Demystifying the decision of Hon'ble HC on JDA transfers

 

Rahul Jain, Partner, M2K

 

The applicability of Goods and Services Tax (GST) on the transfer of development rights under Joint Development Agreements (JDAs) has been a contentious issue in recent legal discourse. This article aims to dissect the key legal principles and implications involved on the taxability of the Development rights in light of the decision of Prahitha Constructions Private Limited v. Union of India - 2024-VIL-152-TEL.

 

Background:

The petitioner interalia challenged the validity of an impugned notification that subjected the transfer of development rights to GST, contending that it violates various provisions of the Constitution.

 

Arguments by the Petitioner

Constitutional Challenge: The primary fulcrum of the argument from the petitioner was that Notification No.4/2018 as amended by Notification No. 23/2019 lacked a prescribed methodology to tax development rights, rendering it arbitrary and unconstitutional under Article 14, 246A and 265 of the Constitution.

 

Sale of Land: It was next contended that JDAs essentially result in the sale of land, which is not a supply under Schedule III Entry 5 of the GST Act, as the landowners transfer part of their property to developers in exchange for residential or commercial units.

 

Lack of Specific Provision: It was also buttressed that the impugned notification levied GST to transactions beyond the scope of land sale, without a specific provision determining the tax liability or rate for such transactions under the GST law.

 

Arguments by the Department

 

No Outright Sale of Land: Department emphasized that JDAs do not entail an outright sale of land, as ownership and title rights remain with the landowners, and developers are merely engaged to execute the JDA for development.

 

Authority of Notification - The impugned notification, issued under Article 279A of the Constitution, fell within the powers conferred and aims to tax transactions beyond land sale, such as the transfer of development rights.

 

Conditions of JDA: Department argued that the clauses of the JDA indicated that the transfer of rights is subject to certain milestones and conditions, refuting petitioner's assertion of an immediate and absolute transfer of ownership.

 

Findings of the Court

The primary issue in the writ petition is whether the transfer of development rights can be brought within the scope of GST. They key findings of the Court are summarized as under

 

• The Joint Development Agreement (JDA) between the landowners and the petitioner outlines the arrangement for developing the property.
• The petitioner is engaged to develop the land, but ownership, title, and possession remain with the landowners.
• The JDA does not result in an outright sale of land, as evidenced by clauses outlining conditions for completion, termination, and transfer of ownership.
• The transfer of development rights is a service provided by the landowners to the petitioner in exchange for development services.
• The JDA specifies that transfer of land or share of land happens only after completion of the project and issuance of a completion certificate.
• The GST Council recommended shifting the liability to pay GST on transfer of development rights to the developer, notified under reverse charge mechanism.
• The transfer of development rights and the subsequent sale of constructed property are distinct transactions, both amenable to GST.
• The circular dated 10.02.2012 under service tax regime is not relevant to the current dispute.
• GST is levied under Article 246A of the Constitution, and the government has the authority to impose tax on supplies, including the transfer of development rights.
• The notification in question deals with the timing of GST payment, not the imposition of tax on transfer of development rights.
• The JDA, when read in its entirety, does not indicate an automatic transfer of ownership to the petitioner.
• Without substantial evidence of ownership transfer, the transfer of development rights is subject to GST and cannot be exempted under Entry 5 of Schedule III of the GST Act.
• The powers conferred upon the GST Council and the subsequent notification clarifying GST applicability on transfer of development rights support the validity of the notification challenged in the petition.

 

Conclusion:

The legal analysis underscores the complexity of the issue and the competing interpretations of JDAs in the context of GST law. With the decision of one High Court directly on the issue, it is a opportune time for the sector to revisit their positions.

 

[Date: 27/02/2024]

 

(The views expressed in this article are strictly personal.)