TAXABILITY OF DEVELOPMENT RIGHTS / TRANSACTION IN IMMOVABLE PROPERTY – ADVANCE RULING

[Dr. Sanjiv Agarwal]

In the instant advance ruling, the applicant had obtained development rights from Maharashtra Airport Development Company Ltd. (MADC) in respect of land owned by MADC and situated at Multi Modal international Hub Airport, Nagpur Project (MIHAN) which included development of Nagpur Airport as an international Hub, development of a Special Economic Zone, & other facilities around the Nagpur Airport.

According to facts,

1. The applicant having developmental rights on the property also had rights to lease out the flats/commercial units to their customers.
2. The customers were to pay them an advance amount of 10% of the cost of the so called lease amount and the balance was to be paid in installments slab-wise as the construction progresses. The final 5 % was to be paid on possession. The Payment Schedule was as per Schedule D of the Draft Agreement of Lease submitted.
3. The maintenance of the said flats was to be borne by the customers (lessees).

It sought advance ruling on following issues:

1. Whether the transaction between applicant and lessee is outside the purview of GST as transaction in immovable property?
2. If not, what is the appropriate classification and rate of GST?

The advance ruling vide Order dated 02.04.2019 was given as follows:

1. The transaction between Applicant and lessee is taxable under GST. It is not a transaction in immovable properly.
2. The transaction is a composite supply of works contract as defined in clause 119 of Section 2 of the CGST Act, 2017 and classifiable under CH 9954 (ii) and will attract tax @ 18%.

[IN RE: M/S. NAGPUR INTEGRATED TOWNSHIP PRIVATE LIMITED - 2019 (7) TMI 39 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA]

Being aggrieved by the Advance ruling, assessee preferred an appeal u/s 100 of the CGST Act, 2017 before the AAAR, Maharashtra.

The short question to be determined in this case was whether the subject transactions are leasing of residential dwelling or provision of works contract service by the appellant in favor of their customers. The grounds of appeal inter alia, included:

1. Order is not in accordance with correct interpretation of law and/or facts involved in this case and hence liable to set aside.
2. The AAR has refused to accept the transaction as a lease transaction.
3. The AAR has not given any finding in the impugned order, as to why the activity of the appellant, in pursuance of the “Agreement for Lease” being entered into by them with their customers could not get classified under SAC 997211 above.
4. The intention of the legislature is not to subject renting or leasing of residential dwelling to levy of GST and by disregarding the real nature of transactions between the appellant and their customers, the AAR has negated such legislative intention.
5. The decision of the AAR that the activity is a works contract, falling under Service Accounting Code 9954 is not sustainable.

The AAAR observed 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. This is 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 was 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 was RERA registered. This fact and the interpretation by the Bombay High Court in the case of [Lavasa Corporation Limited v Jitendra Jagdish Tulsiani, Real Estate Regulatory Authority]SRA Administrative Building, Mumbai and Manju Narendra Joshi, Girish Vassan Panjwani and Nidhi Panjwani (2018) 8 TMI 632 (Bombay)] also indicate that the said transaction was not a lease.

In view of the above, the AAAR, Maharashtra upheld the Advance Ruling and there being no reason found to interfere, rejected the appeal. [IN RE: M/S. NAGPUR INTEGRATED TOWNSHIP PVT. LTD. - 2020 (6) TMI 602 - APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA].