GST / Service Tax on Area Given under Joint Development Agreement

[Kalpesh Shah]

Respected Seniors and Experts,

I have one querry as below :

One of my client is a Builder/Developer. He entered into a JDA with landowner for Development of Land in the month of February 2016. Terms of Agreement were Area Sharing.

We discharged Service Tax liability on Area to be handed over to Landowner under Construction Services in the quarter 4 of 2015-2016. This tax liability was discharged following POT Rules on the basis of Consideration received in advance in the form of Development Rights.

We have entered into supplementary Agreement in the month of Sept 2019 for demarcation of units to be allotted to land owner.

We received Occupancy Certificate in the month of September 2020.

Now GST Department insist that We are liable to discharge GST on the units allotted to landowner following notification no. 4/2018.

We replied that as per Sec. 142(11)(b) of GST Act, the supply on which Service tax was leviable on that service GST will not be levied.

Now department has issued SCN on the same point.

Can you please guide me with case laws

Thanking you in Advance.

[KASTURI SETHI]

Dear Querist,

Can you post all relevant paras of the SCN here? I mean to say 'pillars' of the SCN. Then only it is feasible to post the relevant case laws.

[Kalpesh Shah]

Respected Kasturi sir,

Connected Points of SCN:

Nature of Supply in JDA: The taxpayer, acting as a builder-developer, provides construction services to the landowner ie. M/s ABC Enterprises, in exchange for development rights to the remaining portion of the land. The scenario described, the transaction involving the taxpayer's provision of 35% of the carpet area to the landowner under the Joint Development Agreement (JDA) does indeed create a GST liability, specifically under the following condition of the

Timing of GST Liability: Section 9 of the CGST Act 2017 is the charging section and deals with levy of CGST on a supply. In these regards, we draw relevant reference of Notification No. 4/2018 which clarifies that GST liability arises at the time when possession or the right in the constructed area is transferred to the landowner, typically through a conveyance deed or similar instrument (such as an allotment letter).

Also relying on Rule 27 of the CGST Rules, 2017 for valuation is appropriate when the supply’s value is not determined by the open market. This rule provides guidance for determining the taxable value when goods or services are supplied either for no consideration or at a significantly reduced rate.

Under Rule 27, the valuation hierarchy for GST is as follows:

1. Open Market Value: If an open market value is available, it should be the primary basis for valuation.

2. Comparable Value: If the open market value isn’t available, the valuation may rely on the value of goods or services of a similar kind and quality.

3. Cost Plus Method: If neither open market nor comparable value is available, the value shall be based on the cost of supply plus a standard 10% margin.

4. Residual Method: If none of the above methods are feasible, any other reasonable means, consistent with the CGST Act principles, can be used for valuation.

In the context of a Joint Development Agreement (JDA), this approach would help determine the GST liability by valuing the construction services provided by the developer to the landowner based on fair Comparable value principles, even if no direct monetary consideration is exchanged."

GST LIABILITY ON SUPPLY INVOLVED:

The Taxpayer provides the service of construction of flats, in lieu of the development rights given by the land owner. In other words, the supply of construction service provided by the Taxpayer to the land owner is in the nature of barter. The Section 7 of the CGST Act 2017 defines "Supply", inter alia including all forms of supply of goods or services or both, such as sale, barter etc., that are made or agreed to be made for a consideration by a person in the course of furtherance of business. Further Section 2(31) of CGST Act 2017 defines "Consideration" in relation to the supply of goods or services or both as any payment made or to be made, whether in money or otherwise. In the instant case the Taxpayer received the consideration in the form of development rights which is other than money and qualifies to be "consideration". Therefore, in the instant case the supply is in the form of barter and the consideration is in the form of development rights and is in the course of furtherance of business. Hence the activity squarely falls under "Supply" under CGST Act 2017.

2.1 Section 9 of the CGST Act 2017 is the charging section and deals with levy of CGST on a supply. In this regard we draw reference to relevant Notification No. 4/2018-Central Tax (Rate) dated 25.01.2018, which notifies the following classes of registered persons, namely:

a) Registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and

b) Registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights, as the registered persons in whose case the liability to pay central tax on supply of the said services, on the consideration received in the form of construction service referred to in clause (a) above and in the form of development rights referred to in clause (b) above, shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example Allotment letter).

2.2 In the instant case the Taxpayer, a registered person, is supplying the construction service of building / civil structure to supplier of the development rights (the land owner) against consideration in the form of transfer of development rights. Notification No.4/2018-Central Tax (Rate) dated 25.01.2018, at para (b), stipulates that the supplier of construction service is liable to pay GST for the service provided to the land owner in lieu of development rights."

On the basis of above they are levying GST on units allotted to Landowner under GST Regime.

[Shilpi Jain]

GST being a new law, you would not find decisions hereunder to support. Though certain decisions under ST could help, though not directly relating to the same facts.

Further, another point is that when one tax is already paid i.e. ST and department has not returned that, they cannot levy GST again. It would tantamount to double taxation. You should approach a good consultant to reply to this notice and pls note that this issue will take many many years to settle.

[DEVARA SIVAPRASAD]

First thing you should remember is any Law would flow in Logical sense. That is why because, a restriction has been imposed under the Section 142(11)(b) of the CGST prohibiting the Levy of the GST "to the extent on the "Services," which was leviable under the Chapter V of the Finance Act, 1994." As you, with introduction of the GST in 2017, 15 Indirect Taxes subsumed both from Centre and State side to reduce the cascading of the Taxes imposed at Centre and State Level. Therefore, you cannot equate the GST with the Service Tax at any point of time. The only thing you were eligible is I/P transitional Credit, I believe, subject to the merits and facts best known to you. Before the introduction of the GST, it is settle Law that an Activity can be subjected to two Taxes at a time under two Independent Acts. There is no Question of Double taxation. This Position has also been captured under Transitional Credit Provisions under the GST act also. Hope, this would to sought out your query at your end.

[Manoj Thakur]

I have recently got partial relief in first appeal in ditto case (society redevelopment area sharing model started 2014 occupancy 2020), remaining relief very likely in tribunal. Its a highly nuanced matter driven by the your notice or order, hence can help you only after seeing the notice or order. You can message me or just type my name with .in at end in your browser.

[Kalpesh Shah]

Thank you Experts for your valuable Opinions 

AI Summary

GST liability on construction services in a JDA arises when possession or rights are transferred to the landowner. A builder-developer supplying construction services to a landowner under a JDA in exchange for development rights constitutes a Supply with consideration in kind; GST is chargeable when possession or the right in the constructed area is transferred to the landowner, and valuation follows the statutory hierarchy where open market value is not available.