2020 (3) TMI 442 - AAR - GST

Classification of services - business of real estate developer and is developing a colony by executing joint development agreement with the land owner M/s. Star Construction - works contract or not - Valuation - applicability of Residual Rules i.e. Rule 30/31 provided under GST Valuation Rules. HELD THAT - The service provided by the applicant is regarding development of the site which includes civil construction and amenities regarding the site in order to make it for the purpose of residence. The services provided by the applicant are based on an agreement signed between the land owner and the applicant which comes under works contract. The agreement provides that the applicant gets 40% of the amount at which each of the plots is sold. This shows that the consideration that the applicant receives is in the form of money and not in the form of land. The only peculiar feature of this arrangement is that the landowners do not arrange any cash amount on their own to pay to the applicant for their services. They do not have to invest any personal amount in this manner and as and when a plot is sold the amount is shared and the applicant receives a part of their consideration. In this manner the applicant gets paid his consideration progressively. Therefore in terms of the provisions of Section 15 the applicant receives the value of taxable supply made by them. Consideration for a service is the total value that the service provider gets in the deal and not what the service provider expends for the provisioning of the service. The total gain to the applicant or the total amount accruing to the applicant for the services is 40% of the amount at which the plots are sold. It has already been emphasized and held that the applicant has no right in the title of the land and therefore the applicant cannot be considered as the sellers of the plots. Their role is limited to aiding and assisting the landowners in the sale of the plots. They are only service providers in the whole process, be it development of the raw land into residential plots or their sale after the development. Therefore the entire amount received by them is liable to be taxed. Thus, the activities performed/to be performed by the applicant cannot be classified under Para 5 of schedule Ill. It amounts to supply of services under works contract and is liable to be taxed under GST Act - Rule 31 applies in the instant case and the value of supply is equal to the amount received/receivable by the applicant which is equal to 40% of the amount on which the plots are sold.

Summary

Issues Involved:
1. Classification of the applicant's activities under Para 5 of Schedule III or as a works contract.
2. Valuation of the activities if classified under works contract.
3. Applicability of Residual Rules (Rule 30/31) under GST Valuation Rules.

Detailed Analysis:

Issue 1: Classification of Activities
The applicant, a real estate developer, entered into a joint development agreement with the landowner to develop a colony with various common facilities such as concrete roads, compound walls, gardens, drainage systems, and electric poles. The applicant contended that their primary activity is the sale of land, which should not attract GST as per Para 5 of Schedule III of the GST Act, 2017. However, the Authority found that the applicant does not possess ownership of the land and is primarily engaged in the development of the land. The activities performed by the applicant are in the nature of development of land into residential plots, which is considered a supply of service rather than a sale of land. The applicant's role is limited to providing development services and assisting in the sale of plots, not owning or selling the land themselves. Therefore, the activities are classified as a works contract and are liable to be taxed under the GST Act.

Issue 2: Valuation of Activities
The agreement between the applicant and the landowner specifies that the applicant bears the cost of development and recovers these costs from the purchasers of the plots. The revenue sharing agreement indicates that the applicant receives 40% of the sale value of each plot. The Authority determined that this 40% share constitutes the consideration for the services provided by the applicant. According to Section 15 of the CGST Act, 2017, the value of a supply of goods or services is the transaction value, which is the price actually paid or payable for the said supply. In this case, the applicant's consideration is the 40% share of the sale value of the plots, which is the transaction value for the services rendered.

Issue 3: Applicability of Residual Rules (Rule 30/31)
The Authority examined the applicability of various rules under the GST Valuation Rules. Since the entire consideration is received in money form, Rule 27 does not apply. The transaction does not involve distinct persons as defined in sub-sections (4) and (5) of Section 25, making Rule 28 inapplicable. Rules 29 and 30 also do not apply to this case. Consequently, Rule 31, which provides for the determination of value using reasonable means consistent with Section 15, comes into play. The Authority concluded that the value of the supply is equal to the applicant's 40% share of the sale value of the plots, as this amount constitutes the consideration for the development services provided.

Ruling:
1. The activities performed by the applicant are classified as a supply of services under works contract and are liable to be taxed under the GST Act.
2. Rule 31 applies to this case, and the value of the supply is equal to the amount received/receivable by the applicant, which is 40% of the sale value of the plots.
3. This ruling is valid subject to the provisions under Section 103(2) until declared void under Section 104(1) of the GST Act.