The Maharashtra Appellate Authority of Advance Ruling (AAAR) in its recent ruling on the appeal filed by Mr. Vilas Chandanmal Gandhi has upheld the ruling of AAR and held that 18% GST is leviable on sale of Transferable Development Rights (TDR) or Floor Space Index (FSI) received as consideration for surrendering the joint rights, such transaction being supply of services.
Facts of the case:
- The Applicant, Mr. Vilas Chandanmal Gandhi, was an owner of the land situated within the limits of PMC and wanted to develop the land jointly in collaboration with M/s. Amar Builders and Developers share the profits through distribution of sale proceeds after development of the land by way of construction of residential/ commercial projects.
- In terms of the agreement entered into, between the applicant and the developer the applicant assigned/ transferred the development rights in land to the Developer; the said assignment/ transfer of rights in land was for the purpose of construction of residential/ commercial project on the land, the Developer agreed to pay consideration in the form of 45% of the sale proceeds of the developed project, and the developer had given Rs. 3,60,00,000 to the Applicant as security deposit to be refunded within a month after completion of the project on the underlying land.
- The applicant surrendered the rights in the said land in favour of the PMC against which PMC awarded TDR’s/ Additional FSI as compensation vide issue of Development Right Certificates (DRC’s).
Issues on which ruling was obtained from AAR:
The applicant had sought the advance ruling on the issue whether GST is leviable on sale of TDR/ FSI received as consideration for surrendering the joint rights in land in terms of Development Control Regulations and granted in light of the article of agreement dated 18 December 2017 entered between the Applicant and PMC read with Development Control Regulations and if yes, what will be classification under GST and what will be applicable rate of GST.
Ruling of AAR:
The AAR ruled that 18% GST is leviable on sale of TDR or FSI received as consideration for surrendering the joint rights.
The applicant challenged the AAR’s order before AAAR.
Contention of the Appellant why there should be no GST on TDR:
- The Appellant submitted that as per definition of Land given in Bombay Land Revenue Code, 1879, the development rights in the land can be construed as land only, and therefore any transaction pertaining to sale of TDR would be sale of land and will be a “no supply” transaction being covered under Clause 5 of Schedule III of CGST Act and out of purview of the GST Law.
- The appellant further contended that TDR or FSI is akin to money.
- As per decision of ITAT in case of Income Tax officer v. Shri Prem Rattan Gupta, ITA No. 5803 / Mum /2009 , in relation of Section 50C of the Income tax Act, 1961 has decided that TDR is not land but a right arising out of land and thus an immoveable property.
Ruling of Maharashtra AAAR in regard to GST on TDR:
- We do not agree with the argument of the Applicant as Clause 5 speaks only of ‘land’ and ‘building’. Neither the GST Act nor the schedules define ‘land’ or choose to do that. The CGST Law does not make reference to any other law while mentioning ‘land ‘ in Schedule III. Exemptions need to be interpreted strictly in light of Supreme Court decision in case of ‘Dilip Kumar and Company’ (App 3327 of 2007 dated 30.7.2018). Thus the term ‘land’ has to be interpreted strictly and cannot be extended to cover ‘benefits arising out of land’.
- The transfer of TDR made for consideration in course or furtherance of business is supply of service and taxable as per provisions of CGST Act, 2017. We can say that the definition of ‘service’ under the CGST Law is wide and broad and defining TDR as service does not lead to any absurdity.
- TDR is a benefit arising out of land and not land itself . Therefore it is liable to tax.
- We do not agree with the submission of the Appellant that TDR is money. It is given in lieu of money and just because it is given in lieu of money it does not get the status of money.
In light of above deliberations, Maharashtra AAAR consisting of Sanjeev Kumar and Rajesh Kumar Sharma while rejecting the contention of the applicant upheld the AAR’s ruling and said that TDR or FSI would be leviable in GST under heading 9972 at the rate of 18% GST as prescribed under entry No. 16(iii) of Notification No. 11/2017- Central Tax (Rate), dated June 28, 2017.
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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.
