The core contention in a dispute before the Telangana High Court revolved around the application of Goods and Services Tax (GST) to the transfer of development rights in property ownership. Central to this debate is the interpretation of clauses within the Joint Development Agreement (JDA) that governs the relationship between landowners and developers. By scrutinizing the provisions of the JDA, the distinction between service provision and direct property sale becomes clear, shedding light on the GST treatment of development rights. This analysis carries significant implications for both stakeholders and GST jurisprudence alike.

The petitioner, a construction company, lodged a petition in the Court, contending that when landowners transfer development rights to them via a Joint Development Agreement (JDA), it should be recognized as a land sale exempt from GST. Furthermore, the petitioner sought the Court's declaration of a specific GST notification as unconstitutional.

The petitioner, as a developer, executed a JDA with landowners to develop a plot of land measuring approximately 8.30 acres. The proposed project involved the construction of a composite block, with the petitioner specializing in real estate development and undertaking the construction of three towers.

The petition raised two significant issues.

a. Classification of Development Rights: Should the transfer of development rights be categorized as the transfer of immovable property subject to GST, or should it be treated as a service under GST Rules?

b. Equivalence of Transferring Rights: Can transferring development rights be equivalent to selling land outright?

The counsel contended that the disputed notification violated specific articles of the Constitution of India. He argued that it lacks clarity on how development rights are transferred, rendering it arbitrary and unconstitutional.

According to the counsel, the notification was issued without proper justification and did not adhere to legal principles. He emphasized that under the JDA, the end result is the landowners selling their land to the developer, who retains it for development.

The counsel asserted that the overall effect of the JDA should be considered, not just specific clauses. He argued that JDAs are typically structured so that landowners can sell their land and receive residential or commercial properties in return. Thus, JDAs should be treated like other conveyance transactions in the law, the counsel submitted.

The counsel argued that land sales are not taxed under the GST Act's Schedule III Entry 5. By signing the JDA, there is a significant transfer of development rights, effectively making it a land sale. Therefore, there should not be any tax, as the JDA is equivalent to a land sale, it was argued.

Moreover, the counsel highlighted that the disputed notification dated September 30, 2019 imposed GST on the transfer of development rights or construction services exchanged for those rights. He argued that the notification lacked legal validity as taxation cannot be unilaterally imposed through a notification, violating constitutional principles, and exceeding lawful authority.

Even if considered delegated legislation, it must comply with established legal frameworks, which the counsel asserted it fails to do. Thus, he contended that the issuance of the notification exceeded the authorities' powers.

The Counsel pointed out that GST law does not permit taxation expansion solely through notifications. He noted the absence of a clear method for calculating tax on development rights transfers and the lack of a defined tax rate for JDAs concerning such transfers.

Furthermore, he argued that the challenged notification constituted delegated legislation, which should not surpass the bounds of substantive law. The counsel cited various legal precedents to reinforce his argument.

The Tax Department's counsel countered the petitioner's arguments by asserting that the writ petition lacked merit and should be dismissed. Emphasizing that GST laws exempt land sales from taxation, the counsel argued against the petitioner's attempt to categorize a JDA as a straightforward land sale to avoid GST. Moreover, the Department's counsel stressed the importance of analysing specific clauses in the JDA to determine whether it qualifies as a sale of land or merely a transfer of development rights.

Several important clauses in the JDA are crucial for understanding the situation:

a. The first clause identified specific parts of non-agricultural land owned by individual landowners.

b. The developer, known for expertise in building commercial real estate, was appointed by the landowners to develop the land.

c. The developer was granted exclusive rights to enter and develop the land, along with the responsibility for covering development costs.

d. Clauses outlined the developer's right to construct, develop, and own a certain portion of the developed property.

e. The distribution of the developed area among the landowners is detailed, with specific percentages allocated to each.

f. Provisions were included for possible delays due to unexpected events and the resulting consequences, including the termination of the agreement.

According to the Department’s counsel, these clauses were critical to determine whether the JDA represents a sale of land or simply a transfer of development rights.

The Department’s counsel vehemently argued that upon scrutinizing the clauses of the JDA, especially those aforementioned, it became evident that there is no straightforward sale of property to the developer. Rather, it appeared that the landowner retained ownership and title rights, while the developer's role was confined to executing the JDA for land development.

Moreover, the Department’s counsel highlighted that the exemption from land sale tax, as stipulated in Entry 5 of Schedule III of the GST law, does not apply due to the absence of a clear indication of a land sale by the owner. The Department’s counsel also underscored the extensive powers vested in the GST Council by Article 279A of the Indian Constitution.

Citing various sections of the JDA, the Department’s counsel emphasized that these Sections delineate the developer's responsibilities, deadlines, and procedures during the JDA's implementation. According to the counsel, none of these Sections imply a direct sale of land from the landowner to the developer.

The JDA explicitly stated that the developer can only acquire ownership (sale) of the developer’s portion of the developed property from the landowners after fulfilling specific project milestones. This clause unequivocally indicated that signing the JDA does not automatically confer property rights to the developer.

In essence, the Department’s counsel reiterated that simply signing the JDA does not grant property rights to the developer outright. Certain conditions and milestones must be met before the developer obtains any rights to the developed property.

Drawing from the case of Commissioner of Income Tax v. Balbir Singh Maini, the Supreme Court's insights pertaining to the Income Tax Act offer pertinent parallels. The Court underscored that a JDA primarily fosters development without transferring ownership rights. It emphasized on the retention of ownership by the landowner throughout the JDA, with the developer's possession being specific and limited for development purposes. Consequently, the transaction does not constitute a transfer of ownership rights akin to actual ownership, as outlined in Section 2(47)(vi) of the Income Tax Act.

Notification No. 4 of 2018, dated January 25, 2018, amended by Notification No. 23/2019-Central Tax (Rate) dated September 30, 2019, primarily dictated the timing of tax payment for the transfer of development rights, rather than levying a charge at the time of transfer itself.

Its aim was to streamline the process for both landowners and developers, ensuring that taxation on the transfer of development rights occurs when the constructed area is handed over to the landowner upon project completion. Essentially, this notification deferred the taxation of development rights transfer until the developer delivers the developed area to the landowner, instead of imposing it immediately upon signing the JDA.

In the case of Super Poly Fabriks Limited v. Commissioner of Central Excise, Punjab, the Supreme Court emphasized the holistic interpretation of documents, considering the intentions and objectives of the parties involved. Merely relying on titles or specific activities mentioned in the document may not reveal its true meaning.

Upon scrutinizing the clauses in the JDA, the Court opined that it was clear that the petitioner did not necessarily acquire ownership rights upon signing. Ownership rights only materialize upon project completion and the issuance of a completion certificate.

At this juncture, the petitioner can sell the allocated area to recover its investment. Consequently, the JDA and the transfer of development rights do not inherently transfer ownership or title rights to the petitioner or developer.

Without substantial evidence proving otherwise, the transfer of development rights remained subject to GST and did not qualify for exemption under Entry 5 of Schedule-III of the GST Act, the Court held.

This ruling brings clear guidance for both developers and landowners on how development rights are treated under GST. It promotes a deeper understanding of legal nuances, guiding stakeholders navigate regulatory requirements effectively.

About the author: Ashoo Gupta is a Partner at Shardul Amarchand Mangaldas & Co.

Disclaimer: Views expressed are personal and not views of the firm or its members.