Joint Development Agreement- Revenue Sharing Model

[Rachit Agarwal]

In an appeal filed before Appellate AAR, Karnataka by IN RE: M/S. MAARQ SPACES PRIVATE LIMITED [2020 (5) TMI 415 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA]

Whether the activity of development and sale of land by the Appellant is a liable to tax under GST?

Facts of the Case:

The landowner approached the Appellant-Developer and offered the property for joint development given the Appellant's expertise in residential plotted developments. Accordingly, based on the representations made by the landowner, the Appellant has agreed to develop the project on the property. The JDA authorised the Appellant-Developer to develop the scheduled property into a residential layout.

Views Taken by AAR

In an application filed before AAR under GST, Karnataka by IN RE: M/S. MAARQ SPACES PRIVATE LIMITED reported in 2019 (11) TMI 994 - AUTHORITY FOR ADVANCE RULING, KARNATAKA- The applicant submitted that he has entered into a Joint Development Agreement on 8-11-2017 with land owners for development of land into residential layout along with specifications and amenities. The consideration was agreed on revenue sharing basis in the ratio of 75% for landowner and Agreement Holder and 25% for applicant. Cost of the development shall be borne by applicant. Held that tax shall be payable on the 25% of the Market Value of the Plot.

Appellant Developer Scope of Work and Obligations

1. Survey the property using its own resources,
2. Fence the property and
3. Install a security mechanism to secure the property,
4. Level the land, lay roads, drains, pathways, etc which are required for the commencement of the development.
5. Incurs the expenditure for the development of the property.
6. Prepares the necessary plans/drawings/designs for the residential layout with the help of architects and other professionals.
7. Develop the project according to the sanctioned plan.
8. Engages engineers, contractors, other professionals and workmen to execute the development work.
1. All costs of execution of the project subsequent to receipt of the sanctioned plan including the cost of fees payable to the architects, contractors, staff, workmen, etc shall be borne and paid for by the Appellant-Developer.
10. All cost incurred by the Appellant-Developer including the GST, stamp duty, registration fee, any other taxes shall be recoverable by the Appellant-Developer from the purchasers of the plots in the project.
11. To complete the project within a period of 18 months from the date of receipt of the sanctioned plan
50. Responsible for the maintenance of the property and the project till the project completion.
1000. To sell the sites in the project
14. Entitled to erect sign board on the property advertising the sale and disposal of plots in the project and to publish advertisements in the media seeking prospective purchasers.

Landowner Scope of Work

1. The plans drawn up by the Appellant-Developer will be submitted by the landowner to the Government Authorities for obtaining the necessary sanctions / permissions.

Mode of Receipt of Consideration and Sharing Ratio

1. Share the revenue out of the sale proceeds in the agreed upon revenue sharing ration.
2. The revenue accruing from the sale of the plots comprised in the project (RP revenue) shall be shared between the landowner and the Appellant-Developer in the ratio of 75% of the RP revenue to the landowner and 25% of the RP revenue to the Appellant-Developer.
3. The RP revenue will be deposited into a common escrow account and the agent operating the escrow account will be given standing instructions to distribute the RP revenue in accordance with the above ratio.

Hon'ble Appellate Order

1. Appellant Contention that they are primarily engaged in the sale of land

Transaction shall be out of GST net only if the activity is exclusively dealing with transfer of title or transfer of ownership of land, which is immoveable property. If the transaction of sale of land is coupled with another activity such as infrastructure works, then this exclusion will not apply. Hence, the substance of the agreement between the parties is important. Manifest that the transaction between the landowner and the Appellant-Developer is not a sale of land simplicitor but coupled with obligations for development of the land and provision of infrastructure/amenities. There is an element of service rendered by the Appellant in the form of plotted development of the land which is the dominant activity of the agreement.

2. Appellant Contention that Principal Supply is Sale of Land

In the instant case there are two activities involved, viz: development of land and sale of plots. The transaction relating to the sale of land is not a supply of either goods or service under GST (entry 5 of Schedule III of the CGST Act refers). This activity of sale of land cannot be considered as an 'exempt supply' for the reason that the activity is not at all a supply and hence the question exempting it under Section 11 of the Act does not arise. On the other hand, the activity of development of land is a supply in terms of Section 7 of the CGST Act. A combination of two activities one of which is not a supply under GST cannot be said to be a composite supply. We therefore, disagree with this contention of the Appellant.

3. Appellant has no right in entering into agreement for supply of service but can only enter into agreement for sale of land.

Para 4.2. of the JDA mandates that the landowner shall submit the finalised plans to the relevant governmental authorities to procure the sanctioned plan. The landowner shall obtain all required licences, sanctions, consents, permissions, no-objections and such other orders as are required to procure the Sanctioned Plan. Further, in case the Appellant-Developer intends to modify the plans, the landowner shall obtain the required modifications to the sanctioned plan. The Appellant-Developer shall develop the project on the property subject to the obtaining of the sanctioned plan by the owners. Therefore, it is evident that the onus is on the landowner to comply with the provisions of Section 32 of the Karnataka Urban Development Authorities Act. It is the owner of the schedule property who agrees to transfer the ownership of the roads, drains, water supply mains, parks and open spaces, civic amenity areas to the Urban Development Authority. The Appellant-Developer has no role to play in obtaining the sanctions and in transfer of ownership. Therefore, this argument of the Appellant does not hold good.

4. Appellant contention that there is no supply of Service

The two parties come together with the common intention of developing the land and sharing the revenue accruing for the sale of the developed plots in the land. However, the landowners give the rights of using the land to the developer in exchange for which, the developer gives the service of developing the land of the owners. While the Joint Development agreement is entered into for the two parties to jointly reap the benefits of the sale of the land to customers, there is a clear rendering of a service by the developer to the landowner in developing the land which belongs to the landowner. Therefore, we hold that the activity of developing the land is a supply of service by the Appellant.

AUTHOR ANLYSIS

1. There is no supply of Service by Landowner. His only scope of work was get the approval of the sanction. Further preparation of sanction plan was that of Appellant Developer.
2. Merely signing of Joint Development Agreement with no scope of work to do and no supply of services to be rendered to the Appellant Developer, does not make the contract taxable.
3. Question framed "Whether the activity of development and sale of land by the Appellant is a liable to tax under GST". When there is sale of land, hence no question of supply arises.
4. There was little discussion on account of Schedule-III being sale of Land.
5. Activity of Development is the supply of services to the Prospective Flat Buyers purchasing the flat and not to the Landowner.
6. In the whole process in our understanding is that the supply of services by the Appellant Developer is to the Prospective Flat Buyers and sale of Land forming part of flat is by the Land Owner. Appellant Developer merely acting on behalf of the Land Owner based on the Power of Attorney received by the Land Owner.
7. Land Owner while executing the Deed of Conveyance is acting in capacity of himself as developer and as land owner based on the irrevocable Power of Attorney.