2024 (2) TMI 902 - HC - GST

Telangana HC upholds GST on transfer of development rights under Joint Development Agreements as constitutionally valid taxable supply

The Telangana HC dismissed a writ petition challenging the constitutional validity of GST Notification No. 4 of 2018 imposing GST on transfer of ... Transfer of development rights as a taxable supply of service - sale of land excluded from GST under Entry 5 of Schedule III - time of supply notification for transfer of development rights - validity of delegated legislation issued on recommendation of the GST CouncilTransfer of development rights as a taxable supply of service - sale of land excluded from GST under Entry 5 of Schedule III - Whether the transfer of development rights under the JDA is in the nature of sale of land or is a supply of services liable to GST - HELD THAT: - The Court examined the JDA clauses and held that mere execution of the JDA and permissive possession do not effect an automatic transfer of ownership or title in favour of the developer. The arrangement contemplates the developer performing construction and development services, with the landowners retaining title until separate conveyance by sale after specified milestones, completion and issuance of completion certificate. The agreement contemplates two distinct supplies: (i) the developer's supply of construction/development services to the landowners; and (ii) subsequent sale of constructed units to third party buyers. Both falls within the ambit of taxable supplies under Section 7 and Schedule II (construction services) and therefore cannot be treated as a non taxable sale of land under Entry 5 of Schedule III. The Court rejected the submission that the JDA, by its nomenclature or consequences, should be treated as an outright sale of land at the time of its execution, emphasizing that substance is to be gleaned from the contractual terms read as a whole rather than from labels. [Paras 28, 29, 30, 34, 39]Transfer of development rights under the JDA is a service amenable to GST and not an exempt sale of land under Entry 5 of Schedule III.Time of supply notification for transfer of development rights - validity of delegated legislation issued on recommendation of the GST Council - Whether the notification postponing the time of levy for transfer of development rights is ultra vires or otherwise invalid - HELD THAT: - The Court observed that the challenged notification does not create a charge where none existed but deals with the timing of tax liability in respect of transfer of development rights-a supply that has been taxable since introduction of GST. The notification, issued pursuant to recommendations of the GST Council and within the framework of Article 246A, was held to legitimately prescribe the time of supply (postponing tax incidence until delivery of constructed area/completion). The challenge that the notification amounted to impermissible delegated legislation or exceeded statutory power was dismissed, the Court noting the constitutional scheme empowering Parliament and States to legislate on GST and the consultative role of the GST Council in rate and temporal clarifications. [Paras 33, 36, 40]The notification impugned (relating to time of supply for transfer of development rights) is not ultra vires and is validly issued on the recommendation of the GST Council.Final Conclusion: The writ petition is dismissed: the transfer of development rights under the JDA is a taxable supply of services under GST (not an exempt sale of land), and the notification governing the time of taxation for such transfers is valid; consequently the challenge to the notification fails. Issues Involved:1. Whether the transfer of development rights is in the nature of transfer of immovable property or the nature of services would fall within the scope of GSTRs.2. Whether the transfer of development rights can be safely brought within the purview of an outright sale of landRs.Summary:Issue 1: Nature of Transfer of Development RightsThe petitioner argued that the transfer of development rights under a Joint Development Agreement (JDA) should be treated as a sale of land and hence exempt from GST under Entry 5 of Schedule III of the GST Act, 2017. They contended that the JDA results in a substantive transfer of development rights, equating to a sale of land, which should not attract GST.The respondent-Department countered that the JDA does not constitute an outright sale of land but rather a transfer of development rights, which is a service subject to GST. They emphasized that the ownership, title, and rights remain with the landowner, and the developer is merely executing development activities on behalf of the landowner.The court examined various clauses of the JDA, noting that the agreement grants the developer permissive possession for development purposes but does not transfer ownership or title of the land. The court concluded that the transfer of development rights is a service under GST law and not an outright sale of immovable property.Issue 2: Outright Sale of LandThe petitioner argued that the JDA should be viewed as a conveyance resulting in the sale of land, exempt from GST. They cited various Supreme Court judgments to support their contention that the transfer of development rights amounts to a sale of land.The respondent-Department argued that the JDA does not result in an outright sale of land but rather a service agreement for development. They highlighted that the landowner retains ownership and title, and the developer's rights are limited to development activities.The court referred to the Supreme Court's judgment in Commissioner of Income Tax v. Balbir Singh Maini, which held that similar agreements do not transfer ownership or title but merely grant development rights. The court concluded that the JDA does not result in an outright sale of land and that the transfer of development rights is subject to GST.Conclusion:The court held that the transfer of development rights under the JDA is a service subject to GST and not an outright sale of land. The impugned notification imposing GST on the transfer of development rights was deemed valid and not ultra vires the Constitution of India. The writ petition was dismissed, and the court upheld the applicability of GST on the transfer of development rights under the JDA.