Joint Development Agreement (JDA) is an arrangement between the Land owner and the Builder/Developer, where the Land owner contributes his land and the Developer takes the full responsibility of obtaining approvals, construction, launching and marketing the project with the help of financial resources.
In regard to GST on JDAs there is a recent ruling of Tamil Nadu Authority of Advance Ruling in the case of Thiru Neelakanta Realtors LLP wherein it has been adjudged that the value of construction in respect of Apartments given to land owner shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers as per paragraph 2A of Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019, even if the actual cost of construction is available.
Facts of the case
The applicant, Thiru Neelakanta Realtors LLP is engaged in the business of providing works contract and construction services. They had entered into a Joint development agreement (JDA) with K. Alamelu and N. Rama who are the owners of the property for construction of apartments.
The applicant has stated that the owners approached them for developing the property and entered into an agreement for this purpose. Out of construction made two flats will be given to the land owners.
Issue on which ruling is sought
The applicant has sought the advance ruling on the issue whether paragraph 2A of Notification No. 03/2019-Central Tax (Rate) dated 29th March, 2019, is applicable to those agreements entered on or before 29th September 2019 with unregistered persons. Further, the applicant had also raised the issue as to whether paragraph 2A, is ultravires Section 15(5) of CGST Act,20I7 and hence is inapplicable until there is prescription of rules in terms of Section 15(5) read with Section 2(87) of CGST Act,2017.
Arguments of the Applicant
The applicant has submitted that Paragraph 2A is applicable only when a registered person transfers development right. They have further stated that paragraph 2A was amended vide Notification No. 20/2019- Central Tax (Rate) dated 30th September, 20I9, wherein, the word ‘registered’ mentioned in Notification no 03/2019-Central Tax (Rate) was omitted.: it is evident from the above that, for the period commencing from 29th March 2019 until 29th September 2019, paragraph was applicable only to a registered person transferring development rights; however, with effect from 30th September 2019, paragraph 2A was applicable to any person transferring the said development rights.
The applicant is of the view that Notification no. 03/2019- Central Tax (Rate) dated 29th March 2019, prescribing a notional value of construction service is not applicable to the Applicant’s case since the actual cost of construction is very much available. They have also stated that said Notification is not applicable until rules are prescribed in terms of Section 15(5) of CGST Act 20I7.
The applicant has stated that Notification no 03/2019- Central Tax (Rate) is inapplicable to the instant case and the Value of supply for the services provided by them have to be the cost of construction plus 10% or actual cost of construction in terms of Rule 30 or 31 of CGST Rules. 2017 as the case may be.
Order of AAR: Deliberation and Ruling
Pata 2A of the Notification provides the value to be taxed where a person transfers development rights or FSI to a promoter against consideration and does not limit itself to the transfer of development rights alone to be the taxable event as stated by the applicant. Here in the instant case, the owners have vested the rights to develop the immovable property owned by them, into a residential apartment,with the applicant. So the contention of the applicant that this para would not be applicable to this transaction as it does not involve transfer of development rights is
not sustainable.
In the instant case, the ‘Time of Supply’ falls after the amendment in the Para 2A making the method of valuation to be adopted for the construction service extended to the land owners both registered or unregistered against the development rights and therefore, the applicant has to
adopt the value as per Para 2A to the Notification and the liability to tax arises on the date of issuance of completion certificate for this project or the date of first occupation.
Value of construction services provided by a promoter to land owner being a non-registered person shall be determined based on the total amount charged by the promoter for similar apartments in the project from independent buyers, other than the land owner, nearest to the date on which such development right etc. is transferred to the promoter, less the value of transfer of
land, if any, as prescribed in paragraph 2 of Notification No. 77/2017-CT(R) dated 28.06.2017.
The date of levy being the date of issuance of completion certificate, Para 2A becomes applicable to them and so the value should be calculated only as prescribed in the said para. As the law has provided for such valuation, the contention that para 2A is not applicable when the actual cost of construction is available does not hold water as we cannot go beyond the law pronounced.
In view of the above deliberations the coram of Tmt. T.Padmavathi and B. Senthilvelavan held that Paragraph 2A the Notification no.3/2019-Central Tax (Rate) is applicable to the agreement entered into between the applicant and the owners of the land in as much as the levy is imposable on the date of completion of the construction as per Notification No. 06/2019 -Central Tax (Rate) dated 29.03.2019. It was further adjudged that Notification no.3/2019-Central Tax (Rate) is applicable to this transaction even if the actual cost of construction is available.
Relevant Provision:
Paragraph 2A of Notification no. 3/2019:
2A. Where a person transfers development right or FSI (including additional FSI) to a promoter against consideration, wholly or partly, in the form of construction of apartments, the value of construction service in respect of such apartments shall be deemed to be equal to the Total Amount charged for similar apartments in the project from the independent buyers, other than the person transferring the development right or FSI (including additional FSI), nearest to the date on which such development right or FSI (including additional FSI) is transferred to the promoter, less the value of transfer of land, if any, as prescribed in paragraph 2 above.”
As per paragraph 2, value of land is deemed to be 1/3rd of the gross amount charged.
Thus, such value shall be calculated considering value of similar apartments charged by the promoter developer nearest to the date on which such development rights are transferred where development rights have been transferred against consideration in the form of residential as well as commercial apartments.
As per entry (i) read with entry (d) of notification no. 6/2019 – Central Tax (Rate) dated 29th March, 2019, time of supply of construction services to land owner under JDA shall arise on the date of issuance of completion certificate for the project or on its first occupation whichever is earlier.
It may be noted here that there is no exemption from GST to construction service provided by developer to landowner.
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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.
