In re Nagpur Integrated Township Pvt. Ltd. (GST AAAR Maharashtra)
The Appellate Authority for Advance Ruling agree with the findings and order of the Advance ruling authority in as much as the impugned transaction entered into by the parties is not in nature of lease. The same is rather in the nature of construction of complex services being provided by the Appellant to its customers, and hence find no reason to deviate from the conclusions derived by them.
FULL TEXT OF ORDER OF APPELLATE THE AUTHORITY OF ADVANCE RULING, MAHARASHTRA
PROCEEDINGS
(Under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.
The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Nagpur Integrated Township Pvt. Ltd. (herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-107/2018-19/B-35 dated 02.04.2019.
Brief Facts of the Case
A. M/s. Nagpur Integrated Township Pvt Ltd., the Appellant, herein are registered under GST law, with Registration No. 27AAFCN5825Q1ZS under the jurisdiction of Nagpur. The appellant wish to submit that since the provisions of CGST Act, 2017 and the rules and notifications issued there under are in parametria to corresponding provisions in the Maharashtra SGST Act, 2017 and the rules and notifications issued there under, the provisions of CGST law alone are referred to in this appeal, which would imply reference to corresponding provisions under the SGST law also, unless specified otherwise.
B. Maharashtra Airport Development Authority (hereinafter referred to as MADC), a company registered under the Companies Act, 1956 and having its registered office at 8th Floor, World Trade Centre, Cuffe Parade, Mumbai 400 005 is a special planning authority under the Maharashtra Regional and Town Planning Act, 1966, for the Multimodal International Hub Airport, Nagpur Project (MIHAN) which includes development of Nagpur Airport as an international hub, development of a Special Economic Zone and other facilities around the Nagpur Airport.
C. M/s. Chourangi Builders and Developers Pvt. Ltd. (formerly known as M/s Reatox Builders and Developers Pvt. Ltd.) have formed a Special Purpose Vehicle (SPV), along with M/s IJM Realty (Mauritius) Ltd., under the name and style of M/s Nagpur Integrated Township Pvt. Ltd., the appellant herein. MADC and the appellant have entered into a Development Agreement dated 08.12.2017, a copy of which is placed at Page Nos. 35 to 57 of this appeal. By virtue of this agreement, the appellant has been granted the right to design, finance, develop, a township project, comprising of residential apartments, commercial complexes, etc. in the land owned by MADC. As per the agreement, the appellant had been permitted only to grant long term lease of the residential apartments and commercial buildings and the same cannot be sold outright in favour of the buyers. The land in which the construction is undertaken is a leasehold land, which cannot be transferred. In pursuance of thereof, the appellant intend to grant long term lease of the residential apartments being constructed and a sample “Agreement for Lease” proposed to be entered with prospective lessees is placed at Page Nos. 58 to 88 of this appeal. It may be observed that the identified apartment unit in the residential complex is proposed to be given on long term lease for 99 years, expiring on 21.06.2105, against payment of lease consideration by the lessee to the appellant. It may be noted that what is proposed to be given on lease is the identified apartment, as mentioned in Schedule C of the agreement. It may be further noted that the said “Agreements for Lease” would be entered into, as and when prospective lessees approach the appellant, during the state of construction of the complex, which fact is also noted in clause 1.3 of the agreement. The lease consideration is also payable in various installments as mentioned in Schedule D to the agreement, at various stages of construction.
D. Based on the above facts, the appellant has filed an application for advance ruling before the Maharashtra Authority for Advance Ruling (hereinafter referred to as the AAR), seeking a ruling as to whether the activity of granting long term lease of the residential apartments would amount to “transfer of immovable property” and hence not liable to GST? If not, what is the appropriate classification and applicable GST rate for the said activity? The appellant pleaded that the activity would amount to transfer of immovable property and hence not liable to GST levy at all. In the alternative, it was also claimed by the appellant that the activity is classifiable under Service Accounting Code 997211, as “Rental and leasing services involving own or leased residential property” and as per S.No. 12 of Notification 12/2017 Central Tax (Rate) Dt. 28.06.2017, “Services by way of renting of residential dwelling for use as residence” is exempted from payment of GST. During the hearing, the AAR required the appellant to produce the details of normal sale value of apartments in the area near to the appellant’s project and the lease amounts charged by the appellant, which was also furnished by the appellant. Copy of the application filed by the appellant before the AAR and various written submissions filed before the authority are placed at Page Nos. 89 to 97 of this appeal.
E. The department was also represented before the AAR and written and oral submissions were made by the department also. The department claimed that the activity of the appellant is in the nature of works contract for construction of the apartment for the prospective lessee.
F. After due process of taw, the AAR has passed the impugned Order No. GST-ARA-107/2018-19/B-35 Dated 02.04.2019 (Page Nos. 18 to 34 of this appeal). The AAR noted the following facts, which are not disputed.-
(i) The appellant is granted the development rights on the property by MADC and also has rights to lease out the flats to the customers. In pursuance of the same, the appellant constructs residential apartments and give them on long term lease basis to its customers.
(ii) The customers would be paying 10 % of the lease premium as advance and pay the balance amounts in various installments based on progress on construction and the final 5 % will be paid on obtaining possession.
(iii) The maintenance of the flats would be the responsibility of the customer.
G. The AAR goes on to observe that generally lease agreements for flats would be entered into in respect of finished apartments and the monthly lease amount would be around 2 to 3 % of the property value, but in this case, lump sum lease amount is received during construction stage itself, similar to the case of sale of apartments, where the buyer would make stage wise payments. Then the AAR has proceeded to compare the information as to lease value and sale value of flats in the locality and made certain observations. Further, the AAR has also observed that normally in Maharashtra, the cost of maintenance of the flat is borne by the owners, whereas in the instant case, the same is borne by the lessees.
H. After making the above observations, the AAR has referred to Schedule II of the CGST Act and comes to a conclusion that in the subject case, there is a composite supply of works contract for construction of flat, which is intended to be handed over to the buyer, but the transaction is projected as if it is a lease transaction. The AAR also observes that the entire consideration would be received before issue of Completion Certificate for the project, which does not generally happen in a lease transaction. The AAR also observes that there is not much difference in the price charged for an outright sale of similar apartments in the area and the lease premium payable. Accordingly, the AAR has 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%. The AAR has not at all examined the claim of the appellant that the activity is classifiable under SAC 997211 and entitled for exemption. The AAR has also held that the appellant’s first claim that the activity is not at all liable to levy of GST being a transaction in immovable property is also not sustainable.
I. Aggrieved by the above decision of the AAR, in so far as holding that the activity is classifiable under Service Accounting Code 9954 and attract 18 % GST and not dealing with the appellant’s claim for classification under SAC 997211 and consequent exemption from payment of GST, the appellant is filing the present appeal before the Hon’ble Appellate Authority for Advance Ruling, Maharashtra, under Section 100 of the CGST Act, 2017 and Section 100 of the Maharashtra SGST Act, 2017, on the following grounds.
GROUNDS OF APPEAL
1. The Appellant submit that the impugned order passed by the Maharashtra Authority for Advance Ruling (AAR) is not in accordance with correct interpretation of law and/or facts involved in this case and hence liable to set aside for the following reasons.
2. The short question to be determined in this case whether the subject transactions are leasing of residential dwelling or provision of works contract service by the appellant in favour of their customers.
3. The relevant facts to decide the above issues are not in dispute and they are:-
(i) The appellant has been granted the right to develop and construction residential apartments in the subject land, which is owned by MADC.
(ii) The land is not freehold land but only a lease hold land and there are restrictions on transferring the Land.
(iii) As per the agreement with MADC, the appellant can only allot the residential apartments to their customers on long term lease for 99 years and cannot effect a transfer by way of sale or otherwise.
(iv) The customers can approach the appellant for grant of such long term lease of the residential apartment at any stage, either during the construction stage or after completion of construction.
(v) The lease premium payable by the customer is a lump sum amount, payable in various installments, co-terminus with the stage of construction.
(vi) The customers (lessees) are responsible for proper upkeep and maintenance of the apartment.
(vii) The customers (lessees) use the apartment for their own dwelling or may give it on sub lease to others, subject to the conditions prescribed in this regard.
(viii) The lease is for a long period of 99 years.
(ix) The lease model is chosen by the appellant due to the statutory restrictions on obtaining the land on freehold basis and transferring the same and not with a view to avoid / evade any taxes.
4. The appellant wish to submit that the AAR has refused to accept the transaction as a lease transaction for the following reasons.-
(i) Lease agreement is entered into during the stage of construction of the complex itself and payments are linked to stage of construction.
(ii) The lease premium payable is almost equal to sale price of flats in the locality.
(iii) The lessee have to bear the cost of maintenance of the apartment.
5. The appellant wish to submit that the above reasons are not at all relevant to disregard the genuine lease transaction entered into by the appellant. As already stated the appellant cannot effect transfer of the apartment by absolute sale, due to the restrictions on transfer of the land, both statutorily as well as in terms of the Development Agreement between the appellant and MADC (the owner of the land). Further, grant of such long-term lease is a normal practice in the industry wherever there are restrictions on absolute transfers. Further, entering into lease agreements during the stage of construction itself is also a common commercial phenomenon. For example, in case of commercial buildings, once lease agreements are entered into during the construction stage, according to the requirements of the lessee, suitable changes and additional works would be carried out by the builders. As the lease is for a considerably long period of 99 years, the lease premium payable would be comparable with the sale price of similar apartments in the vicinity and this cannot deny the fact that the transaction remains only as a lease and not a sale. The mode of lease consideration, whether it is monthly or lump sum are determined by the parties, based on various parameters. When a house owner gives his flat on lease / rent to a tenant, normally the lease rental is payable on monthly basis and a returnable deposit would also be required to be paid by the tenant. But in long term lease transactions, the consideration is often payable in lump sum. Whether the cost of maintenance is to be borne by the lessor or the lessee is a matter to be decided mutually between the parties and there is no statutory stipulation in this regard. In a long- term lease transaction it is ideally the lessee who is liable to bear it, as the lessor’s interest in the property after granting a long- term lease for 99 years, would be minimal. Thus, all the facts relied upon by the AAR to conclude that the subject transaction is not a lease transaction are totally extraneous facts and have no bearing on the decision as to whether the transaction is a lease or not. The AAR has completely ignored the statutory restrictions on effecting sale, prevalence of various methods of lease transactions in the field but has substituted its own restricted understanding of the term lease to the subject issue. The agreement between the appellant and their prospective customers is purely one of long -term lease and is in accordance with the relevant laws governing leasing of such properties and it cannot be wished away as a sham. Since the lease is for long period of 99 years, the lease premium payable by the lessee would be near to the sale price of such apartments in the vicinity, which is a commercial fact. Hence, all the facts based on which the AAR has come to a conclusion that the subject transaction is not a lease, are not at all relevant to decide whether the transaction is a lease or not and hence the Authority’s conclusion is totally based on extraneous considerations and hence not sustainable in law.
6. The relevant Service Accounting Code 9972 is reproduced below.
| 220 | Heading 9972 | Real estate services |
|---|---|---|
| 221 | Group 99721 | Real estate services involving owned or leased property |
| 222997211 | Rental or leasing services involving own or leased residential property | |
| 223997212 | Rental or leasing services involving own or leased non-residential property | |
| 224 | 997213 | Trade services of buildings |
| 225 | 997214 | Trade services of time-share properties |
| 226 | 997215 | Trade services of vacant and subdivided land |
7. The classification of Services under GST is based on United Nations classification where real estate services are classified under Section 72 (Page Nos. 98 to 100 of this appeal). It may be observed irrespective of the term of lease, leasing and rental services would fall under 9972 only. 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.
8. S.No.12 of Notification 12/2017 is reproduced below.
| 12 | Heading 9963 or Heading 9972 | Services by way of renting of residential dwelling for use as residence | Nil | Nil |
9. The term “renting in relation to immovable property” is also defined in para 2 (zz) of the notification as,-
(zz) “renting in relation to immovable property” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;
10. It may be observed from the above that the term renting is given a very wider meaning, which covers, leasing, licensing, etc. without any reference to the period for which such agreement is entered into. 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.
11. Further, the appellant also wish to rely on CBIC’s Circular No.44/18/2018 Dt. 02.05.2018 (Page No. 101 of this appeal), wherein it has been clarified that “grant of tenancy right in a residential dwelling for use as residence dwelling against tenancy premium or periodic rent or both is exempt vide S.No. 12 of Notification 12/2017, which would go prove that the mode of payment, whether it is lump sum or periodical is not relevant to claim the said exemption.
12. Further, the appellant wish to submit that the decision of the AAR that the activity is a works contract, falling under Service Accounting Code 9954 is not sustainable for the following reasons. The relevant classification is reproduced below:
