GST on Transfer of property under Tripartite Agreement (Part-I)
By: – CASanjay Kumawat
Goods and Services Tax – GST
Dated:- 19-12-2017
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
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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 CGS
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ces 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 n
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nd 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 resident
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ransferor 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
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ot 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.
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portant 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
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rty. 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 INDIA ], 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'.
Whether a
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D
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
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