GST applicability on purchase of Partially Constructed Immovable Property where no construction activity is involved.
Query: Whether GST is payable on the purchase of a partially constructed immovable property acquired through auction during liquidation proceedings on an “as-is-where-is basis”, where the liquidator is demanding GST on the consideration mentioned in the agreement to sell / sale certificate executed in favour of the purchaser, despite the transaction being a transfer of immovable property without any construction service being undertaken by the liquidator?
Solution: This issue has been examined by the Hon’ble High Court of Karnataka in the case of M/s Rohan Corporation India Pvt. Ltd. v. Union of India & Ors., Writ Petition No. 12700 of 2023 (T-RES) (dated 10.09.2024).
In the said case, M/s Lotus Shopping Centres Private Limited was developing a commercial mall known as Lotus Shopping Mall at Kukshekara, Mangaluru. During the construction of the mall, insolvency proceedings were initiated against the company under the Insolvency and Bankruptcy Code, 2016. By order dated 18.06.2019, the National Company Law Tribunal (NCLT) appointed a liquidator and directed him to liquidate the assets of the corporate debtor.
Pursuant to the liquidation process, the liquidator issued an invitation for expression of interest for acquisition of the asset, namely the partially constructed mall, on a standalone basis. The petitioner submitted its expression of interest and participated in the e-auction conducted on 16.05.2022, in which it emerged as the successful bidder. Thereafter, a Letter of Intent dated 24.05.2022 was issued by the liquidator in favour of the petitioner.
While communicating the payment schedule, the liquidator demanded payment of GST along with the sale consideration. The petitioner objected to the demand on the ground that the transaction involved sale of land along with a partially constructed building, which constitutes sale of immovable property and is covered under Entry 5 of Schedule III of the CGST Act, 2017, and therefore is neither a supply of goods nor a supply of services.
However, due to time constraints in completing the transaction, the petitioner remitted the balance consideration along with the GST amount under protest, expressly reserving the right to claim refund. Subsequently, on 23.08.2022, a sale certificate was executed in favour of the petitioner upon payment of the applicable stamp duty of ₹5.96 crores, transferring the immovable property and all associated rights.
The petitioner thereafter filed a refund claim for the GST amount paid, which was rejected by the department. Challenging the rejection, the petitioner approached the High Court.
The Karnataka High Court held that the transaction in question amounted to sale of immovable property on an “as-is-where-is basis” by the liquidator, and the liquidator had not undertaken any construction activity or agreed to provide any construction service to the purchaser. The Court observed that mere existence of a partially constructed building does not convert the transaction into a supply of construction services.
Accordingly, the Court held that such a transaction falls within Entry 5 of Schedule III of the CGST Act, which provides that sale of land and sale of building (subject to certain exceptions) shall be treated as neither a supply of goods nor a supply of services. Consequently, GST was not leviable on the auction sale of the partially constructed immovable property conducted during liquidation proceedings, and the petitioner was entitled to refund of the GST paid under protest.
Therefore, GST is not payable on the purchase of a partially constructed immovable property sold through auction by a liquidator on an “as-is-where-is basis”, as the transaction constitutes transfer of immovable property and does not involve supply of goods or services under the GST law.
Basis of Decision:
1. It was observed that Schedule III of the CGST Act comes into operation by virtue of Section 7(2) of the Central Goods and Services Tax Act, 2017, which begins with a non obstante clause and specifically excludes certain activities or transactions from the scope of “supply”. The activities specified in Schedule III are treated as neither a supply of goods nor a supply of services.
2. Entry 5 of Schedule III provides that sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building shall not be treated as supply of goods or services. Thus, the statute expressly excludes sale of land in all circumstances, and sale of building, except in situations covered under clause (b) of paragraph 5 of Schedule II.
3. A careful reading of this provision shows that the sale of building will remain outside the scope of GST unless it falls within paragraph 5(b) of Schedule II, which treats construction of a complex, building or civil structure intended for sale to a buyer, where consideration is received before issuance of completion certificate or first occupation, as a supply of service.
4. It follows that if two parties enter into a contract for construction of a building and even a portion of the consideration is received before completion, such transaction would fall within clause 5(b) of Schedule II and would be treated as a taxable supply of service.
5. The Supreme Court judgment in Larsen & Toubro Ltd.(works contract case) clarifies that a construction contract must involve provision of construction services pursuant to a contract. Applying this principle to the GST regime, there must be consensus ad idem between the parties that one party will provide construction services to the other. Further, payments should have been made before issuance of the completion certificate. In the absence of these elements, the transaction would fall under Schedule III as sale of building simpliciter.
6. In the present case, the primary issue to be examined was whether the transaction constituted a contract for rendering construction services or merely a contract for sale of a building, though incomplete.
7. The Court observed that Entries 5(b) and 6(a) of Schedule II would apply only where there exists a contract for construction or works contract, since GST is leviable on supply of goods and services. Therefore, in order to attract GST under these entries, there must be a construction contract and, in the case of Entry 5(b), consideration must be received before completion.
8. However, where the transaction is purely for sale of land or sale of building without any element of construction services or works contract, GST would not apply. In such cases, Entry 5 of Schedule III must be interpreted to ensure that taxation of immovable property does not conflict with the constitutional scheme under which stamp duty on sale of immovable property is within the domain of the States.
9. On examination of the sale deed/transaction in question, the Court found that it was a sale of a substantially completed building, though not fully completed, sold by the liquidator on an “as-is-where-is basis”. The liquidator had no further service obligations, nor was there any agreement or understanding for providing construction or works contract services to the purchaser. Consequently, Entries 5(b) and 6(a) of Schedule II relating to construction services were not attracted. The substantial stamp duty paid on the transaction further indicated that it was treated as a transfer of immovable property.
10. The Court further held that mere absence of a completion certificate cannot determine the taxability of the transaction, as such an approach would not reflect the true nature of the transaction.
11. The authorities were therefore incorrect in fastening GST liability on the liquidator and the purchaser, since no construction services were rendered or contemplated under the agreement. The Court observed that GST may arise in the future only if the purchaser engages contractors to complete the construction, but not at the stage of the auction sale.
12. The Court clarified that reliance on Entry 5(b) of Schedule II solely on the ground that the completion certificate had not been issued is misplaced, because the provision applies only where there is a contract for construction or works contract services.
13. In the present case, the liquidator sold the property on an “as-is-where-is” basis and the purchaser paid stamp duty of approximately ₹5.96 crores treating it as sale of immovable property. Since there was no contract for construction services, the transaction squarely falls within Entry 5 of Schedule III and is therefore outside the scope of supply under Section 7(2) of the CGST Act.
14. The Court reiterated that GST applies to supply of services, and Schedule II clarifies that where a contract involves construction of a building or part thereof for a buyer, GST would be applicable. However, sale of building simpliciter is excluded under Schedule III.
15. Paragraph 5(b) of Schedule II specifically classifies the activity of construction of a complex, building or civil structure intended for sale to a buyer as a service where consideration is received before completion certificate or first occupation.
16. For the said provision to apply, there must exist a service provider and a service recipient, with the service provider undertaking construction activity for the service recipient.
17. In other words, there must be performance of a construction contract by the supplier for the recipient. If such a contractual relationship is absent, the provision does not apply. If the agreement for sale is entered only after the building has come into existence and no further construction activity is undertaken thereafter, it cannot be treated as supply of construction service.
18. Even if the completion certificate has not yet been obtained, where the agreement is entered into after the building has substantially come into existence and no further construction services are undertaken pursuant to the agreement, there is no supply of goods or services under Section 7. Thus, Paragraph 5(b) of Schedule II applies only to supply of construction services to a recipient, and it is essentially a service contract and not a composite works contract.
Accordingly, the Court held that the sale of a partially constructed building by the liquidator on an “as-is-where-is basis” constitutes a sale of immovable property covered under Entry 5 of Schedule III and is therefore not liable to GST.
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