Case Law Details
In re NBER Developers LLP (GST AAR Odisha)
Introduction: The realm of Goods and Services Tax (GST) in India has seen its fair share of complexities, particularly in the real estate sector. A recent ruling by the GST Authority for Advance Ruling (AAR) in Odisha has brought forth questions about the applicability of GST rates on the sale of land and duplex. In this extensive exploration, we unravel the nuances of this ruling, delving into its implications, understanding the rates involved, and scrutinizing the eligibility for input tax credits.
Detailed Analysis:
i. Background and Applicant’s Submission: NBER Developers LLP, the applicant in question, sought clarity on the GST rate concerning the sale of land and the construction of a duplex on the same piece of land. The crux of their argument was rooted in the belief that the sale of developed land falls under Schedule III, exempting it from GST implications.
ii. Memorandum of Agreement and Power of Attorney: A critical aspect of the ruling lies in dissecting the legal documents submitted by NBER Developers LLP. The AAR scrutinized the Memorandum of Agreement and the Power of Attorney, discovering that the developer was authorized, through the Power of Attorney, for the commercial exploitation of the land, including the construction of multi-storied buildings. The agreements with buyers were meticulously analyzed, revealing charges for land, common areas, and services related to construction.
iii. Applicability of GST: The heart of the matter lay in determining the GST applicability. The AAR concluded that the transaction indeed constituted taxable supplies, citing Schedule II, Para 5 Clause (b) of the CGST Act. As a result, the developer was deemed liable to pay GST at a rate of 7.5% (CGST 3.75% + SGST 3.75%). A noteworthy deduction of one-third towards land cost was permitted, establishing an effective GST rate of 5%. Intriguingly, the ruling asserted that input tax credit was not admissible on inward supplies.
iv. Comparison with Previous AAR Rulings: To deepen our understanding, a comparative analysis was conducted with previous AAR decisions in Haryana, Goa, and Karnataka. These rulings, which generally favored the non-taxability of developed plots, were contrasted against the nuanced perspectives of the AAR Odisha. The divergence in facts and circumstances emerged as a key factor in the Odisha ruling.
Exploring the Distinctions:
Now, let’s delve deeper into the distinctive features that set this ruling apart from previous judgments:
- Land Development at Buyer’s Behest: The Odisha ruling underscored that the development of land was initiated by the developer at the request of the buyer. This crucial distinction positioned the transaction as one not solely limited to the sale of land but encompassing the construction of a duplex or multi-storied building.
- Intrinsic Part of Plot Allotment: The agreements with buyers revealed a comprehensive approach to pricing. Charges for land, common areas, internal and external development, taxes, and various other amenities were all bundled into the total price of the plot. This bundling strategy reinforced the idea that the transaction wasn’t a straightforward sale of land but an intricate process involving multiple components.
Implications for Stakeholders:
As stakeholders grapple with the repercussions of this ruling, several considerations come to the forefront:
i. GST Compliances for Developers: Developers in the real estate sector need to meticulously evaluate their transactions in light of this ruling. The imposition of GST at a specific rate, coupled with the denial of input tax credit, necessitates a thorough understanding of the tax implications on the overall project cost.
ii. Buyer’s Perspective: From the buyer’s standpoint, the inclusion of various charges in the total price might lead to increased costs. Understanding the breakdown of these charges becomes imperative for buyers aiming to make informed decisions in the real estate market.
iii. Professional Advisory: The complexities elucidated by this ruling emphasize the importance of seeking professional advice. Tax experts well-versed in GST regulations can guide both developers and buyers through the intricacies of these transactions, ensuring compliance with the latest guidelines.
Conclusion:
In conclusion, the GST AAR Odisha ruling sheds light on the evolving landscape of taxation in real estate transactions. The intricate details of the agreements, the development initiated at the buyer’s request, and the bundling of charges all contribute to a nuanced understanding of the transaction at hand. As the real estate sector adapts to these complexities, stakeholders must stay abreast of evolving GST regulations, seeking professional advice to navigate the intricate web of compliance and financial implications.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, ODISHA
Subject: M/s NBER DEVELOPERS LLP (herein after referred to as the ‘Applicant’) having principal place of business/registered office at Mahadev Tower, Plot No.542, Saheed Nagar, Bhubaneswar, Odisha, 751007 bearing GSTIN 21AAPFN36I6G1ZG has filed an application for advance ruling under Section 97 of CGST Act, 2017 and Section 97 of the OGST Act, 2017 in FORM GST ARA-01 discharging fee of Rs. 5.000/- each under the CGST Act and the SGST Act.
1.0 The Applicant has sought for an advance ruling with regard to ” Applicability of GST rate on sale of Land and Duplex constructed on same land on execution of two separate Agreements and whether input tax credit is admissible”.
1.1 At the outset, we would like to make it clear that the provisions of both the CGST Act and the OGST 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 provision under the OGST Act.
2.0 Submission of the Applicant
2.1 The Applicant is engaged in the business of Real Estate & Construction, being incorporated in the year 2018 in the name and style of M/s NBER DEVELOPERS LLP. The firm has started a project of land plotting at Jatni, Odisha. The firm further intends to construct duplex houses for the customers on the same land. The firm is going to enter into two separate agreements with its customers; for sale of land (residential) and for construction of duplex over the same land. It has been submitted that the duplexes are not “‘affordable residential apartment”.
2.2 It has been submitted that following rates revision for construction of residential apartments finalized in 34th GST Council meeting dated 19.03.19 and notified vide Notification No. 03/2019-Central Tax (Rate) dated 29.03.2019, applicable from 01.04.2019 making amendments against serial number 3, for item (i) of Notification No. 11/2017- Central Tax (Rate), dated the 28thJune, 2017. [HSN-9954] the revised rates of GST stand as under-
(a) GST @ 1.5% [(CGST@ 0.75% + SGST@ 0.75%), Effective rate 1% (CGST@0.5% + SGST@0.5%) after deducting 1 /3rd towards Land Cost*] without ITC for affordable residential apartments.
(b) GST @ 7.5% [(CGST@ 3.75% + SGST@ 3.75%), Effective rate 5%(CGST@ 2.5% + SGST@ 2.5%) after deducting 1/3rd towards Land Cost*] without ITC for residential apartments other than affordable residential apartments.
2.3 That the ‘”Works Contract” as defined in Section 2(119) of the CGST Act, 2017 means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. The rate of GST for Works Contract service has been prescribed in item(ii) of serial number 3 of Notification No. 11/2017- Central Tax (Rate), dated the 28thJune, 2017 as amended by Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017 & Notification No.24/2017-Central Tax (Rate) dated 21.09.2017 and read as “composite supply of works contract as defined in clause 119 of Section 2 of Central Goods and Services Tax Act, 2017: 18% [CGST 9%+ SGST9%] “
2.4 That as per Schedule III of the CGST Act, sale of land shall be treated neither as a supply of goods nor as a supply of service. Hence GST is not applicable on sale/transfer of land. The Applicant has referred to Circular No. 177/09/2022-TRU Dated: 3rd August, 2022 as under.-
“14. Whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST –
14.1 Representation has been received requesting for clarification regarding applicability of GST on sale of land after levelling, laying down of drainage lines etc. 14.2 As per SI (5) of Schedule HI of the Central Goods and Services Tax Act, 2017, ‘sale of land’ is neither a supply of goods nor a supply of services, therefore, sale of land does not attract GST.
14.3 Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.
14.4 However, it may be noted that any service provided for development of land, like leveling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.”
2.5 The Applicant is of the view that both the contracts should be dealt separately. Once the customer enters into a contract for purchase/sale of land and land is registered in his name, the customer becomes the owner of the land and he has no obligation/bindings to get his house constructed from the same developer. Separate approval needs to be taken from concerned authorities for construction of individual houses. When a developer starts development of a land into plotting and other development activities like electricity, drainage, water facilities, parks, club house etc., he may enter into sale agreements with the prospective buyers either before commencement of such development or during the course of such development or after development is completed. Circular 177 cited above, clarifies that ”As per S.No. (5) of Schedule III of the Central Goods and Service Tax Act, 2017 (CGST Act) sale of land is neither supply of goods nor a supply of service”.
2.6 That Para 5 of Schedule II deals with GST on construction and selling of apartments when sold before the building gets occupancy certificate. The provisions of Para 5 of Schedule II are different from Sr. No. 5 of the Schedule III. Hence sale of land, whether before development or after development, it remains land, and in the absence of specific provisions similar to Para 5 of Schedule II the same shall not be subject to GST. Accordingly, the Circular No. 177 cited above, provides the clarification that land may be sold either as it is or after some development such as leveling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.
2.7 The Applicant has also referred to the Advance rulings given by Haryana AAR in case of M/s Informage Realty Private Limited (Oct 2018), Goa AAR in case of M/s Shantilal Real Estate Services (May 2021) and Karnataka AAR in case of of M/s Rabia Khanum (Sep 2022), wherein it is held that sale of developed plots is not taxable in terms of Entry 5 of Schedule III. Hence, sale of plots by a developer to his customers, whether before development or during the course of development or after development shall be exempt from GST. Whether, it is a case of own land or JDA case, the plots sold by the developer to his customers are not chargeable to GST in terms of the said Circular.
2.8 The Applicant is of the opinion that their contract is purely in the nature of “works contract” as defined above and thus 18% GST will be payable on the consideration amount of works contract and the developer will be eligible for input tax credit for the expenses incurred in relation to the works executed. (As per item (ii) of serial No.3 of Notification no. 11 /2017-Central Tax (Rate) dated 28.06.2017).
3.0 The personal hearing was fixed on 26.04.2023 under due intimation to the Applicant, the jurisdictional officer of State GST & jurisdictional officer of Central GST (intimated through their respective Commissionerates along with a copy of the application and the written submission of the Applicant). The Applicant, through its representative Shri Nikhil Tekariwal, AR appeared for personal hearing. Shri Tekariwal re-iterated the submissions already furnished in the application filed for advance ruling. The Revenue has neither submitted its comments nor appeared for personal hearing.
3.1 During personal hearing, the Applicant was asked to submit copies of the documents submitted to RERA and copy of approval, copies of registered power of attorney and JDA with the land owners, draft agreement/final agreement with the plot owners for sale of land/ construction and copy of LLP deed. On receipt of the said documents, a fresh date for P.H. would be considered. Accordingly, a fresh date of personal hearing was fixed on 01.12.2023. The applicant (AR) submitted the required documents on the said date and appeared for P.H.
Discussion & findings
4.0 We have gone through the advance ruling application, question on which advance ruling has been sought and the Applicant’s interpretation of law and/or facts, as the case may be, in respect of the question asked. We find that the question before us essentially pertains to GST rate on sale of Land and construction of Duplex on the same land & applicability of a Notification issued under the provisions of the GST Act. 2017. We, therefore, observe that the issue before us is squarely covered under Section 97(2) of the CGST Act, 2017 and therefore we admit the application for consideration.
4.1 The issue involved in this case is to decide rate of GST on sale of Land and construction of Duplex over the same land on execution of two separate Agreements by the Applicant and admissibility of input tax credit of tax paid or deemed to have been paid.
4.2 The issue was examined in detail. It has been submitted that the Applicant is engaged in the business of Real Estate & Construction & has started a project of land plotting at Jatni, Odisha. The Applicant further intends to construct duplex houses for the customers on the same land. The Applicant firm is going to enter into two separate agreements with its customers, one for sale of land and another for construction of duplex house over the same land. It is also submitted that in the subject case, the duplexes would not be “affordable residential apartments”.
4.3 The Applicant in its submission has contended that as per Schedule III of the CGST Act, sale of land shall be treated neither as a supply of goods nor as a supply of service. Hence, no GST is applicable on sale/transfer of land. The Applicant has further contended that in view of the Circular No. 177/09/2022-TRU Dated: 3rd August, 2022, sale of developed land is also sale of land and is covered by Sr. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST. The Applicant argued that both the contracts should be dealt separately. Once the customer enters into a contract for purchase/sale of land and land is registered in his name, customer becomes the owner of the land and he has no obligation/bindings to get his house constructed from the same developer. Hence, sale of plots by a developer to his customers; whether before development or during the course of development or after development shall be exempt from GST. As regards contract for Construction Service, the Applicant has contended that the contract is purely in the nature of “works contract” and thus would attract 18% GST on the consideration amount of’ works contract’ and the Applicant would be eligible for input tax credit for the expenses incurred in relation to the works executed.
4.4 It is seen from the records/documents that Arnav Constructions a partnership firm having its office at Bhabagrahi Lane, Rajabagicha. Dist- Cuttack, PIN- 753009 bearing PAN No AAQFAI880L. the owner of the land in question covered under Khata No 106, Plot No 343 Area A.c. 5.180 dec. Plot No 343/367 area- A.c. 0.060 dec situated in Mauza- Gora. Dharmasagar. P.S. Jatani, Dist – Khurda has executed a General Power of Attorney in favour of NBER Developers, represented through its designated partner Mr. Chetan Kumar Tekariwal for commercial exploitation of the land in question. The relevant clauses of the Power of Attorney is reproduced below.-
NBER, Developers ” (a) To submit applications affidavit, indemnity bond, rent receipts etc. along with the other requirements as well as complete other formalities prescribed by the Authorities, in this regard.
b. To get the building plans including revised plans prepared through qualified Architects for construction of the Multi Storied Building complex/independent duplex comprising of Units/Flats/Duplex Houses/Parking spaces and to submit the same before the Concerned Development Authority or any other Departments or Agencies for sanction, approval and subsequent modification and/or revision of such plan or plans,
c. To appear and represent us before the Bhubaneswar Development Authority/Bhubaneswar Municipal Corporation/ORERA and other appropriate authorities and obtain approval/permission required from the concerned authorities in connection with the sanction, modification and/or alteration of the plans for construction of the housing/commercial complex and sale those fats to the intending purchasers.
d. To sign and submit all papers, documents, statements, undertakings, applications and plans as may be required for getting the plans sanctioned modified and/or revised by the authorities concerned for construction of the Building Complex over the said land.
e. To apply for and obtain electricity, water, sewerage, drainage or other connections or any other utility / facility / amenities to the said Multi Storied building complex and for that purpose to sign, execute and submit al! papers / documents and plans and to do all other acts, deeds and things as may be deemed fit and proper by the said Attorney.
f. To receive from the intending buyers any earnest money advance or advances and also the balance of the consideration money and to grant the receipt for the same in their own name at their own risk.
g. To deal with and dispose of the proportionate impartible undivided share in the land in question as well as the saleable built up area in the proposed Housing Complex or vacant land to any intending purchase.
h. To enter into any agreements, with the intending purchasers regarding transfer of Flats / Units/independent duplex houses by way of absolute sale and to take advances, consideration amount and / or construction cost as settled in respect of such Units and to grant proper receipts and discharge for the same.
h. To appear before any income Tax, Wealth Tax, Sales Tax /GST or such other authorities and before any court of law tribunal committee and/or commissioner pertaining labour of staff matters or otherwise and to answer and offer explanations to any question arising out of such proceeding before them and to engage counsels(s) verify and submit statements and other records and papers before them and prefer appeals or revisions and make applications or petition before any such or other authorities as may be necessary.
i. To insert advertisements in any local and national daily News Papers offering for sale of Flats / Units/independent duplex houses in the proposed building complex of the total built up areas /flats /Duplex houses at its cost and expenses.
j. To take all steps in arty’ legal proceedings and/or litigations that may arise during the period of construction including engaging any Advocate / Solicitor.
k. To appear before any Courts and/or any Office for obtaining copies of any documents and papers relating to the schedule property.
l. To apply for inspection and/or to inspect the judicial/revenue records.
m. To accept service of summons, notices to writ to be issued by any Court or authority concerning or arising out of construction of the Housing Complex on the said land.
n. To appear before any Registrar of Assurances, other Officer(s), Authority/ies having jurisdiction to entertain and receive the conveyance for registration and execute and register sale deeds, conveyances, instruments transferring Flats / Units together with proportionate impartible undivided share in the land in favour of intending owners of such Units of Super built up area together with proportionate interest in the land in question as enjoined by the law in force.
o. To negotiate for sale and transfer, let out charge or encumber land and building and / or Flats / Units/independent duplex houses, Parking spaces by the said Attorney at its discretion as may deem fit and expedient.
p. To sign, execute, draw, present for registration and admit registration of documents, sale deeds transferring proportionate impartible undivided share in the land in favour of the intending owners of the Flats/Units/ independent duplex houses, and other documents in connection with sale and transfer of the Flats,/Units/ independent duplex houses together with proportionate impartible undivided share in the land in favour of intending owners of the Units/Flats/ independent duplex houses including our share in the project with our written consent.
q. To mortgage commercial/residential built up space together with proportionate impartiable undivided interest on the land in the project before any hank or financial institution to avail finance except our owner’s share allotted in the project.
r. To offer on lease/rent built up commercial/residential units/spaces including proportionate undivided interest on the said land in the project excluding our owner’s share of built up space allotted in the project “.
4.5 Having gone through the Memorandum of Agreement & Power of Attorney both dated 27.02.2019, we observe that the Applicant has procured land from the land owner M/s Arnav Constructions through General Power of Attorney for commercial exploitation of the land. The Memorandum of Agreement meant for commercial exploitation of the subject land is towards construction of multi storied building complex/independent duplexes comprising of Units/Flats/Duplex Houses/Parking spaces. The Applicant has been authorized to carry out the activities such as to obtain electricity, water connection, sewerage, drainage or other connections or any other utility / facility / amenities to the said Multi Storied building complex. The Applicant shall complete the construction of proposed duplex/multistoried building within a period of 60 months from the date of approval of the plan. The land owner M/s Arnav Constructions will be allocated 33% of relevant super built area as the compensation of the land. Hence, going by the mandates of the Memorandum of Agreement & Power of Attorney, it is crystal clear that the land owner M/s Arnav Constructions has not authorized the Applicant to sale land/plot; rather to construct Duplex /Multi Stories buildings over the land in question.
4.6 However, the Applicant has entered into two separate agreements with its customers, one for sale of land (residential) and the other for construction of duplex/multi storied building over the same Land. For this purpose, the Applicant has obtained the final layout approval plan for the project from BDA. The Applicant has also registered the said project under the provisions of the Act with RERA, Bhubaneswar, separately i.e. Apartment Project as “Neeladri Ark” on dated 04.08.2021 under regdn no. RP/19/2021/00523 and for plotted scheme “Neeladri Ark, Phase-11” on 18.112021 under regd no. RP/19/2021/00603. in accordance with the terms and conditions set out in the agreement and as mutually agreed upon by and between the Applicant & its customers, the Applicant hereby agrees to sell and the customers agree to purchase the plot, undivided interest in the common areas. From the Agreement for Sale (draft agreement furnished), it is observed that total price of the plot includes taxes (consisting of tax paid or payable by the applicant by way of GST and such other taxes which may be levied in connection with construction of project payable by the applicant) up to the date of handing over the possession of the plot to the customer and the projects to the association of the customers. The total price is escalation free, save and except increases which the customer agrees to pay due to increase on account of development charges payable (if any). Further, it is also observed that the customers also have undivided interest on common areas. Where the interest of customers in the common areas is undivided and can not be divided/separated, the customer shall use the common areas along with other occupants, maintenance staff etc. The computation of price of plots includes recovery of price of land, construction of common areas, internal development charges, external development charges, taxes, cost of providing electric wiring, electrical connectivity to the plot, water line, fire detection equipment in the common areas and includes cost for providing all other facilities, amenities and specifications to be provided within the plot and project.
4.7 As can be seen from the submission, the Applicant started development of a land into plotting and other development activities like electricity, drainage, water facilities, parks, club house etc . Further, from the Circular No. 177/09/2022-TRU Dated: 3rd August, 2022, we observe that Plot/ Land may be sold either as it is or after some development such as leveling, laying down of drainage lines, water lines, electricity lines, etc. So, we don’t differ with the contention/view of the Applicant to the extent that sale of land/ developed land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.
But in the case before us, the situation is very different. The transaction between the Applicant & its customers is a transaction not limited to the sale of plot/land only. Here, the Applicant is engaged in construction of duplex/multi storied flats for the customers on the same land. The Applicant has developed the land for the project at the behest of the buyer (s). The development of land undertaken by the Applicant is an activity preceding and in relation to construction of project, as evident from the Memorandum of Agreement & Power of Attorney both dated 27.02.2019. Here, the project means the building and the land appurtenant thereto and all passages, the parking space, amenities thereto etc as provided in BDA plan.
4.8 As per Clause 1.8 (iii) of the ”Agreement for sale (draft), the computation of the price of the land includes recovery of price of land, construction of common areas, internal development charges, external development charges, taxes, cost of providing electric wiring, electrical connectivity to the plot, water line, fire detection equipment in the common areas and includes cost for providing all other facilities, amenities and specifications to be provided within the plot and project which evidences that the Applicant cum-developer is collecting charges for land and services on a proportionate basis and all these are intrinsic part of the plot allotted to the buyer and such transactions are not intended for the sale of land rather towards construction of project (duplex/multi storied building) which amounts to rendering taxable supplies. Hence, the impugned transaction attracts GST in view of the Schedule II, Para 5 Clause (b) definition of the CGST Act.
4.9 In support of its submission, the Applicant has relied upon Ruling of Haryana AAR in case of M/s Informage Realty Private Limited (Oct 2018). Goa AAR in case of M/s Shantilal Real Estate Services (May 2021) and Karnataka AAR in case of of M/s Rabia Khanum(Sep 2022). Wherein it has been held that sale of plots/developed plots is not taxable in terms of Entry 5 of Schedule 111. In this regard, it is stated that the ratio of the rulings on the cases cited by the applicant are found different to be facts and situation of the case in hand. There is no law that those decisions will have universal application. It is ruled by the Hon’ble Supreme Court in the case of Escorts Ltd vrs CCE, Delhi, 2004(173)ELT 113(SC) that one additional or different fact may make a world of difference between conclusion of two cases. It would be relevant to mention here that the facts of the cases cited by the Applicant are different from the case under discussion. In those cases, the owner of the land has developed the land not at the behest of the buyer and not because the buyer has requested for any service from him. The development of land undertaken by the owner was an activity incidental to the sale of land. The transaction between the purchaser and the owner of the land was a transaction purely for the sale of land. But, the facts and footings of the present case are completely different and therefore, decisions of the AARs cited supra are not applicable to the instant case.
4.10 In view of the above, we pass the following order:
RULING
5.0 Q. Applicability of GST rate on sale of Land and Duplex constructed on same land on execution of two separate Agreements and whether input tax credit is admissible.
Ans: On conjoint reading of agreements & submissions made to the application, we are of the considered view that the activity undertaken/proposed to be undertaken by the Applicant towards sale of plot/land and construction of Duplex/Flats over the said land amounts to taxable service under GST in view of the Schedule II, Para 5 Clause (b) definition of the CGST Act. In view of Notification No. 03/2019-C.T. (Rate) dated 29.03.2019, the Applicant is liable to pay GST @7.5% (CGST @3.75% + SGST @3.75%) after deducting l/3rd towards land cost from the total consideration i.e. effective rate of 5% GST on the full consideration received towards land and Duplex and is not eligible for ITC on any inward supply of goods and services.
6.0 The Applicant or jurisdictional officer, if aggrieved by the ruling, may appeal to the Odisha State Appellate Authority for advance ruling under Section 100 of the CGST/OGST Act, 2017 within 30 days from the date of receipt of the advance ruling.
