Land is a State subject as per Entry 18in List II of Seventh Schedule of the Constitution of India. Levies on sale of land and other immovable property has been an important source of revenue for the States. Sale of land has been expressly excluded from GST as per Schedule-III of CGST Act. However, transactions in immovable property are generally complex involving multiple persons and therefore, sometimes, they get intertwined with various other transactions or activities. Such other transactions then become the subject matter of scrutiny for fastening GST liability. Joint development agreements (JDAs) constitute one of the sources of dispute and revenue under GST. A recent ruling is analysed to spur further discussions on this subject.
The ruling is by Appellate Authority for Advance Rulings, Karnataka in the case of Maarq Spaces Pvt. Ltd.  116 taxmann.com 702 (AAAR-KARNATAKA). The Appellate AAR has upheld the ruling of AAR. Briefly, the appellant-developer is stated as engaged in development of land into plots and sale of such developed plots to prospective buyers. The landowners and the developer share the revenue from sale of land (developed plots) in the ratio of 75% and 25% respectively. Development work undertaken by the appellant include levelling of land, construction of roads and drains and provision of various civic amenities. The appellant was of the view that sale of land being the primary activity with development being incidental, GST was not liable to paid on the activity carried out by them.
The AAAR perused the clauses of Joint Development Agreement (JDA) entered into between the landowners and the appellant-developer. The appellant was authorised to develop the land into a residential layout and was given the right to survey, secure the property and carry out various activities using own men and materials. According to the AAAR, the primary purpose of the JDA was development of land and consideration for the same was in the form of share in revenue earned from sale of land/plots. The transaction was held to be not sale of land simplicitor but coupled with obligation to develop and provide amenities. The Authority held that the element of service of development was the dominant activity of the appellant and the same was liable to GST.
Nature of JDA
JDA, as the name indicates, refers to a joint venture. The parties involved are landowners and the developer. The transaction under examination in the ruling discussed in this article pertains to inter-se between the parties and not vis-à-vis third parties. When consideration is received in the form of revenue share by the developer, the same is for certain activity performed by him. The activity has been rendered in favour of landowners and therefore, the developer is entitled to such share on sale of land. Nature of such activity performed is not one of goods and not one of sale of land. The developer is not engaged in sale of land to landowner. If the activity does not relate to goods or immovable property per se, then the same may have to be categorised as a service.
If there is a service and consideration for such service, then GST becomes applicable. But in a JDA, both the parties are engaged in common endeavour i.e. sale of land. As per the agreement, both the parties have to perform certain obligations. Landowners shall obtain the necessary approvals for plans and drawings and developer shall level the land and convert the barren land into residential plots. Both the parties perform such obligations as per the JDA intended to result in sale of the plots for which consideration will be paid by the purchasers. The developer is not being paid by the landowner but by the buyer of the plot. If both the parties act together as seller of property, then extricating the obligation of the developer from such joint agreement and then assigning the revenue share from sale of land as consideration may not be unassailable.
Status of developer and receipt of consideration
In a JDA, the developer is an equal party like the landowner. With respect to the buyer of the plot, he is also a principal. But such statement may not be legally tenable in a transaction relating to immovable property. It is the landowner who has the title and who conveys such title to the buyer through an instrument of sale deed. The developer is not recognised as a party in such transaction. However, if power of attorney is given to such developer, then he is engaged in conveyance also but not as owner but only as an agent of the landowner. For the landowner, the developer develops the land into saleable plot and also markets the same with prospective buyer through advertisements. In the ruling discussed in this article also, the JDA indicates such activities being performed by the developer. As consideration need not necessarily flow from the service recipient in GST law but the amounts received from other parties will also be taken into account, the share out of sale proceeds (of land) can be treated as consideration for such activities performed by the developer.
But the issue may get complicated as the share in revenue represents proceeds of sale of land and not for services per se. Sale of land being out of GST, amount received for such sale cannot be subject to GST. However, as noted above, the developer not being the owner of the property, does not receive any consideration towards sale of land. The share in revenue is only a mode of payment for the services rendered by the developer to the landowners. The buyer is not entering into two agreements – one for purchase of land with landowners and another for development of land with the developer. He enters into a transaction of purchase of developed land with the landowners.
Schedule-I of CGST Act seeks to levy GST on supply or receipt of goods by agents on behalf of principal even when no consideration is involved. If services are provided by agents on behalf of principal without consideration, the same is not covered. When the developer draws the revenue share from the escrow account maintained in the bank as per the JDA, the amount is from sale of land but the right to draw such amount has arisen due to performance of activities like development of the land. Such activity is undertaken on principal-to-principal basis by the developer and concept of agency is not involved.
Is it a composite supply?
One of the arguments considered by the AAAR pertains to whether the transaction is one of composite supply. For such purpose, the authority, after analysing the definition in CGST Act, has concluded that sale of land could not be considered as an exempt supply as it is not a supply at all and combination of activities one of which is not a supply under GST law and another being a service, cannot be considered as a composite supply.
Composite supply arises when two or more taxable supplies are made. The conditions like natural bundling indicate that there are two supplies involved. In the case of JDAs, the only supply is that of development and marketing service provided by the developer to the landowner. The activities of developer are not being scrutinized for sale of land since such activity is not undertaken by him vis-à-vis the landowner. Two different transactions being undertaken between two different parties – sale of land by landowner to buyer and development of land by developer provided as service to landowner. In such a factual scenario, question of composite supply may not arise.
Characterisation of the activity performed from the perspective of consideration as against subject-matter of transaction will lead to different outcomes and therefore, such transactions get complicated. If consideration is taken as the basis for treating the activity as supply, reckoning the subject matter of sale of land as the basis will provide otherwise. The issue of taxability of development right has not arisen in this case because the JDA does not expressly identify, assign or transfer such rights to the developer. From the ruling, it appears that it is the landowners who will apply for necessary statutory permissions and approvals and therefore, as per applicable laws, they will enter into a relinquishment deed with the local authority in respect of common areas like road, park, etc., are concerned.
If the landowners develop the land themselves, appoint the developer as power of attorney who can execute the sale deed and then pay commission for effecting such sale on their behalf, then there may be a case to argue that what is received by the developer is directly related to sale of land and cannot be brought within the ambit of GST. The department may in this case argue that the developer has received an amount from landowners for facilitation of sale of land which is not sale of land per se. Unless the line is drawn between activities directly related to sale of land and those which are not, either through amendments or through judgments, the battle will have to be carried on.
Executing the transaction through an appropriate structure where both landowners and the developer jointly carry out the venture and having suitable clauses in the agreement to reflect the business as one vis-à-vis the buyer can be explored