Goods & Services Tax (GST) in IndiaTransfer of Development Rights comes under the Ambit of Service and thereby Attracts GST

The Hon’ble Telangana High Court, in the case of M/s. Prahitha Constructions Private Limited v. Union of India and Ors. [Writ Petition No. 5493 of 2020] decided on February 09, 2024, held that the transfer of development rights is deemed as a service and  thus is chargeable under GST.

FACTS OF THE CASE

M/s. Prahitha Constructions Private Limited (hereinafter referred to as the “Petitioner”), engaged in the business of conceptualizing, planning, constructing, and developing commercial real estate projects, entered into a Joint Development Agreement (hereinafter referred to as “JDA”) with landowners for the development of land through the construction of towers in the initial phase along with shared amenities.

The Petitioner approached the Telangana High Court with the present writ petition seeking a declaration that the transfer of development rights from the landowners to the Petitioner through the JDA should be classified as a sale of land by the landowners, thus the execution of the JDA should not be subjected to the levy of Goods and Services Tax (hereinafter referred to as “GST”).

ISSUE BEFORE THE HIGH COURT

Whether or not the transfer of development rights would be categorized as a service and thereby be brought under the scope of GST law?

CONTENTIONS OF THE PARTIES

The Petitioner argued that the execution of the JDA essentially indicates a sale of land. Moreover, it asserted that the Revenue Department (hereinafter referred to as the “Respondent”) lacks the authority to mandate GST payment from the Petitioner by treating the JDA as a land sale transactionThe Petitioner further contended that the execution of JDA itself results in the transfer of development rights in favor of the Petitioner which ultimately results in the sale of land. It was therefore contended that the Respondents cannot compel the Petitioner to pay GST as the execution of JDA is considered to be a sale of land.

The Petitioner further challenged Notification No. 4/2018- Central Tax (Rate) dated 30.09.2019 (hereinafter referred to as “TDR Notification”) vide which GST on TDR was imposed.  and argued  that the revenue authorities cannot levy tax by way of notification.

The Respondents on the other hand contended that upon reading the relevant clauses of the JDA, it can be clearly stated that there was no outright sale of land by way of execution of JDA in the name of the Petitioner.

DECISION AND FINDINGS

The Hon’ble High Court after scrutinizing the terms of the JDA observed that there was no actual sale of land occurring under the agreement. The JDA itself couldn’t be viewed as a means for the landowner to sell their land because it didn’t directly result in the transfer of land ownership.

The Court held  that unless the land was officially transferred to the Petitioner’s name, it couldn’t be classified as an outright ‘sale of land’, and transferring development rights didn’t equate to transferring ownership rights. The Court further emphasized that the execution of the JDA or the transfer of development rights does not entail an automatic transfer of ownership or title rights over any portion of the land belonging to the landowner to the Petitioner.

Hence, the Court determined that TDR couldn’t be considered as a sale of land under Entry 5 of Schedule III of the CGST Act.

Additionally, the Court dismissed the challenge to the TDR Notification, asserting that it didn’t impose any charges on the transfer of development rights; it merely specified the timing of supply of TDR services.

AMLEGALS REMARKS

The Telangana High Court through the present case has ruled that the transfer of development rights is considered as a ‘service’ and is therefore subject to levy of GST. The Court emphasized that under no circumstances mere execution of JDA indicate an automatic transfer of ownership or title rights over any portion of land in favor of the Petitioner/Developer.

This judgment, therefore, establishes a precedent for future issues over the taxation of development rights transfers under GST law.

The taxability of TDR had been a matter of contention even before the introduction of GST, as the immovable property includes land and its associated benefits, and the ‘sale of land’ is exempted from GST.

Although this decision establishes the levy of GST on TDR, it was rendered based on the specific circumstances and terms of the JDA. Thus, the issue may undergo further judicial review considering the unique provisions of different development agreements.

– Team AMLEGALS