2020 (6) TMI 602 - AAAR - GST

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 ... Nature of supply - renting of immovable property versus construction - Composite supply - works contract - Schedule II classification - renting of immovable property and construction for sale during construction - Transfer of immovable property not leviable where entire consideration received after completion - Classification under Service Accounting Code 9954 - Classification under Service Accounting Code 997211 and exemption under Notification 12/2017 - Applicability of RERA and contract substance over nomenclatureNature of supply - renting of immovable property versus construction - Schedule II classification - renting of immovable property and construction for sale during construction - Classification under Service Accounting Code 997211 and exemption under Notification 12/2017 - Whether the appellant's transactions for granting long term leases of identified apartments are transactions of renting of residential dwelling (exempt under SAC 997211 / Notification 12/2017) or not. - HELD THAT: - The Appellate Authority for Advance Ruling held that, notwithstanding the labels in the draft agreements, the transactions cannot be treated as ordinary renting of a completed residential dwelling. The authority relied on the timing and structure of the transactions - agreements entered during construction, staged payments linked to construction milestones, payment of substantial consideration prior to possession, lessees bearing maintenance and other clauses resembling sale/transfer arrangements - and the statutory matrix in Schedule II which treats construction of a building intended for sale (or where consideration is received before completion) as supply of services. The authority observed that the exemption for renting of residential dwelling under Notification 12/2017 applies to genuine renting of a completed residential unit for use as residence, and that the factual and contractual features here are inconsistent with that characterisation. The authority also noted judicial precedent and RERA registration which support examining substance over nomenclature; consequently the claim that the activity falls under SAC 997211 and is exempt was rejected. [Paras 44, 45, 46, 48, 49]The transactions are not rent/lease of a completed residential dwelling entitled to exemption under SAC 997211 / Notification 12/2017; the appellant's claim of exemption was rejected.Composite supply - works contract - Classification under Service Accounting Code 9954 - Transfer of immovable property not leviable where entire consideration received after completion - Whether the transactions constitute a composite supply in the nature of a works contract (as defined in Section 2(119) and Schedule II), and are therefore taxable as construction services under SAC 9954. - HELD THAT: - Applying Schedule II and the definition of 'works contract', the authority concluded that the arrangement is essentially for construction of residential flats for prospective customers with staged payments before completion and possession. The elements identified - construction activity undertaken by the developer, staged payment linked to construction milestones, transfer of substantial consideration prior to completion, and contractual clauses (maintenance, formation of association, obligations on delay) - demonstrate a composite supply involving transfer of property in goods in execution of construction and correspond to works contract services. On that basis the authority agreed with the earlier AAR that the principal character of the supply is construction/works contract and classified the activity under SAC 9954, attracting GST as a supply of services rather than being outside the levy as transfer of immovable property. [Paras 42, 44, 45, 46, 50]The transactions qualify as a composite supply in the nature of a works contract and are correctly classified under SAC 9954 as taxable construction services; the AAR's classification is upheld.Final Conclusion: The Appellate Authority affirmed the Authority for Advance Ruling: the agreements, although titled as leases, are in substance construction/works contract transactions and not exempt renting of residential dwellings; they are correctly treated as composite works contract supplies falling under SAC 9954 and taxable accordingly, and the appeal is dismissed. 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.