The Tamil Nadu Authority of Advance Ruling (AAR) in its recent ruling in the case of Chennai Metro Rail Limited has ruled that 18% GST will be applicable on grant of easement rights of the pathway to a person to their dwelling unit.
Facts of the case:
- The applicant, Chennai Metro Rail Limited acquired a portion of the property including the land which is now leased out to the owner for public purpose on payment of adequate compensation.
- As per clause 4 of the agreement entered into between CMRL and Dr. K. Prema, the lessee, Dr. K. Prema is entitled to use the passage with 3 Meter width and 14 Meter length measuring 452 out of the acquired land for shared access purpose for 35 years and has to pay Rs.30,00,000 towards lease amount.
Issues on which ruling was sought:
Whether leasing of pathway to a person to her /his dwelling unit by CMRL is taxable under GST?
Contention of the Applicant:
- The applicant claims that this land for which the access is shared against a consideration is to be considered as leased for residential dwelling as the pathway provides the existing residential property of Dr. K. Prema, access to the Road. It is their claim that the shared access extended for consideration, is an Easement right extended, should be considered as land appurtenant to the residential dwelling and they are eligible to the exemption at SI.No. 12 of Notification No. 12/2017- C.T.(Rate) which exempts the ‘services by way of renting of residential dwelling for use as residence’ classified under SAC 9963 or 9972.
- The applicant has stated that the extension of lease of shared access is in the course of business and therefore it is a supply under GST.
Arguments of Revenue:
- The term lease is covered within scope of supply under CGST Act 2017.
- CMRL is a provider for outward supply for a pecuniary benefits and for furtherance of business as per Section 2(17) of CGST Act and the applicant is a taxable person for supply of land for pathway to his lessee under lease agreement for consideration is leviable to tax under Section 2(108) of CGST Act, 2017.
- As per Notification 12/2017 CT (R) dated 28.06.2017, exemption is provided for renting of residential dwelling to be used as residence. However, the said premise is not a residential dwelling and irrespective of other facts the exemption would not be applicable.
- Easement rights and Notification 12/2017 cannot be clubbed together. Hence, the leasing of pathway to lessee for pecuniary benefits is supply of service and lease agreement made for consideration is taxable under GST Act 2017.
Order of Tamilnadu AAR: Deliberations and Ruling
- It is seen that in the course of business of the applicant , i.e constructing the metro station, the applicant has given easement rights to the land measuring 452 sqft to the individual for an amount agreed, Rs 60,40,980/-, in the MOU which is the consideration here. Hence, it is seen that this transaction of granting easement rights satisfies the conditions of Section 7(1)(a) as a ‘supply’ under CGST/TNGST Act. Further, As per Section 7(1A) and Para 2(a) of Schedule II to the Act, activity of easement of land constitutes supply of service.
- In the case at hand, the applicant vide the MOU agreed to provide shared access to the pathway for a specific period for a consideration to the lessee. It is clear that it is not an accommodation service and not classifiable under SAC 9963.
- In the case at hand, the applicant owns the pathway but has agreed through an MOU with the individual to permit her to use the pathway to access the main road from her residential property which is adjacent to the pathway. As seen above, this is an easement right given by the applicant to the individual to enjoy her residential property for a period of time for a consideration. The applicant has agreed through a MOU to tolerate her use of this pathway for a period of time for consideration. Hence, this service of agreeing to grant easement rights is a service of agreeing to tolerate an act and is classifiable under SAC 999794 under ‘other miscellaneous services’/ ‘Agreeing to tolerate an act’.
In view of above deliberations, the two-member bench of Manasa Gangotri Kata and Kulinjee Selvaan ruled that the act of agreeing to grant easement rights of the pathway by the applicant to Dr.K.Prema by way of shared access as per the MOU dt 21-08-2019 is classifiable under SAC 999794 and taxable under GST at 9% CGST and 9% SGST under Sl No. 35 of Notification 11/ 2017 –Central Tax (Rate) dated June 28, 2017 and Notification No.II(2)/CTR/532(d-14)/2017 vide G.O. (Ms) No. 72 dated June 29, 2017 respectively.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
