GST on Development Rights & Construction Services: Conflicting Judicial Views

In recent months, the application of GST to real estate transactions involving Transfer of Development Rights “ToDR” and construction services has been subjected to varying judicial interpretations. Two recent High Court rulings—Bombay High Court in Shrinivasa Realcon Pvt. Ltd. and Patna High Court in Shashi Ranjan Constructions Pvt. Ltd. offer contrasting interpretations of Entry 5B of Notification No. 5/2019-Central Tax (Rate) dated 29.03.2019, when read with earlier and allied notifications.

This article offers a comprehensive analysis of these cases and their broader implications.

1. Bombay High Court: Shrinivasa Realcon Pvt. Ltd. vs. Deputy Commissioner, CGST

In the case of Shrinivasa Realcon Pvt. Ltd., the Honourable Bombay High Court was called upon to adjudicate whether GST was applicable on the rights granted under a development agreement between a landowner and a developer. The petitioner, a developer, had entered into an agreement where the consideration included both monetary and non-monetary elements, i.e, Rs. 7 Crores and 2 apartments. The GST department sought to impose tax under Entry 5B of Notification No. 13/2017 – Central Tax (Rate), treating the arrangement as a transfer of development rights.

However, the Hon’ble Bombay High Court drew a crucial distinction between rights arising from private contractual agreements and those governed by urban planning regulations. It was held that the rights granted under the contractual agreement did not amount to a “transfer of development rights“ as envisaged under Entry 5B inserted by Notification No. 5/2019 Central Tax (Rate) dated 29-03-2019. Specifically, the Court observed that the term TDR used in the relevant notification should be interpreted in light of statutory town planning schemes, such as Maharashtra’s Unified Development Control and Promotion Regulations “UDCPR”.

Since no compensatory or statutory TDR or FSI was transferred by the landowner, the arrangement did not qualify as a taxable transfer under GST. According to the Court, mere contractual permission to construct and retain units does not constitute a taxable supply of development rights.

Held in favour of the assessee.

2. Patna High Court: Shashi Ranjan Constructions Pvt. Ltd. vs. Union of India

In contrast, the Honourable Patna High Court took a different approach in the case of Shashi Ranjan Constructions Pvt. Ltd. Here, the petitioner had entered into a development agreement in the pre-GST era i.e., November 2014 and completed the construction work in the post-GST era, i.e., December 2018. As part of the agreed consideration, 36 flats were handed over to the landowner. The department raised a GST demand on the grounds that this constituted construction services provided to the landowner fall under the Reverse Charge Mechanism “RCM”.

The petitioner argued that since the development agreement was executed before the introduction of GST, no GST liability could arise on the transaction. The petitioner countered that liability to pay tax on the supply of development rights was introduced through Notification No. 4/2019 CT(R) dated 29.03.2019. The Court, however, rejected this argument and held that what mattered was not the date of the agreement, but the date of supply of services and consideration.

The Court held that the construction services provided to the landowner constituted ‘consideration‘ for the transfer of development rights. Even though the development agreement was executed prior to the implementation of GST, the construction activity was treated as a post-GST taxable event by virtue of Notification No. 4/2018 CT(R) dated 25.01.2018, which states that tax liability arises only when possession or rights in the constructed property are transferred to the landowner in exchange for development rights. As the same happened post 01.07.2017, the transaction was taxable under GST. Further, Entry 5B of Notification No. 5/2019 CT(R) clarified that GST shall be discharged by the developer under RCM, where the construction services rendered serve as consideration for the transfer of development rights “TDR”. Hence, GST was applicable under reverse charge as per Entry 5B of Notification No. 5/2019 Central Tax (Rate) dated 29-03-2019., which clarified that when a landowner transfers development rights to a developer and receives construction services in return, the developer is liable to pay GST under RCM.

The Court emphasized that the transaction fell within the scope of Schedule II, Clause 5(b) of the CGST Act and was covered under Notification No. 11/2017 – Central Tax (Rate). The Court held that construction services were always taxable by virtue of Notification No. 11/2017-CTR dt. 28.06.2017, and that Entry 5B merely clarified the mechanism and person liable.

Held in favour of the department.

Conclusion

These judgments underscore the complexity and evolving nature of GST law as it relates to real estate development. Both High Courts interpreted Entry 5B of Notification No. 5/2019-CTR but applied it differently:

• The Bombay High Court took a restrictive view, holding that Entry 5B only applies when statutory TDR (defined under town planning laws, e.g., UDCPR) is transferred, not when developers receive mere permission to construct under a private contract. Ignore the Supreme Court clarification in the case of Prahitha Constructions Private Limited V/s Union of India.
• The Patna High Court applied a substance-over-form approach, concluding that construction services provided to landowners in exchange for TDR are a taxable supply under RCM, guided by Notification No. 4/2018-CTR (which identifies the time of supply) and Entry 5B of Notification No. 5/2019-CTR (which affirms taxability and liability under RCM).

The former judgment provided relief to developers by shielding contractual rights from GST, clarifying that not all permissions to develop amount to taxable TDR. Meanwhile, the latter ruling reinforced that construction services provided in kind to landowners post-GST are taxable, even when rooted in pre-GST agreements.

For developers, builders, and tax professionals, these cases highlight the importance of:

• Analysing whether the rights transferred fall under statutory TDR or mere contractual permissions;
• Assessing the timing of consideration and issuance of the completion certificate; and
• Structuring agreements carefully to mitigate exposure under GST.

With such divergent High Court views, it is now imperative for either the Supreme Court or the GST Council (via CBIC circulars) to provide further clarification to ensure consistency in GST treatment across states and projects.

Key Notifications Cited in Both Judgments:

• Notification No. 11/2017-CT(R): Specifies GST rates on construction services under SAC 9954 from the inception of GST, unless the entire consideration is received after the completion certificate or first occupation. (Cited in the Bombay judgment as the base notification amended to include TDR/FSI under RCM).
• Notification No. 13/2017-CT(R): Specified the categories of supply of services on which GST is payable under the RCM. (Cited in Bombay judgment as the base notification amended to include TDR/FSI under RCM).
• Notification No. 4/2018-CT(R): Determined the time of supply (point of taxation) for transactions involving the supply of development rights against construction services, setting it at the time the developer transfers possession or right in the constructed property. This notification is applicable with respect to the development right transferred on or before 31^st March 2019. (Cited in the Patna judgment to establish when the tax liability arose for the construction service).
• Notification No. 4/2019-CT(R): Amended exemption Notification No. 12/2017 CT(R), dealing specifically with exemptions and RCM liability for TDR/FSI supplied on or after April 1, 2019, for the construction of residential apartments. (Cited in Patna judgment; petitioner argued it introduced TDR taxability prospectively, but the court focused on the taxability of the construction service itself under N.N. 11/2017)
• Notification No. 5/2019-CT(R): Inserted Entry 5B, clarifying RCM liability on the developer when the landowner transfers development rights and receives construction services. Mandates RCM on ToDR supplied to the developer. (Cited specifically in Bombay judgement, in Patna judgement it was considered indirectly as supply of construction service in lieu of development rights.)
• Notification No. 6/2019-CT(R): Provides the time of supply for ToDR and Construction services

Sections 7 and 9 of the CGST Act, 2017, along with Schedule II & III.