Appellate Authority rules on works contract services for long-term leases

The Appellate Authority upheld the ruling that the activity of granting long-term leases of residential apartments constituted a composite supply of works contract services rather than a lease. The decision was based on the timing of lease agreements during construction, payment milestones linked to construction progress, maintenance responsibilities of lessees, and full consideration received before completion. The activity was classified under SAC 9954, attracting 18% GST, and not exempt under Notification 12/2017. The Authority's decision aligned with a similar case precedent from the Bombay High Court, emphasizing the sale-like nature of the transaction despite its lease title.

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Issues Involved:
1. Classification of the activity of granting long-term lease of residential apartments.
2. Applicability of GST on the said activity.
3. Determination of whether the activity constitutes a "works contract" or "leasing" under GST law.
4. Examination of the exemption under Notification 12/2017.

Issue-Wise Detailed Analysis:

1. Classification of the Activity:
The appellant, Nagpur Integrated Township Pvt. Ltd., entered into a Development Agreement with Maharashtra Airport Development Authority (MADC) to design, finance, and develop a township project on leasehold land. The appellant proposed to grant long-term leases of residential apartments for 99 years. The primary question was whether this activity amounted to "transfer of immovable property" and thus was not liable to GST, or if it should be classified under a specific Service Accounting Code (SAC).

2. Applicability of GST:
The appellant argued that the activity should be classified under SAC 997211 as "Rental and leasing services involving own or leased residential property" and claimed exemption under S.No. 12 of Notification 12/2017, which exempts "Services by way of renting of residential dwelling for use as residence" from GST. The AAR, however, concluded that the activity was a composite supply of works contract for the construction of flats, thus classifiable under SAC 9954 and attracting GST at 18%.

3. Determination of "Works Contract" or "Leasing":
The AAR based its decision on several observations:
- The lease agreements were entered into during the construction stage, with payments linked to construction milestones.
- The lease premium was comparable to the sale price of similar flats in the locality.
- Maintenance costs were borne by the lessees, which is atypical for standard lease agreements.
- The entire consideration was received before the issuance of the Completion Certificate, which is unusual for lease transactions.

These factors led the AAR to conclude that the transaction was essentially a sale disguised as a lease, thus constituting a "works contract" as defined in Section 2(119) of the CGST Act, and not a mere leasing of property.

4. Examination of the Exemption under Notification 12/2017:
The appellant contended that the activity should be exempt under S.No. 12 of Notification 12/2017. However, the AAR did not examine this claim in detail, as it had already classified the activity as a works contract. The AAR's decision was supported by the fact that the transaction involved construction services provided to prospective lessees, which falls under the ambit of GST as per Schedule II of the CGST Act.

Appellate Authority's Decision:
The Appellate Authority upheld the AAR's ruling, agreeing that the transaction was a composite supply of works contract services and not a lease. The Authority noted that the agreement's terms and payment schedules were consistent with those of a sale during construction rather than a lease. The Authority also referenced a similar case decided by the Bombay High Court (Lavasa Corporation Limited), where the court held that despite being titled as a lease, the agreement was essentially a sale.

Conclusion:
The Appellate Authority found no reason to deviate from the AAR's conclusions and upheld the decision that the activity was taxable under GST as a works contract, attracting 18% GST. The appellant's claim for exemption under Notification 12/2017 was not accepted, as the transaction did not qualify as mere renting of residential property but involved significant construction services.

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