Sale of incomplete building without construction services not taxable under GST Entry 5(b) Schedule II

The Karnataka HC held that the sale of an incomplete building without providing subsequent construction services does not fall under Entry 5(b) of Schedule II, which covers construction services. The court determined that such transactions constitute neither supply of goods nor services under GST law, making them non-taxable. The HC quashed the rejection order and allowed the petitioner's GST refund claim, ruling that authorities erroneously applied Entry 5(b) when the transaction involved only sale without construction services.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

- Whether the transaction involving the sale of an incomplete building is subject to GST under the CGST/KGST Act.

- Whether the transaction falls under Entry 5(b) of Schedule II, which treats certain construction activities as a supply of services subject to GST.

- Whether the transaction is covered by Entry 5 of Schedule III, which treats the sale of land and buildings as neither a supply of goods nor services, thus exempting it from GST.

- Whether the petitioner is entitled to a refund of the GST paid under protest.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework primarily revolves around the CGST Act, 2017, specifically Section 7, which defines the scope of supply, and the relevant entries in Schedule II and Schedule III. The court also considered precedents from the Supreme Court and various High Courts, including the cases of Larsen & Toubro Ltd. v. State of Karnataka and Munjaal Manishbhai Bhat Vs. Union of India, which clarify the applicability of GST to construction activities and the sale of immovable property.

Court's interpretation and reasoning:

The Court interpreted that for a transaction to fall under Entry 5(b) of Schedule II, there must be a contract for construction services between the parties, and consideration must be received before the completion certificate is issued. In the absence of such a contract, the transaction would fall under Entry 5 of Schedule III, exempting it from GST.

Key evidence and findings:

The Court found that the sale transaction was conducted on an 'as is where is' basis without any further construction obligations by the liquidator. The sale was of an incomplete building, and no construction services were provided post-agreement, which is crucial to determining the applicability of GST.

Application of law to facts:

The Court applied the legal principles to the facts and concluded that the transaction was a sale of immovable property without any service component. Therefore, it was not subject to GST under Schedule II and was covered by Schedule III, exempting it from GST.

Treatment of competing arguments:

The respondents argued that the transaction was taxable under Entry 5(b) of Schedule II due to the absence of a completion certificate. The Court rejected this argument, emphasizing that the absence of a construction contract and the nature of the sale as a transfer of immovable property placed it under Schedule III.

Conclusions:

The Court concluded that the impugned order rejecting the refund claim was illegal and without jurisdiction. It directed the respondents to refund the GST amount paid by the petitioner with applicable interest.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The impugned order petitioner is illegal, arbitrary and without jurisdiction or authority of law apart from being contrary to the provisions of the CGST/KGST Act and the same deserves to be quashed and consequent directions are to be issued to the respondents to sanction/grant and pay refund in favour of the petitioner together with applicable interest."

Core principles established:

- A transaction involving the sale of an incomplete building without a construction contract does not attract GST under Schedule II.

- Such transactions fall under Schedule III, exempting them from GST, as they are considered sales of immovable property.

Final determinations on each issue:

- The transaction in question was not subject to GST, and the petitioner was entitled to a refund of the GST paid under protest.

- The Court quashed the impugned order and directed the refund of Rs. 14,32,64,614/- with applicable interest to the petitioner.

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