CA Shrenik Gandhi
Goods and Services Tax (GST) has been implemented in India from July 2017 and still in the month of December 2017, there are number of issues, on which clarity is required from the Central Government of India and/or the respective State Government. One such issue, is in relation to applicability of GST on supply of Transferrable Development Rights.
What is Transferrable Development Right
Generally, Transferrable Development Right (TDR) is a development potential of land, which was reserved or suspended owing to some kind of reservation on the said piece of land. Generally, the respective Municipal Corporation or State Government reserves certain pieces of land in a City or area, for public utility, considering the proposed development in the respective City or area. The Government Authorities do not have adequate monetary resources to compensate the land owners of the reserved plot and accordingly development rights equivalent to the development potential of such reserved land is granted, in the form of TDR, as per the Development Control Regulations (DCR) of the respective Municipal body. TDR is also awarded in case of Slum Rehabilitation Projects.
TDR are formalized by issuance of the Development Right Certificate (DRC’s). DRC’s are transferrable as per the provisions of the DCR, for a consideration, to any other person and on transfer of DCR, the transferee, subject to the provisions of applicable law, may be issued/utilized construction rights over and above the permitted Floor Space Index (FSI) of another land.
The issue involved in the present GST regime is to whether, sale/supply of TDR shall be chargeable to GST or not? The below is an effort made to summarize one of the possible interpretation(s).
GST law related provisions:
Section 9 of the Central Goods and Services Tax, 2017 (the “CGST Act”) provides for levy of the Central GST on all intra-state supplies of goods or services or both. Further, Section 7 of the CGST Act defines the scope of supply as under:
“7. (1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.”
Thus, as a general principle any sale of goods or services shall be considered as “supply”, for the purpose of GST. It is thus of utmost importance to consider the meaning of the term ‘goods’ and ‘services’.
Section 2(52) of the CGST Act defines “goods” as under:
““goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply” (emphasis supplied)
Further, Section 2(102) of the CGST Act, defines “services” as under:
““services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged” (emphasis supplied)
Thus, generally all kinds of moveable property shall be considered as “goods”. In the present scenario, it needs to be appreciated that, though TDR is granted by way of issuance of DRC, the question arises whether transfer of DRC shall be considered as transfer of ‘movable property’ and accordingly whether DRC shall be considered as ‘goods’.
Considering the principle on which DRC is issued and in the State of Maharashtra, a reference can also be drawn from the provisions of the Maharashtra Regional and Town Planning Act, 1966, that DRC is granted to establish ownership of TDR and hence by transfer of DRC, per-se, it may be possible to argue that, what is being transferred is not DRC, but is a right to utilize the Floor Space Index of land as per the applicable Development Control Regulations.
A question now remains unanswered is that, whether TDR should be considered as “goods” or “services”, for the purpose of levy of GST, for which it is important to consider the provisions of Section 7(2) of the CGST Act. Section 7(2) of the CGST Act provides that:
“(2) Notwithstanding anything contained in sub-section (1),––
(a) activities or transactions specified in Schedule III; or
shall be treated neither as a supply of goods nor a supply of services.” (emphasis supplied)
Thus, supply of activities/transactions listed in Schedule III to the CGST Act, shall neither be considered as supply of goods or of services. Paragraph 5 of Schedule III of the CGST Act provides that, “Supply of land, subject to clause (b) of paragraph 5 of Schedule II, sale of building” shall be considered as “activities or transactions which shall be treated as neither as supply of goods nor a supply of services”
To determine the exact nature of TDR, it would thus be important to consider the meaning of term ‘land’. The term ‘land’ is not defined in the CGST Act, the Integrated Goods and Services Tax, 2017 (the “IGST Act”) and the respective State Goods and Services Act, 2017 (the “SGST Act”) and hence certain reference may be drawn from the provisions of the General Clause Act, 1897 (the “GC Act”) or the applicable provisions of the respective States’ General Clauses Act.
The GC Act does not define the term “land”. However, Section 3(26) of the GC Act defines the term “immovable property” as:
““immovable property” shall include land, benefits to arise out land, and things attached to the earth, or permanently fastened to anything attached to the earth” (emphasis supplied)
The definition of ‘immovable property” distinguishes between “land” and “benefits to arise out of land”. However, it would be important to consider the provisions of Section 3(p) of the Right to Fair Compensation, Transparency in Land Acquisition, Rehabilitation Act, 2013 (the “Fair Compensation Act”), which defines “land” as under:
““land” includes benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth”
Thus, a possible view is that, any benefit arising of land, shall be considered as land only. In the instant, case, to determine whether TDR is a benefit arising out of land, the following decisions of the Hon’ble High Court of Judicature at Bombay (the “Hon’ble Bombay High Court”) needs careful consideration:
♠ Chheda Housing Development Corporation vs. Bibijan Shaikh Farid (APPEAL NO.1081 OF 2005)
The Hon’ble Bombay High Court, while determining on the appellants rights for an injection/interlocutory relief held that, TDR/FSI is a benefit arising out of land and observed, in Para 15 and Para 16 of the said judgment that:
Can FSI/TDR be said to be a benefit arising from the land. Before answering that issue We may refer to some judgments for that purpose. In Sikandar & Ors. vs. Bahadur & Ors., XXVII Indian Law Reporter, 462, a Division Bench of the Allahabad High Court held that right to collect market dues upon a given piece of land is a benefit arising out of land within the meaning of Section 3 of the Indian Registration Act, 1877. A lease, therefore, of such right for a period of more than one year must be made by registered instrument. A Division Bench of the Oudh High Court in Ram Jiawan and Anr. vs. Hanuman Prasad and Ors., AIR 1940 Oudh 409 also held, that bazar dues, constitute a benefit arising out of the land and therefore a lease of bazar dues is a lease of immovable property. A similar view has been taken by another Division Bench of the Allahabad High Court in Smt. Dropadi Devi vs. Ram Das and Ors., AIR 1974 Allahabad 473 on a consideration of Section 3(26) of General Clauses Act. From these judgments what appears is that a benefit arising from the land is immovable property. FSI/TDR being a benefit arising from the land, consequently must be held to be immovable property and an Agreement for use of TDR consequently can be specifically enforced, unless it
Specific performance can be granted of the land or interest in the land, belonging to a person who has agreed to sell the land with interest therein. If the person is not the owner or has no interest in the land agreed to be sold or transferred there is no question of granting specific performance. Slum TDR is not interest on the owners property. It is F.S.I. of some other land which is transferable in terms of D.C. Regulations. TDR may be owned by the holder but not the land from which TDR was generated. It can only be used on the owners property in terms of D.C. Regulation. Therefore, it is the F.S.I. of the entire property, including of R.G.and D.P. Road, which alone in terms of the Agreement, prima facie which can be specifically enforced. In such circumstances irreparable loss and injury would be occasioned to the Appellants, if the injunction is not granted. The balance of convenience is in their favour as compensation in money in such cases, would not be adequate. To that extent, we are clearly of the opinion, that the clarification given in para.46 of the impugned order is liable to be set aside and we accordingly do so.”
♠ Sadoday Builders Private Ltd vs. The Jt. Charity Commissioner Nagpur Diocesan Trust Association and M.P.V. Contractors, Builders and Developers (WRIT PETITION NO.: 4543 OF 2010)
While determining a matter on Section 36(1)(c) of the Bombay Public Trusts Act, 1950, the Hon’ble Bombay High Court following the decision of Chheda Housing Development Corporation (supra) held that,
6. The Division Bench has held that since TDR is a benefit arising from the land, the same would be immoveable property and therefore, an agreement for use of TDR can be specifically enforced. The said dictum of the Division Bench is later on followed by a learned single Judge of this Court in 2009 (4) Mh.L.J. 533 in the matter of Jitendra Bhimshi Shah v. Mulji Narpar Dedhia HUF and Pranay Investment and Ors. The learned judge relying upon the judgment of the Division Bench in Chheda Housing Development Corporation (supra) has held that the TDR being an immovable property, all the incidents of immovable property would be attached to such an agreement to use TDR. In view of the judgments of this Court (supra), in my view, the order of the Charity Commissioner that no permission under Section 36 is required as TDR is a movable property cannot be sustained and therefore, the application filed by the Respondent No.2 -under Section 36 of the said Act would have to be considered on the touch stone of the said Section 36 and also on the touch stone of the principles applicable to such a sale by a Trust.”
Thus, considering the above, a possible interpretation is that, if benefit arising out of land is considered as a “land”, then, supply of TDR may be considered as “land” and may not be liable for GST.
However, considering the fact that, GST is a relatively new law in India and it shall take time for the legal positions to be settled, it goes without say that, applicability of GST on TDR is subject to litigations and shall be dependent on the facts of the case including the classification adopted as per the provisions of the respective States’ Stamp Act. Further, if the interpretation of “land” as provided in the Fair Compensation Act is extended, a question shall arise once again, as to whether GST is applicable on under construction buildings or not?
Disclaimer: The above is an effort to capture various aspects related to applicability of GST on TDR and is based on the Author’s understanding of the law and regulations and there is no assurance that any authority or regulator shall accept the above views.
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