1. Introduction- JDA:
Under joint development agreements, two or more parties join hands to carry out a common project for a profit. Typically, parties work on principal-to-principal basis and divide roles and responsibilities on the basis of experience, and resources of each party. Say, landowner brings in land and developer undertake construction on such land. Generally, each party’s share of area is fixed at the beginning of an arrangement. Respective party is entitled to earn revenue by selling off its respective share of area.
2. Is it taxable?
More often than not as an indirect tax advisor, we get a query almost on a daily basis- Is GST applicable on Joint Development Arrangement (JDA)? In particular, on the flats given by the builder promoter – free of cost, to the landowner-promoter.
The query is not only confined to GST, but it goes even to the past and people still wonder if Service tax payable on JDA.
The Credit goes to various circulars issued by CBIC, which though were meant for clarifying the position, but ended up creating more confusions.
Firstly, CBEC had issued Circular No. 109/03/2009-ST dated 23.02.2009. Para 2.2. of the said Circular clarified that –
“2.2. Another type of arrangement is where the contract between the theatre owner and the distributor is on revenue sharing basis i.e. a fixed and pre-determined portion i.e. percentage of revenue earned from selling the tickets goes to the theater owner and balance goes to the distributor. In this case, the two contracting parties act on principal-to-principal basis and one does not provide service to another. Hence, in such an arrangement the activities are not covered under service tax.”
Due to such clarification, taxpayers were given to understand that if contracting parties act on principal-to-principal in a revenue sharing arrangement, then service tax is not applicable since contracting parties are not providing services to each other.
Subsequently, without any major change in law, CBEC changed its stand and issued another Circular No. 148/17/2011-ST dated 13.12.2011 and clarified as follows –
“9. Thus, where the distributor or sub-distributor or area distributor enters into an arrangement with the exhibitor or theatre owner, with the understanding to share revenue/profits and not provide the service on principal-to-principal basis, a new entity emerges, distinct from its constituents. As the new entity acquires the character of a “person”, the transactions between it and the other independent entities namely the distributor/sub-distributor / area distributor and the exhibitor etc. will be a taxable service. Whereas, in cases the character of a “person” is not acquired in the business transaction and the transaction is as on principal-to-principal basis, the tax is leviable on either of the constituent members based on the nature of the transaction and as per rules of classification of service as embodied under Sec 65A of Finance Act, 1994.
10.To sum-up the above, the arrangements entered into by the distributor or sub-distributor or area distributor etc. and the exhibitor or theatre owner etc. in exhibiting the film produced by the producer, the original copyright holder, the arrangements and their respective service tax classification is tabulated as under:
Type of Arrangement
|Movie exhibited on whose account||Service Tax Implication|
|Principal–to-Principal Basis||Movie being exhibited by theatre owner or exhibitor on his account – i.e. The copyrights are temporarily transferred||Service tax under copyright service to be provided by distributor or sub-distributor or area distributor or producer etc., as the case may be|
|Movie being exhibited on behalf of Distributor or Sub-Distributor or Area Distributor or Producer etc. – i.e. no copyrights are temporarily transferred||Service Tax under Business Support Service / Renting of Immovable Property Service, as the case may be, to be provided by Theatre Owner or Exhibitor|
|Arrangement under unincorporated partnership/ joint/ collaboration basis||Service provided by each of the person i.e. the ‘new entity’/ Theater Owner or Exhibitor / Distributor or Sub-Distributor or Area Distributor or Producer etc., as the case may be, is liable to Service Tax under applicable service head|
11. It is understood that the Circular dated 23.02.2009 has been misinterpreted to exclude all ‘revenue sharing’ arrangements from the levy of service tax. Remuneration or payment arrangements on basis of fixed or revenue sharing or profit sharing or hybrid versions of these may exist. However, the nature of transaction determines the leviability of service tax. Each case may be looked into on its merits and decision be taken on case-to-case basis.”
As a result of above clarification, the leviability of service tax on joint arrangements was turned upside down. Now, service tax could be attracted even if revenue sharing joint arrangements were made on principal-to-principal basis. This resulted into interpretations like:
(i) If contracting parties are working under principal-to-principal arrangement, then services were provided by one contracting party to another contracting party
(ii) In unincorporated partnership/ joint/ collaboration basis, the services were provided by each contracting party to a new person (arising due to joint collaboration)
Moreover, in one more subsequent Circular No. 151/2/2012-ST dated 10.02.2012 this view was reiterated by stating that in case of joint development agreements, service tax would be payable on the flats provided free of cost to the landowners. However, while issuing these circulars, the original circular dated 23.02.2009 was never withdrawn.
In the presence of two sets of contrary circulars, builders were in sheer confusion – whether to pay Service Tax/GST or not? The matters were debated at various levels of adjudication as well as first appeals.
3. Recent Order of Tribunal :
Recently, Ahmedabad bench of Tribunal in the case of Safal Construction Private Limited vs. Commissioner of Central Excise & ST, Ahmedabad 2022 (11) TMI 1279 had an opportunity to examine the issue of Service tax on joint development.
Facts of the case were that appellant viz. Safal Construction Private Limited had entered into a co-development agreement with Safal Infrastructure Private Limited and Pegasus Commercial Co-op Society Limited for carrying out joint development. As per mutual convenience, all the co-developers decided to divide the functions amongst themselves. One of the co-developers was responsible to deploy necessary funds. Another was responsible to carry out all other works like obtaining licenses, plan approvals, approvals, NOCs, advertisement, marketing, etc. In consideration for carrying out such functions, co-developers were entitled to share of revenue/profit. Co-developers were individually authorized to collect the sale proceeds and were not obliged to deposit such amount in common pool or joint bank account. Also, co-developers had specifically agreed that joint development shall not constitute as partnership and neither party shall be considered as an agent of other.
Hon’ble Tribunal examined the issue in light of terms of agreement, definition of “joint venture” as per Black’s Law Dictionary. Even after considering controversial Circulars dated 13.12.2011 and dated 10.02.2012 (supra), held that there are no implications of service tax. Tribunal stated that all the parties to co-development agreement were assigned their respective jobs which were performed in favor of the joint venture in which again all the parties were participants. Therefore, Tribunal categorically held that appellant had not provided any service to the joint venture.
At this juncture it may not be out of place to mention the case of Gujarat State Fertilizers & Chemicals Ltd. Versus Commissioner Of C. Ex. – 2016 (45) S.T.R. 489 (S.C.), wherein Supreme Court had held that in a joint venture arrangement, if parties merely agree to share the expenditure then by no stretch of imagination, it can be said that there is a Joint Venture and a separate service has been provided by one party to another.
Pursuant to above it may be inferred that the long pending issue of taxability under joint development agreement has come to a rest. However, the question still remains alive if the above decision will continue to hold good even under GST regime.
In various rulings including Jayachandran Alloys 2019 (25) G.S.T.L. 321 (Mad. HC) and Godway Furnicrafts 2021 (54) G.S.T.L. 151 (A.P. HC) it has been clearly held that GST is not a new law but its subsummation of previous laws. Therefore, the rulings given under Service tax law which got subsumed in GST law, can be considered as good for the purposes of GST law, unless there is some fundamental change made in the new law.
In this context, it may be relevant to note the concept of ‘supply’ introduced by the GST law. Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act), defines the term in an inclusive manner. Section 7 was amended retrospectively (with effect from 1st July, 2017) by way of insertion of Clause (aa) to sub-section (1). This clause provides that–
“(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment, or other valuable consideration.
Explanation.––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another”
This amendment was made to overrule the Apex Court’s Judgment which stated that a club and its members are not two distinct persons and therefore, there cannot be any levy of Service tax or GST on the transactions between them.
On minute reading of amendment, it appears that activity/transaction carried out by one person ‘to’ its members is captured under the ambit of supply. Usually, an activity can be performed by one person or can be performed ‘for’ another person. Activity is not performed ‘to’ another person. Also, typically, transaction can be ‘with’ another person and not ‘to’ another person. Therefore, it seems that amendment is badly worded and prone to grammatical errors.
Due to such retrospective amendment, it is clear that the parties of a Joint venture are distinct from each other. But what is important is that there must be an activity or a transaction and the same should be for a consideration. If both the conditions are satisfied, GST would be attracted.
One may argue that yes, services are provided by co-developers to each other under joint development agreement in view of Circulars dated 13.12.2011 and dated 10.02.2012 (supra)
It is worth noting that even after taking into consideration both the Circulars dated 13.12.2011 and dated 10.02.2012 (supra), Hon’ble Tribunal held that under joint development agreement where co-developers are working on principal-to-principal basis, the service cannot be said to be rendered by co-developers to the joint venture.
Another angle to any JDA would be non-existence of ‘consideration’ between two JV parties. Normally, no party pays any consideration to the other.
Therefore, it can be safely said that Clause (aa) to sub-section (1) of Section 7 of CGST Act may not get triggered in cases of joint development agreement wherein co-developers are working on principal-to-principal basis. Thus, GST may not be applicable in such a situation.
The issue of taxability under joint development agreement has come to certain conclusion and the same may not attract Service tax/ GST. However, one must carefully understand the peculiar facts of the case and frequent amendments in the provisions of law, judicial precedents to understand the taxability of GST/Service Tax under joint development agreement. Also, agreements should be carefully drafted to avoid unnecessary litigation.