:1. Whether the activity of development and sale of land attracts tax under GST.2. If taxable, whether Rule 31 can be applied to ascertain the value of land and supply of service.Issue-Wise Detailed Analysis:1. Taxability of Development and Sale of Land under GST:The applicant, a property developer, entered into a Joint Development Agreement (JDA) with landowners to develop land into residential plots. The applicant contended that the sale of developed plots falls under 'sale of land,' which is excluded from GST under Entry 5 of Schedule III of the CGST Act, 2017. The applicant argued that development activities are incidental to the sale of land and thus constitute a composite supply, with the predominant supply being the sale of land.Upon examination, the authority noted that the applicant’s primary activity is the development of land, which involves significant civil works, including surveying, leveling, and construction of infrastructure. The agreement stipulated that the applicant bears all development costs and recovers these costs from the sale proceeds of the plots. The revenue from the sale is shared between the applicant and the landowners.The authority highlighted that the applicant does not hold the title to the land; thus, they cannot be considered as sellers of land. Instead, the applicant is engaged in providing development services to the landowners. The agreement’s provisions, such as the landowners' responsibility for obtaining approvals and indemnifying the applicant against title claims, further support this conclusion.Therefore, the authority ruled that the activities undertaken by the applicant constitute a supply of service to the landowners and are liable to be taxed under GST.2. Applicability of Rule 31 for Determining Taxable Value:The applicant argued that if their activities are taxable, the value of the supply should be determined using Rule 31 of the CGST Rules, 2017, as the consideration includes both land and development costs. Rule 31 allows for the determination of value using reasonable means when other rules (27 to 30) are not applicable.The authority observed that the applicant’s consideration for services is 25% of the sale value of each plot, which is received progressively as plots are sold. This arrangement does not involve any physical possession of land by the applicant; instead, they receive monetary consideration. Therefore, the transaction value, as defined under Section 15 of the CGST Act, is the price actually paid for the supply of services.The authority concluded that Rule 31 is applicable in this case, and the value of the supply is equal to 25% of the market value of each plot. The entire amount received by the applicant is liable to be taxed under GST.Ruling:1. The activities as envisaged in the agreement between the applicant and the landowners amount to a supply of service and are liable to be taxed under GST.2. 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 25% of the market value of each plot.