Introduction

A typical transaction in this business will entail three parties, namely; builder (or developer), land owning party and flat buyer. The developer enters into a development agreement with landowner, whereby the developer acquires the development rights with respect to the land.

The agreement for transfer of development rights executed between developers and landowners involve payment of consideration by the developers to the landowners for transfer/acquisition of development rights. Such consideration may be in monetary terms or by way of ownership rights of certain percentage of the developed area.

Therefore, an opinion has been sought for the GST on Transfer of Property under Tripartite Agreement.

Stages for discussion are as follows:

1. Transfer of Development Rights (TDRs)
2. Transfer of some flats to the landowner as a consideration for land
3. Sale/transfer of flats by the landowner
4. Sale/transfer of flats by the developer or builder
5. Time of Supply
6. Valuation
7. Input Tax Credit

STAGE-I: TRANSFER OF DEVELOPMENT RIGHTS (TDRs)

1. What are development rights?

In order to determine the taxability of the transfer of development rights, it is important to first analyze the legal nature of development rights. Accordingly,

1. A landowner enjoys various rights with respect to the land, such as cultivation rights, easement rights etc. One of such rights is the right to develop such land into an agricultural, industrial, commercial, residential or for any other purpose.
2. In other words, these are rights to modify an immovable property by carrying out improvements, constructing building thereon etc.

2. Modus-operandi for TDRs

Following steps are undertaken with respect to transfer of development rights:

1. Developer is given permission to enter the land for the purpose of carrying out the development activity. However, ownership in land continues with the landowner (i.e., license to occupy land);
2. Developer enters into an agreement with a landowner, wherein the right to develop the land is permanently and irrevocably transferred by the landowner to the developer(, i.e., sale of land);
3. As a consideration for sale of development right, a fixed consideration or a share in sales proceeds or ownership of certain developed area is given by the developer to the landowner;
4. Accordingly, the developer acquires exclusive, permanent and irrevocable rights for development and subsequently transfers (by way of sale, lease, license, etc. to end customers) the entire or certain percentage of the developed area (i.e. apartment, units, plots etc.)
5. The developer is allowed to further assign the development rights to any other person, but the landowner is precluded from doing so.

3. Relevant provisions under GST Act, 2017

1. Definition of goods

Section 2(52) of the CGST Act, 2017,  “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

2. Definition of services

Section 2(102) of the CGST Act, 2017, “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

3. Scope of supply

Section 7 of the CGST Act, 2017, (1) For the purposes of this Act, the expression “supply” includes––

1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
2. import of services for a consideration whether or not in the course or furtherance of business;
3. the activities specified in Schedule I, made or agreed to be made without a consideration; and
4. the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1),––

1. activities or transactions specified in Schedule III; or
2. such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-

1. a supply of goods and not as a supply of services; or
2. a supply of services and not as a supply of goods.

IV. Schedule-II- Activities to be treated as supply of goods or supply of services

1. Clause 2(a) of the Schedule-II, any lease, tenancy, easement, license to occupy land is a supply of services.
2. Clause 5(b) of the Schedule-II, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

5. Schedule-III- Activities or transactions which shall be treated neither as a supply of goods nor a supply of services

Clause 5 of the Schedule-III, Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

4. Taxability of Development Rights under GST regime

      In respect to the taxability of TDRs, there are two situations, as follows:

1.  Where TDRs of the land transferred but ownership in land continues with the landowner (i.e., license to occupy land) , and
2.  Where TDRs of the land transferred permanently and irrevocably transferred by the landowner to the developer (i.e., sale/transfer of land).

As per ‘Clause 2(a) of Schedule-II of the CGST Act, 2017 read with Section 7 of the said Act merits consideration. Under the said clause, any lease, tenancy, easement, licence to occupy land is a supply of services. Accordingly, GST is applicable on license to occupy land being a supply of service.   

On other hand, as per ‘Clause 5 of Schedule-III of the CGST Act, 2017 read with Section 7 of the said Act, under the said clause, Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building shall be treated neither as a supply of goods nor a supply of services. Accordingly, GST is not applicable on sale of land. 

Thus, acquisition of development rights with respect to a vacant land (not intended solely for residential property) is subject to GST if it qualifies as: (i) lease of vacant land; or (ii) tenancy of vacant land; or (iii) easement of vacant land; or (iv) license of vacant land.

Thus, to assess the applicability of GST on acquisition of development rights, it is important to discuss the concept of ‘lease’, ‘tenancy’, ‘easement’ and ‘license’.

1. What is the concept of ‘lease’, ‘tenancy’, ‘easement’ and ‘license’?

Lease

The term ‘lease’ of immovable property is defined as a transfer of a right to enjoy property for a limited period or in perpetuity for a consideration, whether periodic or otherwise.

Section 105 of the Transfer of Property Act, 1882 defines lease as: “A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms."

Tenancy

As per Duhaime's Law Dictionary, the term ‘tenancy’ means ‘a contract by which the owner of real property (the landlord), grants exclusive possession of that real property to another person (tenant), in exchange for the tenant's periodic payment of some sum of money (rent)’.

Accordingly, tenancy is the right to occupy real property permanently, for a time which may terminate upon a certain event, for a specific term, for a series of periods until cancelled (such as month-to-month), or at will (which may be terminated at any time). Some tenancy is for occupancy only as in a landlord-tenant situation, or a tenancy may also be based on ownership of title to the property.

Easement

As per section 4 of the Easement Act, 1882 easement defined as an easement is a right which the owner or occupier of certain land possesses, as such, for the beneficial enjoyment of that land, to do and continue to do something, or to prevent and continue to prevent something being done, in or upon, or in respect of, certain other land not his own.

Accordingly, easement is a right of use over the property of another. Traditionally the permitted kinds of uses were limited, the most important being rights of way and rights concerning flowing waters. The easement was normally for the benefit of adjoining lands, no matter who the owner was (an easement appurtenant), rather than for the benefit of a specific individual (easement in gross).

License

The term ‘license’ is defined as a grant of right to do over immovable property which otherwise for such grant of right would be unlawful. It is defined in section 52 of the Indian Easements Act, 1882 as:

“Where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license"

The determinative test of whether a right is prima facie a lease of immovable property is whether the effect of the instrument of lease is to give the holder the exclusive right of occupation of the land, though subject to certain reservations, or to a restriction of the purposes for which it may be used.

In case of license, only a right to use the property in a particular way or under certain terms is given which permits another person to make use of the property, of which the legal possession continues with the owner. There is no creation of interest in property and merely permission is granted to undertake an activity.

2. Whether acquisition of development rights constitutes a license of vacant land?

With respect to license, as per the definition and various judicial precedents, it is a settled position that there cannot be a license, if the activity creates an interest in the property.

If as per the terms of the agreement, the developer has all the rights required for development and transfer (by way of sale, lease, license, etc. to end customers) of the property against a fixed consideration. Further, such rights are granted in exclusivity.

In other words, by the activity of permanent and irrevocable transfer of development rights in lieu of a fixed fee, the owner not only gives permission to develop the land, but allows the developer to construct, sell and collect sales proceeds at its own will, i.e. without any intervention from the owner.

In light of above, it is clear that the transaction, i.e., ‘Development rights’ creates an interest in the immovable property and thus, it does not tantamount to ‘license’ of immovable property (i.e. land) by the landowner to the developer. Accordingly, it is to be considered as sale of land.

Having discussed that in the instant case the transfer of development rights does not constitute license of vacant land, it is important to discuss the nature of development rights.

3. What is the legal nature of the transaction involving transfer of development rights?

From the discussions in the preceding paragraphs, it is clear that a transaction involving transfer of developmental rights is not a license of a vacant land. Given the extent and nature of rights transferred, it can be said that the transactions involves outright transfer i.e. ‘sale’ of development rights.

4. Whether development rights can be treated as an ‘immovable property’?

The term ‘immovable property’ has not been defined under the GST law. However, as per the General Clauses Act, 1987, ‘immovable property’ also includes benefits arising out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

The Courts in India have consistently held that any right associated with an immovable property also partakes the nature of ‘immovable property’. Accordingly, benefits arising out of land are also in the nature of immovable property.

The Courts have also held that rights to develop property and avail benefits arising from such developed property are benefits arising out of land, which cannot be severed from the land. Accordingly, it could be argued that development rights should qualify as ‘immovable property’.

Reliance is placed on the below-mentioned judicial precedents in support of the above paragraph:

• The Hon’ble Bombay High Court in Chheda Housing Development Corporation v. Bibijan Shaikh [Farid], observed that Transferable Development Rights (TDR) being a benefit arising from the land must be held to be an immovable property.
• In Sadoday Builders Private Limited v. Joint Charity Commissioner, the Hon’ble Bombay High Court was dealing with Section 36(1)(c) of the Bombay Public Trusts Act, 1950 which necessitated taking permission of the Charity Commissioner for sale of immovable property. The Court held that transferable development rights are benefits arising out of land and must be considered as immovable property.

• In State of Orissa v. Titaghur Paper Mills Co. Ltd., the Supreme Court held that bamboo contract was neither a contract for the sale of goods or lease or the grant of an easement. Rather the same conferred upon the company a benefit to arise out of land, namely, the right to cut and remove bamboos which would grow from the soil coupled with ancillary rights and was thus a grant of a profit a prendre which is a benefit arising out of land.

• In Shakti Insulated Wires Limited v. JCIT, it was held that the developmental rights are embedded in the ownership of land only. These were valuable rights inherent in the ownership of land.

Basis the ratio laid out in the above judgments it can be said that development rights a benefit arising from the land and, thus, qualify as ‘immovable property’.

5. Whether a permanent transfer of development rights is akin to transfer of title in immovable property?

‘Sale’ is defined as transfer of ownership in exchange for a price paid or promised or part paid or part promised. Therefore, with respect to an agreement for transfer of development rights whereby such rights are transferred permanently on an irrevocable basis, a view may be taken that the transfer of development rights under such agreement constitutes a ‘sale’ of immovable property

In other words, it can be said that an agreement for transfer of development rights constitutes transfer of title in immovable property, accordingly excluded from the definition of ‘service’.

It may be noted that Transfer of an immovable property should be made through a registered instrument, per the Registration Act, 1908. Whether any stamp duty is payable on such a transfer would depend on the relevant Stamp Duty law applicable.

STAGE-II: TRANSFER OF SOME FLATS TO THE LANDOWNER AS A CONSIDERATION FOR LAND

5. Taxability of transfer of flats to the landowner by the developer as a consideration

The transfer of development rights by landlord to developer involves payment of consideration. Such consideration is generally given in kind by way of ownership rights of certain percentage of the developed area. The developer receives consideration normally in two ways:

1. From landowner, in the form of land /development rights; and
2. From other buyers, in the form of money.

For instance assume, GKC developers limited enters into a agreement with land owner Mr. Nagarjuna whereas in lieu of this agreement a total of 1000 residential units will be constructed by GKC ltd on the land provided by Mr. Nagarjuna, whereas 40% of the units i.e. 400 units shall be given to Mr. Nagarjuna and rest 600 units shall be taken by GKC ltd. Both can commercially sell the units in the open market. Land owner gets 400 units of flats in lieu of the land given and Developer gets 600 units of flats in lieu of the construction work done.

Based on above, redevelopment transaction is a barter transaction between landowner and developers. Here developer is providing construction service to landowner. Value of construction service shall be ascertained on the basis of flats given to landowner in exchange of development rights given by him to builder.

Further, as per decisions taken in 14th Meeting of the GST Council held on May 18-19, 2017 in Srinagar, J&K; 18 sectoral groups have been constituted representing various sectors of the economy in order to ensure smooth roll-out of GST. One such sectoral group is "MEDIA & ENTERTAINMENT SECTORAL GROUP" which has issued some FAQs on GST in respect of Construction of Residential Complex by Builders/Developers. In these FAQs, following clarification has been given in respect of land owner's share of the flats/houses:-

"Q.16) Whether GST is payable on the owner's share of the flats/houses/portion of the building constructed by the builder/developer and given to the land owner as per the development agreement?

Ans. 16:- The builder/developer is liable to pay GST even on the share of the land owner and given in lieu of the land received for the development, besides GST on the builder/developer's share of the complex/building.”

In the above transaction, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash. Thus, the builder is liable to pay GST not only on his portion of the complex/building, but also on the share of the land owner.

(Continue to Part-II)