CA Rohit Surana & CA Sunayna Banthia
Bombay High Court Ruling in the case of Shrinivasa Realcon Private Ltd. Vs Deputy Commissioner Anti-Evasion Branch (Bombay High Court); Writ Petition No. 7135 of 2024; 08/04/2025
TAXABILITY OF TRANSFER OF DEVELOPMENT RIGHTS
This is a very different judgement, relying upon the covenants of development agreement (which we do not have access to) as well as entry 5B of Notification 13/2017-Central Tax (Rate) as amended by 5/2019-Central tax (Rate) (which talks of GST on RCM basis for transfer of TDR). The definition of TDR has been derived from Regulation 11.2 of Unified Development Control and Promotion Regulations of State of Maharashtra.
√ Important facts of the case as understood from judgement only:
a) The Development agreement between parties specified appointment as developer by the owner to develop a plot for a monetary consideration (para 2 of judgement)
b) The Developer has been granted rights to develop the plot by utilising the present FSI available (para 5 of the judgement)
c) The owner as on the date of judgement has not purchased any TDR/FSI nor the developer has done the same from any person/Entity (para 5 of judgement) and that the owner shall sign and execute a deed of declaration under section 2 of the Maharashtra Apartment Ownership Act, 1970 submitting the entire scheme thereto and also execute apartment deeds in favour of nominees of Developer (para 6 of judgement)
√ Issues involved in the instant case
i) GST was claimed by the Department from the developer on the monetary consideration received by it for development of plot under clause 5B of Notification 13/2017 -Central tax (Rate) as amended.
√ Our understanding of Transfer of Development Rights and FSI
In real estate transaction particularly involving Development agreements, there are two stages:
a) The landowner gets into a development agreement with a developer for development of plot into a residential or a commercial building. In this case the development rights are transferred to developer who gets power of attorney to construct, apply for necessary permissions and sell the units
b) The second stage is Developer applying to local relevant state authorities to grant a sanction plan for construction of units as per the FSI available as per the local laws of the state. A sanction fees is generally payable to authorities. The construction can begin only after such sanction is granted.
√ Relevant laws for transfer of Development rights under GST Act
TDR or Transfer of Development Rights has not been defined under GST Act. However, there are various Notifications, Circulars and judgments issued under GST which comprehend the transfer of Development Rights from land Owner to a Developer to be a taxable supply under GST Act. Notably:
a) Notification No. 4/2018- Central tax (rate) notified the time of supply in case of –
Registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure at the time when the said developer transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter)
b) Later, Notification No. 5/2019-Central tax (Rate) made amendments in the list of services notified under RCM by adding:
Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project to a promoter.
c) Further, Notification 4/2019- Central tax (rate) exempts supply to TDR in case of-
Service by way of transfer of development rights (herein refer TDR) or Floor Space Index (FSI) (including additional FSI) on or after 1st April, 2019 for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
d) The Hon’ble Supreme Court has not stayed the judgement of Hon’ble High Court in the case of M/s Prahitha Constructions Pvt. Ltd. v. Union of India which held that transfer of development rights from owners to developer by virtue of Joint Development Agreement was amendable to GST and could not be brought within purview of Entry No. 5 of Schedule-III of GST Act. The matter is pending before Supreme Court.
√ Has the judgement taken a restricted view by restricting TDR to Clause 11.2 of State of Unified Development Control and Promotion Regulations for the State of Maharashtra only ?
The instant judgement restricts to Sl. No. 5B of Notification 5/2019 which lays down GST being payable on reverse charge basis. The Hon’ble High Court says (in para 4 of judgement) that the expression “transfer of development rights” read in conjunction with ‘FSI’ as indicated in entry 5B, would only relate to a TDR as contemplated by clause 11.2.2 under the regulations for grant of TDR in Unified Development Control and Promotion Regulations for the State of Maharashtra, clause 11.2.1 of which defines transferable development rights, to mean compensation in the form of Floor space index (FSI) or development rights, which shall entitle the owner for construction of built up area subject to the provisions in the said regulations.
Regulation 11.2 of Maharashtra UDCPR:
Transferable Development Rights (TDR) is compensation in the form of Floor Space Index (FSI) or Development Rights which shall entitle the owner for construction of built-up area subject to provisions in this regulation. This FSI credit shall be issued in a certificate which shall be called as Development Right Certificate (DRC).
The reason for non-applicability of clause 5B of Notification 5/2019 (supra) to transfer of Development Rights from Landowner to Developer is not very clear from the judgement
The Hon’ble High Court further held thar the TDR/FSI as contemplated by entry 5B, cannot be related, to the rights which a developer derives from the owner under the agreement of development for constructing the building for the owners, in lieu of the owner agreeing to permit the developer to transfer certain built up units for consideration to be appropriated by the developer.
We do not see any legal or analytical reason for holding as above. The submission made by appellant that the owner or developer has not purchased any TDR or FSI yet from any person or entity could be the influencing factor but beyond logical understanding.
√ Our Understanding of the whole issue:
Transfer of development rights from land owner to Developer has been considered as a supply by various notifications on this issue as well as judgements. Entry 5B in Notification 5/2019 also states services supplied by any person by way of transfer of development rights or FSI for construction of project by a promoter and does not restrict only to the one provided by Governmental Authorities only.
The only way that TDR may not be taxable under GST is if it is held to be akin to sale of land itself. There are judgement pending before Supreme court in the case of M/s Prahitha Constructions Pvt. Ltd. v. Union of India on this ground.
We suggest not to take an action solely on the decision of Hon’ble High Court in the instant case of Shrinivasa Realcon Pvt. Ltd. vs. Deputy Commissioner, Anti-Evasion Branch and take necessary steps to ensure that we comply with law and also safeguard that any tax paid does not become a cost in case the Hon’ble Supreme Court holds that TDR is not taxable.
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