Service tax on Joint Venture activity - development of residential plots

[M. R. Nadkarni]

A developer enters into joint venture with the owner of the land to develop the plots for residential purpose and to sell them to the purchasers. Developer will bear entire cost for developing the plots. The developer in turn will be asigned 60% of the plots, sale proceeds of which will be given to the developer by the owner of the land. As there is no construction activity, there seems no service tax chargeable by the developer. Is there any other tax issue? Looking forward for early advice. Regards.

[Surender Gupta]

It is peculiar situation. On the one side you are saying that they enter into Joint venture on the other side you are saying that developer is paying 60% of the sale proceeds to the land owners. Once it is joint venture, profit is distributed among the partners (each parties of joint venture are partners). But, if one party is paying as sale proceed to another, how can it be a joint venture. Therefore, in my view, this issue will take some time to settle. Before deciding the issue of service tax, we have to decide the issue of nature of transaction carefully. It would have long impacts.

AI Summary

Joint venture characterization determines service tax liability; must resolve whether arrangement is profit sharing or a sale proceeds payment. A landowner and developer purportedly enter a joint venture where the developer bears development costs and is assigned a proportion of plots, yet payments of sale proceeds from the landowner to the developer are also described, creating an inconsistency between a profit sharing joint venture and a sale proceeds payment; the adviser advises that the transaction's legal characterisation must be determined before deciding on service tax liability.