Transfer of right over undivided share of land and reversal under Rule 42

[Shripada Hegde]

Under GST, construction and sale of residential dwellings (flats) is treated as supply of service if any part of the consideration is received before the project turns into an immovable property. When the flat is bought, buyer also gets a right over undivided share of land incidentally. Towards this transfer of right over undivided share of land, Notification No. 11/2017 – Central Tax (Rate) dated 28.06.2017 (“Rate Notification”) provides that tax shall not be charged on 1/3^rd portion of the consideration treating it to be related to undivided share of land. This gives rise to a portion in the revenue on which GST is not charged. Section 17(2) read with Rule 42, require that whenever any inputs or input services are commonly used for taxable as well as exempt supplies, only the proportionate ITC shall be available. Given this background, this article attempts analyze if at all there is any need to reverse ITC under Rule 42 on the 1/3^rd portion kept out of tax net towards undivided share of land.

Before the legality of requirement is dealt with, it would be relevant to note that the reversal applies only for inputs and input services commonly used. As such, even if the requirement to reversal is assumed, reversal is not applicable on the inputs and input services directly used in construction of building. The major input service which might attract Rule 42 will be the marketing related expenses and administrative expenses.

Section 17(3) extends the meaning of ‘exempt supplies’ for the purpose of Section 17(2). Said Section 17(3) includes 4 specific transactions in the ambit of ‘exempt supplies’ [of course over and above the supplies covered by Section 2(47)]. Although ‘sale of land’ is included, the legislature has not included ‘undivided share of land’ within the ambit of Exempt Supplies. There is a difference between ‘land’ and ‘undivided share of land’. GST Law also recognizes such difference. It is because the law recognizes such difference, Rate Notification explicitly mentions both ‘land’ and ‘undivided share of land’ separately. When ‘undivided share of land’ is not mentioned in Section 17(3), interpretation can be made that exempt supply for the purpose of Section 17(2) read with Rule 42 doesn’t include the ‘undivided share of land’.

Explanation to Chapter V of CGST Rules, 2017 reads as under

“Explanation. - For the purposes of this Chapter,-

(1) the expressions "capital goods" shall include "plant and machinery" as defined in the Explanation to section 17;

(2) for determining the value of an exempt supply as referred to in sub-section (3) of section 17-

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b) the value of security shall be taken as one per cent. of the sale value of such security.”

As may be seen, for the purpose of Chapter V of CGST Rules, 2017, which includes even Rule 42, for determining exempt supply under Section 17(3) value of land SHALL be equal to the stamp duty value paid for sale of land. Even this explanation doesn’t cover ‘undivided share of land’. Even otherwise, in the case of sale of flat Stamp Duty is paid only on ‘value of flat’. Generally, no value is separately assigned to the right transferred over the undivided share of land. That being the case, stamp duty value of land/share of land can only be taken as NIL. There is no provision under GST law to deem the 1/3rd portion as the stamp duty value of land/undivided share of land. In the absence of any provision deeming the stamp duty value to be 1/3rd portion or in the absence of any separate stamp duty value for undivided share of land, 1/3rd portion of the total amount cannot be subjected to reversal under Section 17(2) read with Rule 42.

It is also to be noted that the agreement between the transacting parties is to sell flat. Neither the seller intentionally attempts to sell nor the buyer intentionally attempts to buy the undivided share of land. When the intent of the transacting parties is never to deal in undivided share of land, transfer of right over the same can only be considered as incidental and unavoidable. In the case of real estate projects, it is more likely that the majority of the common input services relate to selling expenses/sales commission/project management fees. All these input services aim towards selling the flat not the undivided share of land. There cannot be a scenario where flat can be sold with lesser quantity of selling expenses/sales commission/project management fees. It is also not the case that developer obtains any additional quantity of input services to sell the undivided share of land. In such circumstances, even if the 1/3^rd portion is considered as exempt supply in terms of Section 17(3) reversal requirement doesn’t arise. Somewhat similar scenarios were considered by the Courts of Law under Rule 6 of erstwhile CENVAT Credit Rules, 2004. The dispute was - whether any reversal is required towards the incidental by-products which arise during the course of manufacturing if such by-products are exempt from excise duty. Honorable CESTAT in the case of C.C.E. & S.T. -RAJKOT VERSUS RELIANCE INDUSTRIES LTD - 2021 (12) TMI 903 - CESTAT AHMEDABAD made the following observations

“4.5 The LPG generated during the course of manufacture of motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. is dutiable right from the stage of receipt of input and input services till the completion of manufacture of LPG. Therefore, during that stage availment of Cenvat Credit is absolutely in conformation to Cenvat Credit Rules, 2004. In the process or refining crude oil to obtain value added finished goods namely motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. the LPG inevitably arises and tapped from the crude distillation unit, coker unit, fluid catalytic cracking unit (FCCU), platformer unit etc. in these process it is not as if respondent had set out to manufacture LPG. The same arises in the refining process and that the same could not have been limited or curtailed the production of LPG nor could have been manufactured other value added products using a less quantity of input of input services as whether the LPG then or otherwise. The quantum of input and input services will not get reduced even if LPG is not generated with main products. The same quantity of input and input services is required and indeed used for the manufacture of motor sprit (MS), High Speed Diesel Oil, aviation Turbine fuel (ATF), Naphtha, Fuel oil etc. Therefore, the input and input services of such dutiable product the Cenvat Credit on such input and input services cannot be curtailed or reduced by applying rule 6 (1), 6 (2) and 6 (3A) of Cenvat Credit Rules, 2004. In this undisputed facts when the entire quantity of input and input services was required for manufacture of dutiable finished goods and when LPG emerged inevitably without any deliberate attempt to manufacture it, the provision of Rule 6 (1) was not violated in any manner.”

In the case of COMMISSIONER OF C. EX. & CUSTOMS, VADODARA-I VERSUS STERLING GELATIN - 2010 (9) TMI 857 - GUJARAT HIGH COURT Honorable High Court of Gujarat has held that as the assessee therein could not have manufactured Gelatin using a lesser quantity of Hydrochloric acid Rule 6 (1) of the CCR itself would not come into play. This decision of Gujarat High Court was maintained even before Supreme Court. Even the Supreme Court in the case of SWADESHI POLYTEX LTD. VERSUS COLLECTOR OF C. EX. - 1989 (11) TMI 131 - SUPREME COURT has held that ‘where dutiable finished goods could not have been manufactured using the lesser quantity of inputs, exemption cannot be denied for emergence of exempted products in the process of manufacturing’. Similar was the decision in the case of COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS M/S NATIONAL ORGANIC CHEMICAL INDUSTRIES LIMITED - 2008 (11) TMI 6 - SUPREME COURT. Hence, it is settled position of law that when inputs and input services gets used incidentally in some non-taxable portion of transaction, wherein taxable portion of the transaction could not have been done using lesser inputs and input services, reversal requirement are not applicable.

By relying on the above judgements a view can be taken that reversal requirement under Rule 42 is not applicable to 1/3^rd portion of the supply excluded from taxability towards ‘undivided share of land’ as the same is incidental and sale of flat could not have happened with any lesser quantity of inputs and input services.

Any critical comments or additional points are most welcome.