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GST – SCRUTINY AND AUDIT

INTRODUCTION

There are specific provisions under GST laws on Scrutiny and Audit, both of which are different.

There are fundamental differences in the three terms – reconciliation, scrutiny and audit. The scope of audit would include the first two which aid in conduct of audit.

The purpose of preliminary scrutiny of returns includes:

ensuring the completeness of the information furnished in the return,

arithmetic correctness of the amount computed as tax and its timely payment,

timely submission of the return and identification of non-filers and stop-filers.

Scrutiny of documents viz. ledger accounts, returns of tax, compliances etc is nothing but a strong compliance verification procedure or mechanism. For example, in case of a return, the purpose of detailed scrutiny of returns is to ensure the correctness of the assessment made by the assessee. Such scrutiny plan only supplement the audit programme. It is expected that for an effective scrutiny, it shall follow best audit practices.

The scope of audit, on the other hand, is to inspect the financial records of a company for a complete financial year in order to identify non-compliance issues and to evaluate the assessee’s internal control system. The two processes of audit and scrutiny are, in fact, complementary to each other.

Simply put, auditing is an examination or verification of books of accounts and financial records so as to arrive at truth and fairness of such statements. It is that branch of accounts that deals with the examination and verification of accounts or books based on evidence, procedures and principles of auditing.

Statutory Provision

Section 61 of the GST Act, 2017 authorizes the proper officer to scrutinize the return for verification of correctness of the return and if any discrepancies are noticed by the officer, then, he shall inform about the same to the taxable person. Where the explanation regarding such discrepancies are found acceptable, then, no further action shall be taken against the assessee but where no explanation is furnished or the explanation furnished is not satisfactory within thirty days of being informed by the proper officer, the proper officer may initiate appropriate action against such taxable person.

Notice of scrutiny of returns

As per sub rule (1) of rule 99 of the GST Rules, 2017 where any return furnished by a registered person is selected for scrutiny, the proper officer shall scrutinize the same in accordance with the provisions of Section 61 with reference to the information available with him, and in case of any discrepancy, he shall issue a notice to the said person in FORM GST ASMT-10, informing him of such discrepancy and seeking his explanation thereto within such time, not exceeding thirty days from the date of service of the notice or such further period as may be permitted by him and also, where possible, quantifying the amount of tax, interest and any other amount payable in relation to such discrepancy.

Consequences of not providing an explanation against scrutiny

As per Section 61(3) of the GST Act, 2017 in case no satisfactory explanation is furnished regarding the discrepancies found by proper officer within a period of thirty days of being informed by the proper officer or such further period as may be permitted by him or where the registered person, after accepting the discrepancies, fails to take the corrective measure in his return for the month in which the discrepancy is accepted, the proper officer may initiate appropriate action including those under Section 65 or Section 66 or Section 67,or proceed to determine the tax and other dues under Section 73 or Section 74.

Essential ingredients of scrutiny

According to Section 61 of the GST Act, 2017 relating to scrutiny of returns:

scrutiny shall be done by the proper officer;

scrutiny shall be done of return and related particulars furnished by taxable person;

purpose of such scrutiny shall be to verify the correction of return;

manner of scrutiny of return as prescribed under Rule 99

proper officer shall inform the taxable person (assessee) about the discrepancies noticed during the course of scrutiny;

by such intimation, explanation is sought from the assessee;

where explanation furnished by assessee is found acceptable, no further action shall be required and assessee be informed accordingly.

Manner of dealing with discrepancies

As per rule 99 of the GST Rules, 2017, discrepancies shall be dealt with as under:

(a)   The registered person may accept the discrepancy mentioned in the notice issued under sub-rule (1), and pay the tax, interest and any other amount arising from such discrepancy and inform the same or furnish an explanation for the discrepancy in FORM GST ASMT-11 to the proper officer.

(b)   Where the explanation furnished by the registered person or the information submitted under sub-rule (2) is found to be acceptable, the proper officer shall inform him accordingly in FORM GST ASMT-12.

Situation when no further action can be taken

According to Section 61(2) of the GST Act, 2017 where the explanation given by the tax payer in response to discrepancies informed by the proper officer, is found acceptable, the taxable person shall be informed accordingly and no further action shall be taken in this regard by the proper officer.

Actions for non-compliance

According to Section 61(3) of the GST Act, 2017 where –

no explanation is furnished, or

explanation furnished is not found satisfactory, or

taxable person fails to take corrective action/measures after accepting the discrepancies,     proper officer may initiate appropriate action against such taxable person which may include 

audit by tax authorities under Section 65

special audit under Section 66

inspection, search or seizure under Section 67

proceed to determine tax and other dues under Section 79 providing for recovery of dues.

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GST on Transfer of property under Tripartite Agreement (Part-II)

STAGE III: SALE/TRANSFER OF FLATS BY THE LANDOWNER

Taxability of transfer/sale of flats by the landowner

In normal parlance, in tri-partite agreements, the under-construction flats are transferred by the builder to the land owner. The tax on these flats is paid as and when the pre-defined level of construction is reached. Thus, the builder pays the tax on these flats just like he pays the tax on the flats sold to independent buyers. However, if the land owner further sells these under construction flats, he shall also be liable to pay the tax as it will be treated as an independent transaction.

As per Clause 5(b) to Schedule II to CGST Act, 2017 read with Section 7 of the CGST Act, 2017, reads as follows:-

"(b) 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."

Accordingly, the construction of complex, building or civil structure or a part thereof for sale to buyer except where the entire consideration has been received after issuance of completion certificate or after its first occupation whichever is earlier. Therefore, the above language is clear and it does not distinguish between the actual service provider and one who actually sales. The only thing to be taken care of is that the entire consideration should not be received after completion certificate or after its first occupation, whichever is earlier. Therefore, in such cases, the land owner is also required to take the registration under GST and pay the tax accordingly.

In other case, where entire consideration has been received after completion certificate or the occupancy certificate, whichever is earlier, and then in that case GST shall not be applicable in accordance with Clause 5 of the Schedule-III of the CGST Act, 2017.

STAGE IV: SALE/TRANSFER OF FLATS BY THE BUILDER/DEVELOPER

Taxability of transfer/sale of flats by the Builder/Developer

In case of builder/developer, same ratio shall apply as discussed in case of the sale of flats by the landowner. Accordingly, if builder sales under construction flats then it will be considered as supply of construction services in accordance with Clause 5(b) of the Schedule-II of the CGST Act, 2017, accordingly, GST will be applicable.

Alternatively, where entire consideration has been received after obtaining completion certificate or the first occupancy certificate, whichever is earlier, and then in that case GST shall not be applicable in accordance with Clause 5 of the Schedule-III of the CGST Act, 2017.

STAGE V: TIME OF SUPPLY

Relevant provisions for time of supply of services and goods under GST

As per section 13 of the CGST Act, 2017,- Time of supply of service,

The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section.

The time of supply of services shall be the earliest of the following dates, namely:-

the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or

the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply:

As per section 12 of the CGST Act, 2017,- Time of supply of goods,

(1) The liability to pay tax on goods shall arise at the time of supply, as determined in accordance with the provisions of this section.

(2) The time of supply of goods shall be the earlier of the following dates, namely:-

the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply; or

the date on which the supplier receives the payment with respect to the supply.

STAGE VI: VALUATION

Relevant provisions for Valuation under GST

As per section 15 of the Act, 2017, (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include–––

(3)The value of the supply shall not include any discount which is given––

Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

Accordingly, as per Rule 27 of the CGST Act, 2017, Value of supply of goods or services where the consideration is not wholly in money where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

(a) be the open market value of such supply;

(b) if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

(d) if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.

STAGE VII: INPUT TAX CREDIT

Relevant provisions for Input Tax Credit under GST

As per section 16 of the CGST Act, 2017,

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

(c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

As per section 17 of the CGST Act, 2017,

(1) Where the goods or services or both are used by the registered person partly

for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

c. works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service,

d. goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business;

Taxability, Time of Supply, Valuation, Rate of Tax and eligibility of Input Tax Credit

Transfer of development rights (TDRs)/License to occupy land [from landowner’s view]:

Result in transfer of interest in land (TDRs result in Sale of land):

Taxability: Not taxable under GST as per Clause 5 of the Schedule-III of the CGST Act, 2017read with Section 7 of the CGST Act, 2017.

Input Tax Credit: Common credits need to be reversed as per section 17(2) & (3) of the CGST Act, 2017.

Result in non-transfer of interest in land (License to occupy land):

Taxability: Taxable under GST as per Clause 2(a) of the Schedule-II of the CGST Act, 2017read with Section 7 of the CGST Act, 2017.

Time of supply: Receipt of license amounts to advance receipt of consideration in kind. Hence, date when license are received will be time of supply.

Valuation: Value is to be determined as per Rule 27 of the CGST Rules, 2017.

Input Tax Credit: Input tax credit is available as per section 16 read with section 17 of the CGST Act, 2017.

Rate of Tax- 18%

Transfer of flats by the builder/developer to the landowner [from builder’s/developer’ view]

Taxability: GST is payable as it is supply of services as per clause 5(b) of the Schedule-II of the CGST Act, 2017 read with Section 7 of the CGST Act, 2017.

Time of supply for Continuous supply of service:

Clauses (a) and (b) of sub section (2) of section 13 are not applicable in this case, as neither any invoice is raised by the builder on landowner, nor any payment received. As per clause (c) ibid, the time at which the landowner shows the receipt of service in his books of accounts would be the time of supply.

If the landowner is retaining such flats for his own use, he would recognise the same as his capital assets and if the landowner is going to again sell such flats, he would recognise the same as his stock in trade. So, the builder would be liable to pay GST at the time, when the landowner recognizes the receipt of flats from the builder.

Practically, after entering into TDRs/Joint Development Agreements, various approvals are sought by the builder and after obtaining the requisite approvals, the flats meant for landowner and builder are identified and a Supplementary Agreement is entered into for this purpose. It can be said that upon entering into such Supplementary Agreement the landowner recognises the receipt of services in his books of accounts. Or sometimes, the landowner may recognises the receipt of services (flats) only at the time of handing over of flats to him. But from builder’s point of view it would be very difficult to conclude when the landowner recognises receipt of service. In this connection, a person may refer to the CBEC Instruction F.No.354/311/2015 Dt. 20.01.2016, wherein in the context of point of taxation under service tax it has been clarified as,

“Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter)”.

Accordingly, it can be concluded that the builder is liable to pay GST in respect of the services supplied to landowner, at the time of when the flats are identified for the landowner and communicated.

Valuation: Value is to be determined as per Rule 27 of the CGST Rules, 2017.

Input Tax Credit: Input tax credit is not available as it is restricted by section 17(5) (c) & (d) of the CGST Act, 2017.

Rate of Tax- 18%

Transfer of flats by the landowner to the customers

Entire consideration received after obtaining completion certificate or first occupancy certificate, whichever is earlier (Sale of flats):

Taxability: Not taxable under GST as per Clause 5 of the Schedule-III of the CGST Act, 2017read with Section 7 of the CGST Act, 2017.

Input Tax Credit: Common credits need to be reversed as per section 17(2) & (3) of the CGST Act, 2017.

Entire consideration received after obtaining completion certificate or first occupancy certificate, whichever is earlier (Construction services):

Taxability: GST is payable as it is supply of services as per clause 5(b) of the Schedule-II of the CGST Act, 2017 read with Section 7 of the CGST Act, 2017.

Time of supply for Continuous supply of service: On stage of completion of supply and date on which advance received.

Valuation: Value is to be determined as per section 15 of the CGST Act, 2017 read with Rule 27 of the CGST Rules, 2017, if required.

Input Tax Credit: Input tax credit is not available as it is restricted by section 17(5) (c) & (d) of the CGST Act, 2017.

Rate of Tax- 18% subject to paragraph 2 of the Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017 (i.e., value of land is to be received where consideration includes the same)

Transfer of flats by the builder/developers

Entire consideration received after obtaining completion certificate or first occupancy certificate, whichever is earlier (Sale of flats):

Taxability: Not taxable under GST as per Clause 5 of the Schedule-III of the CGST Act, 2017read with Section 7 of the CGST Act, 2017.

Input Tax Credit: Common credits need to be reversed as per section 17(2) & (3) of the CGST Act, 2017.

Entire consideration received after obtaining completion certificate or first occupancy certificate, whichever is earlier (Construction services):

Taxability: GST is payable as it is supply of services as per clause 5(b) of the Schedule-II of the CGST Act, 2017 read with Section 7 of the CGST Act, 2017.

Time of supply for Continuous supply of service: On stage of completion of supply and date on which advance received.

Valuation: Value is to be determined as per section 15 of the CGST Act, 2017 read with Rule 27 of the CGST Rules, 2017, if required.

Input Tax Credit: Input tax credit is not available as it is restricted by section 17(5) (c) & (d) of the CGST Act, 2017.

Rate of Tax- 18% subject to paragraph 2 of the Notification No. 8/2017-Integrated Tax (Rate) dated 28.06.2017 (i.e., value of land is to be received where consideration includes the same).

GST on Transfer of property under Tripartite Agreement (Part-I)

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:

Transfer of Development Rights (TDRs)

Transfer of some flats to the landowner as a consideration for land

Sale/transfer of flats by the landowner

Sale/transfer of flats by the developer or builder

Time of Supply

Valuation

Input Tax Credit

STAGE-I: TRANSFER OF DEVELOPMENT RIGHTS (TDRs)

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,

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.

In other words, these are rights to modify an immovable property by carrying out improvements, constructing building thereon etc.

Modus-operandi for TDRs

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

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);

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);

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;

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.)

The developer is allowed to further assign the development rights to any other person, but the landowner is precluded from doing so.

Relevant provisions under GST Act, 2017

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.

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.

Scope of supply

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

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;

import of services for a consideration whether or not in the course or furtherance of business;

the activities specified in Schedule I, made or agreed to be made without a consideration; and

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),––

activities or transactions specified in Schedule III; or

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-

a supply of goods and not as a supply of services; or

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

Clause 2(a) of the Schedule-II, any lease, tenancy, easement, license to occupy land is a supply of services.

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.

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.

Taxability of Development Rights under GST regime

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

 Where TDRs of the land transferred but ownership in land continues with the landowner (i.e., license to occupy land) , and

 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’.

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.

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.

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.

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] 2007 (2) TMI 664 - Bonbay High Court, 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 [ 2011 (6) TMI 936 - Bombay High Court], 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.[ 1985 (3) TMI 226 - Supreme Court of Ibdia ],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 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’.

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

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:

From landowner, in the form of land /development rights; and

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.