2020 (6) TMI 602 - AAAR - GST

Nature of supply / transaction - Development of land - Lease of property or supply of works contract for construction of flat - The appellant pleaded that the activity would amount to transfer of immovable property and hence not liable to GST levy at all. - Held that - Though the appellant in the draft agreement has projected the said transaction as a lease transaction of residential unit in an apartment/building and has also drafted agreement in such a way to project it as a lease transaction, the said transaction cannot be a lease transaction but it is an agreement for construction of residential flats. We say so because the clauses in the agreement though purported to be a lease agreement as clauses which are in complete disharmony with a normal lease transaction. When a flat/apartment is given on lease it is always a complete unit which is immediately handed over to the Lessee for use. The appellant has argued that the transaction purported to be undertaken by him will come within the purview of renting of residential dwelling for used as residence. However, in the present case, the agreement has taken place during the construction of the project and the lease payments are made slab wise before the completion of the project. This almost never happens in the lease of a flat or a unit. It is seen that almost 95% of the amount comprising the lease consideration is paid before the possession of the apartment. It is difficult to believe that a Lessee will commit such amount before moving or enjoying the flat. All these leads us to believe that this is nothing but a sale transaction projected as a lease transaction. Though the object of the RERA Act is to regulate the sale of building, apartment or building, this project is RERA registered. This fact and the interpretation by the Bombay High Court in the case of Lavasa also shows that the said transaction is not a lease. Decision of AAR upheld wherein it was held that, the activity would be in the nature of works contract as defined under Section 2 (119) of the Act and fall under SAC 9954 and attract GST @ 18%.

Issues Involved:
1. Classification of the activity of granting long-term lease of residential apartments.
2. Applicability of GST on the said activity.
3. Determination of whether the activity constitutes a "works contract" or "leasing" under GST law.
4. Examination of the exemption under Notification 12/2017.

Issue-Wise Detailed Analysis:

1. Classification of the Activity:
The appellant, Nagpur Integrated Township Pvt. Ltd., entered into a Development Agreement with Maharashtra Airport Development Authority (MADC) to design, finance, and develop a township project on leasehold land. The appellant proposed to grant long-term leases of residential apartments for 99 years. The primary question was whether this activity amounted to "transfer of immovable property" and thus was not liable to GST, or if it should be classified under a specific Service Accounting Code (SAC).

2. Applicability of GST:
The appellant argued that the activity should be classified under SAC 997211 as "Rental and leasing services involving own or leased residential property" and claimed exemption under S.No. 12 of Notification 12/2017, which exempts "Services by way of renting of residential dwelling for use as residence" from GST. The AAR, however, concluded that the activity was a composite supply of works contract for the construction of flats, thus classifiable under SAC 9954 and attracting GST at 18%.

3. Determination of "Works Contract" or "Leasing":
The AAR based its decision on several observations:
- The lease agreements were entered into during the construction stage, with payments linked to construction milestones.
- The lease premium was comparable to the sale price of similar flats in the locality.
- Maintenance costs were borne by the lessees, which is atypical for standard lease agreements.
- The entire consideration was received before the issuance of the Completion Certificate, which is unusual for lease transactions.

These factors led the AAR to conclude that the transaction was essentially a sale disguised as a lease, thus constituting a "works contract" as defined in Section 2(119) of the CGST Act, and not a mere leasing of property.

4. Examination of the Exemption under Notification 12/2017:
The appellant contended that the activity should be exempt under S.No. 12 of Notification 12/2017. However, the AAR did not examine this claim in detail, as it had already classified the activity as a works contract. The AAR's decision was supported by the fact that the transaction involved construction services provided to prospective lessees, which falls under the ambit of GST as per Schedule II of the CGST Act.

Appellate Authority's Decision:
The Appellate Authority upheld the AAR's ruling, agreeing that the transaction was a composite supply of works contract services and not a lease. The Authority noted that the agreement's terms and payment schedules were consistent with those of a sale during construction rather than a lease. The Authority also referenced a similar case decided by the Bombay High Court (Lavasa Corporation Limited), where the court held that despite being titled as a lease, the agreement was essentially a sale.

Conclusion:
The Appellate Authority found no reason to deviate from the AAR's conclusions and upheld the decision that the activity was taxable under GST as a works contract, attracting 18% GST. The appellant's claim for exemption under Notification 12/2017 was not accepted, as the transaction did not qualify as mere renting of residential property but involved significant construction services.

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