Activity of development of land by developer liable to tax under GST as supply of service¹

Fact of the case

The Applicant is engaged in the business of property development. In the course of business the applicant hasentered into a Joint Development Agreement (JDA) with land owner for development of land into residential area along with specifications and amenities. It was agreed that land owner will take 75% of consideration and developer (herein referred as applicant) will take 25% of consideration. Pursuant to JDA the applicant entered into an agreement with customers for sale of developed plots of land for consideration.

In this regard, the Applicant wants to understand whether the activity of development and sale of land shall attract tax under GST. Further the applicant want to understand whether the provision of Rule 31 of the CGST Rules shall be made applicable in ascertaining the value of land and supply of service in respect to the above transaction.

The Karnataka Authority for Advance Ruling held that the activities as envisaged in the agreement between applicant and land owner shall be considered as a supply of service and tax shall liable to be discharged on the same.

Therefore an appeal was filed by the applicant in the given case against the above advance ruling.

Contention of the Applicant

It was contended that as per the definition of supplier and recipient as  mentioned in Section 2(105) and 2(93) respectively of the CGST Act, contract for supply of goods or services or both should specify the intention of the parties to sell the goods or provide services for consideration. However in the given case, the applicant had never agreed for supply of goods or services between them, rather they had agreed to contribute mutually in this agreement to reap the benefit out of sale of developed plots to the prospective customers.

It was highlighted that in case of sale of developed plots, the principal supply is land and development activity is incidental to the main principal supply, therefore sale of land should not attract GST as per Schedule III, entry no 5 of the CGST Act.

The Applicant has relied on the decision of Hon’ble Karnataka Appellate Tribunal²wherein it was held that “Civic amenities work done by land developer, subsequent to transfer of same to local authority, there is no transfer of property in goods to the site purchasers either collectively or individually.”Therefore the applicant believed that consideration received for sale of land should not attract GST.

Applicant also referred the judgement passed by Hon’ble Supreme court³wherein it was held that expression transfer of property connotes passing of the right in the property from one person to another. However it was clarified that the applicant has right or interest in the immovable property and therefore share of revenue shall be treated as sale of immovable property and therefore shall not attract GST under law.

Observation of the Hon’ble Karnataka AAAR

The Appellate authority held thatin the given transaction one party owns the land and another party has the expertise to develop the land. Therefore the two parties come together with the common intention of developing the land and sharing the revenue accruing for the sale of the developed plots in the land.

However, the landowners has given the rights of using the land to the developer (herein referred to as applicant) in exchange for which, the developer gives the service of developing the land of the owners.

Accordingly a joint development agreement is entered into between the two parties to jointly reap the benefits of the sale of the land to customers. Hence there is a clear rendering of a service by the developer to the landowner in developing the land which belongs to the landowner.

Further the agreement acknowledges that expertise of the developer is the sole reason for which land owner approached the developer. Therefore, element of service is involved, which is a dominant activity.

Therefore, the activity of developing the land is a supply of service by the applicant is a combination of two activities. The above said activity cannot be a composite supply also because to be a composite supply there has to be two or more taxable supplies. In this case, sale of land is neither a supply of goods nor a supply of service and combination of any two activities; out of which one is not a supply cannot be said to a part of composite supply.

Hence on the view of above discussion it is pertinent to conclude that development of land comes under the purview of supply of services as per GST Law.

¹ M/s MAARQ SPACES PVT LTD Vs AAR Karnataka(2019-TIOL-454-AAR-GST)

² Continental Builders and Developers Bangalore Vs State of Karnataka

³Sunil Vs. CIT AIR 1986 SC 368