JDA ruling: construction for landowner taxable under CGST Schedule II entry 5(b); 5% GST, 18% on development rights

AAR held that under the JDA, the developer's construction of residential flats for the landowner in exchange for development rights constitutes a taxable supply of services under entry 5(b) of Schedule II of the CGST Act. As the project is a non-affordable residential apartment project, GST at 5% without ITC is payable by the developer on the construction services relating to the landowner's share, with taxable value determined as the open market value of similar flats sold near the date of transfer of development rights. Transfer of development rights by the landowner is a supply of service taxable at 18%, with GST on unsold units payable by the developer under RCM on completion/first occupation.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether construction of residential apartments allotted to the landowner under an area-sharing Joint Development Agreement constitutes a taxable "supply" under the GST law.

1.2 What rate of GST and valuation mechanism apply to the construction services provided by the promoter to the landowner in respect of such apartments.

1.3 Whether transfer of development rights by the landowner to the promoter under the Joint Development Agreement is taxable under GST, including liability, rate, timing, and extent of tax under reverse charge.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Taxability under GST of construction of residential apartments allotted to the landowner under JDA

Legal framework

2.1 The Court referred to Section 7(1)(a) and 7(1A) of the CGST Act, 2017 defining "supply", including all forms of sale, transfer, barter and exchange for consideration in the course or furtherance of business, and to Schedule II, entry 5(b), which treats construction of complex/building intended for sale (where consideration is not wholly received after completion) as a supply of services.

Interpretation and reasoning

2.2 The arrangement was found to be a typical area-sharing Joint Development Agreement, where the landowner contributes land and transfers development rights to the promoter, and the promoter undertakes construction, marketing and sale at its own cost.

2.3 Under the agreement, the landowner sells a portion of land to the promoter/its nominees, and in exchange receives 11 apartments (with built-up and common area and undivided share in land) valued by mutual consent at a specified amount, with the development rights handed over to the promoter on execution of the agreement and possession delivered for implementation of the project.

2.4 Clause XI of the agreement, authorising the promoter to take possession, commence construction and appoint all professionals at its own cost, was construed as evidencing transfer of development rights by the landowner to the promoter.

2.5 The Court characterized the transaction as an "exchange": the landowner transfers development rights (TDR) and the promoter supplies constructed flats to the landowner as consideration. This reciprocal arrangement falls within Section 7(1)(a) as a "supply" made for consideration in the course of business.

2.6 Applying entry 5(b) of Schedule II, construction of the residential apartments intended for sale (including those allotted to the landowner) prior to completion certificate acquires the character of "supply of services" under GST law.

Conclusions

2.7 The construction of residential apartments allotted to the landowner under the Joint Development Agreement is a taxable "supply of services" by the promoter to the landowner under the CGST Act, 2017.

2.8 GST is applicable on the landowner's share of constructed residential flats received as consideration for transfer of development rights.

Issue 2 - Rate of GST and valuation mechanism for construction services supplied to the landowner

Legal framework

2.9 The Court applied Section 15(1) and 15(4) of the CGST Act, 2017 (transaction value and determination where value not wholly in money), and Rule 27 of the CGST Rules, 2017 (valuation where consideration is not wholly in money).

2.10 Para 2A of Notification No. 03/2019-Central Tax (Rate) dated 29.03.2019 was relied upon for deeming value of construction service where development rights/FSI are exchanged for construction of apartments.

2.11 Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, as amended by Notification No. 03/2019-Central Tax (Rate) (new real estate regime effective 01.04.2019), particularly Serial No. 3 (construction of residential apartments in a Residential Real Estate Project), was applied for rate and ITC conditions, including definitions and conditions for "affordable residential apartment".

Interpretation and reasoning

2.12 As consideration is partly non-monetary (development rights), Rule 27 and Para 2A of Notification No. 03/2019-CT(R) were invoked. Para 2A deems the value of construction service provided to the landowner (in exchange for TDR/FSI) to be the value of similar apartments charged by the promoter from independent buyers nearest to the date of transfer of development rights.

2.13 The project is located in Thiruvananthapuram, treated as a non-metropolitan city under Notification No. 03/2019-CT(R). The landowner's 11 apartments have an average area of about 114.64 sq. metres each (> 90 sq. metres), so the project does not satisfy the carpet-area condition for "affordable residential apartment".

2.14 The second affordability condition (gross amount charged not exceeding Rs. 45 lakhs per apartment) could not be verified due to lack of disclosure; however, the Court proceeded on the basis that the project does not qualify as an "affordable residential apartment project" and therefore falls under the category of "residential apartments other than affordable residential apartments".

2.15 Under the amended regime, for such residential apartments (other than affordable), the applicable GST rate is 5% (2.5% CGST + 2.5% SGST), with no input tax credit, where consideration is received before completion certificate/first occupation.

Conclusions

2.16 The construction of residential apartments allotted to the landowner under the JDA is liable to GST at 5% (2.5% CGST + 2.5% SGST), without availability of ITC, treating the project as a Residential Real Estate Project of "other than affordable" residential apartments.

2.17 For valuation of the construction service supplied by the promoter to the landowner, the taxable value shall be deemed to be the value of similar apartments charged by the promoter from independent buyers nearest to the date of transfer of development rights, in terms of Para 2A of Notification No. 03/2019-Central Tax (Rate) read with Rule 27 of the CGST Rules.

Issue 3 - GST implications on transfer of development rights (TDR) by the landowner to the promoter, including reverse charge, rate, timing, and extent

Legal framework

2.18 The Court considered the amended GST scheme for real estate effective from 01.04.2019, including:

* Notification No. 04/2019-Central Tax (Rate), Serial No. 41A, Heading 9972, read with Notification No. 12/2017-Central Tax (Rate), granting conditional exemption to services by way of transfer of development rights/FSI (including additional FSI) for construction of residential apartments intended for sale;

* Notification No. 05/2019-Central Tax (Rate) read with Notification No. 13/2017-Central Tax (Rate), shifting GST liability for TDR/FSI services to the promoter under reverse charge;

* Notification No. 06/2019-Central Tax (Rate), fixing the time of liability for GST on construction services provided in consideration of TDR/FSI on the date of completion certificate or first occupation;

* Section 9 of the CGST Act, 2017 (charge of tax) and Heading 9972 of Notification No. 11/2017-Central Tax (Rate) (classification and rate for TDR/FSI services).

2.19 The Court also noted the clarification in CBIC FAQs on Real Estate (Part II), F. No. 354/32/2019-TRU dated 14.05.2019, that the value of TDR is to be equated to the amount charged by the promoter for similar apartments from independent buyers nearest to the date of transfer of development rights.

Interpretation and reasoning

2.20 The JDA, being an area-sharing arrangement, necessarily involves transfer of development rights by the landowner to the promoter for construction and sale of residential apartments. Though "development rights" are not defined in GST law, the Court adopted the general understanding as entitlements to develop or permit development of land in accordance with statutory norms.

2.21 Under Serial No. 41A of Notification No. 04/2019-CT(R) read with Notification No. 12/2017-CT(R), service by way of transfer of TDR/FSI on or after 01.04.2019 for construction of residential apartments intended for sale is exempt from GST, subject to the condition that whole of consideration is not received after completion certificate/first occupation.

2.22 Where such exemption applies, the promoter is nonetheless liable, on a reverse charge basis, to pay GST on such proportion of the value of TDR/FSI as is attributable to residential apartments remaining un-booked on the date of completion certificate/first occupation. The formula for computing this liability is:

GST on TDR/FSI payable = GST payable on TDR/FSI had there been no exemption × (Carpet area of un-booked residential apartments on date of completion certificate/first occupation) ÷ (Total carpet area of all residential apartments in the project).

2.23 The maximum effective tax under reverse charge shall not exceed 0.5% of value in case of affordable residential apartments and 2.5% of value in case of other residential apartments remaining un-booked as on completion/first occupation.

2.24 Under Notification No. 05/2019-CT(R) read with Notification No. 13/2017-CT(R), the entire GST liability under Section 9 on services by way of transfer of development rights or FSI for construction of a project is to be discharged by the promoter under reverse charge.

2.25 Notification No. 06/2019-CT(R) specifies that where development rights or FSI are received by a promoter against consideration (wholly or partly in the form of construction services or otherwise, including cash), the liability to pay tax on construction services provided by the promoter to the landowner arises on the date of issuance of completion certificate or first occupation, whichever is earlier.

2.26 The Court further held that, in general, transfer of development rights by a landowner to a promoter is to be treated as a supply of service under Section 9, attracting 18% GST (per Heading 9972 and Notification No. 11/2017-CT(R)), but, in respect of residential projects, this is subject to the conditional exemption and the restricted liability for un-booked units at completion as per the special real estate notifications.

Conclusions

2.27 Transfer of development rights (TDR) by the landowner to the promoter under the Joint Development Agreement is a supply of service under GST.

2.28 For residential apartments constructed for sale, such TDR is generally exempt under Serial No. 41A of Notification No. 04/2019-CT(R) read with Notification No. 12/2017-CT(R), subject to the condition that entire consideration is not received after completion certificate/first occupation.

2.29 Notwithstanding the exemption, the promoter is liable under reverse charge to pay GST at 18% on the proportionate value of TDR attributable to residential apartments remaining un-booked on the date of completion certificate or first occupation, computed by the specified formula and subject to the prescribed maximum effective rates (0.5%/2.5% of value, as applicable).

2.30 The promoter is the person liable to discharge the entire GST under Section 9 for TDR/FSI services received, on reverse charge basis, in terms of Notifications No. 05/2019 and 13/2017-Central Tax (Rate).

2.31 The liability to pay GST on construction services supplied by the promoter to the landowner in consideration of TDR/FSI arises on the date of issuance of completion certificate for the project or first occupation, whichever is earlier, in accordance with Notification No. 06/2019-Central Tax (Rate).

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