HC holds transfer of development rights by landowner to developer under JDA is exigible to GST

This Tax Alert summarizes a recent judgement of the Telangana High Court (HC)[1]on whether transfer of development rights pursuant to joint development agreement (JDA) can be treated as outright sale of land and hence, outside the purview of Goods and Services Tax (GST).

Taxpayer is engaged in construction of properties and entered into JDA for development of land in exchange of undivided share of land in the developed property. It filed a writ petition before the HC challenging the levy of GST on transfer of development rights by landowners to developer.

Key observations of the HC are:

• Mere execution of JDA for development of land by itself would not mean that the right, title and ownership of the property or a portion of that property stands transferred in the name of the developer.
  
• The title of the property stands vested with the landowners and it is only by way of a separate conveyance deed, that too, after the completion of development activity, the undivided share of land to the extent the developer is entitled could be transferred.
• Thus, the contention that JDA eventually results in sale of land is incorrect and misleading.
• Further, Notification No. 4/2018 - Central tax (Rate) merely deals with time of supply of transfer of development rights which always was taxable since the introduction of GST. Taking Article 246A of the Constitution and extraordinary powers of the GST Council into consideration, the challenge to the Notification can safely held to be devoid of merits.

Basis above, HC held that transfer of development rights is not akin to sale of land and hence, exigible to GST.   

Comments:

• Since the issue of taxability of development rights is pending before other HCs also, the matter may not be said to be settled with this ruling. Further, the same could be challenged from the perspective of constitutional power.
  
• It is relevant to note that the definition of ‘land’ under other statutes like Land Acquisition Act, 1894 and Andhra Pradesh Land Grabbing (Prohibition) Act, 1982 was not referred. In the case of Safiya Bee v. Mohd. Vajahath Hussain, Supreme Court observed that ‘land’ includes benefits to arise out of the land considering definition of land as per section 2(c) of Andhra Pradesh Land Grabbing (Prohibition) Act, 1982.
• Considering the provisions of the erstwhile service tax law, Chandigarh CESTAT had held that service tax was not payable on transfer of development rights [2019-TIOL-1514-CESTAT-CHD].
• It is pertinent to note that w.e.f. 1 April 2019, exemption has been provided to supply of development rights by landowner to developer for construction of residential apartments subject to certain conditions.

[1] TS-60-HC(TEL)-2024