M/s Vidit Builders (“the Applicant”) is a partnership firm engaged in the business of real estate as a developer and is developing a colony by executing a joint development agreement on March 14, 2019, with the landowner M/s Star Construction. The Applicant will develop and provide common facilities such as the construction of concrete roads and compound walls, development of the garden, construction of drain and water supply system as well as erection of electric poles & transformers etc. With due permission of the Local Municipal Corporation, the Applicant will sell vacant plots to individual buyers and will not do any construction activity on these plots. No common facilities will be transferred/sold to buyers. After the development of all the above-mentioned common facilities; the local municipal corporation will review and provide completion certificate to the developer and the developer will hand over the colony to the municipal corporation for further maintenance.
Whether the activity performed by the Applicant is covered under para 5 of Schedule III of the Central Goods and Services Tax Act, 2017 (“CGST Act”) or classified as Works Contract and if covered within the ambit of Works Contract, then, how would valuation be done? Also, if the Residual Rules i.e. Rule 30/31 provided under the CGST Rules, 2017 (“the CGST Rule”) can be considered or not?
The Hon’ble Madhya Pradesh Advance Ruling Authority (“MPAAR”) passed the following ruling vide Order No. 02/2020 dated January 6, 2020:
- The land in question is under the mortgage of SBI, Jabalpur and the permission was taken from SBI for the development of the land and such permission was provided solely under the condition that the Applicant would enter into an agreement with the landowner only for the development of the land thus defining the scope of the work that is to be carried out by the Applicant. The agreement provides that the Applicant can enter into sale agreements however this activity is incidental to the main activity of the development of land. The sale is entrusted to the Applicant only because he has invested huge sums in the development of the land and for protecting his financial exposure in the matter. Here it becomes evident that the core competence of the Applicant is the development of land and not the sale of land. The landowner remains the landowner till the property is transferred to the purchaser.
- There are many other provisions in the agreement that the Applicant has no right over the land and consequently, he cannot claim to be engaged in the activity of the sale of land as envisaged in the provisions of entry at serial number 5 of said Schedule III. The provisions of this entry will apply only to those persons who are owners of the land and not to persons who are incidental to the sale of the land.
- The revenue-sharing portion of the agreement indicates that the Applicant gets an amount on the sale of each individual plot which shows that there are no fixed earmarked plots to which the Applicant can claim an entitlement. Further, the amount received on sale of the plots is credited to an escrow account and then only the same is divided. Further, the Applicant is not the owner of the plots and cannot claim the sale of plots as his supply.
- Therefore, the services provided by the Applicant are regarding the development of the site which includes civil construction and amenities regarding the site in order to make it ready for the purpose of residence. The services provided by the Applicant are based on an agreement signed between the landowner & the Applicant which comes under Works Contract.
- The Applicant receives consideration equal to 40% of the value at which each of the plots is sold. This amount constitutes consideration for services as provided by the Applicant. It is seen here that the Applicant does not get physical possession of 40% of the plots as understood by the Applicant. This shows that the consideration that the Applicant receives is in the form of money and not in the form of land. Therefore, in terms of Section 15 of the CGST Act, the Applicant receives the value of taxable supply made by them.
- Rule 31 of the CGST Rules is applicable in the present case, which provides that where the value of supply of goods or services or both cannot be determined under Rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of Section 15.
- Section 15 of the CGST Act provides that the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply where the supplier and the recipient are not related and the price is the sole consideration. The Applicant in the present case gets paid for their services only upon the sale of the plots which enables the landowners not to spend any financial resources to pay the Applicant for their services. Consideration for a service is the total value that the service provider gets in the deal and not what the service provider expends for provisioning of the service. The Applicant gets 40% of the amount collected from the plot purchasers and has no right in the title of the land and therefore cannot be considered as the seller of the plots so developed. Therefore, the entire amount received by them is liable to tax.
The Hon’ble MP AAR conclusively ruled that the activities performed by the Applicant amount to the supply of services under Works Contract Services wherein Rule 31 of the CGST Rules would be applicable and the value of supply would be equal to the amount received/receivable by the Applicant which is equal to 40% of the amount on which the plots are sold.
Para 5 of Schedule III of the CGST Act, 2017: Activities or Transactions which shall be treated neither as a Supply of Goods nor a Supply of Services
Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of the building.
Rule 31 of the CGST Rules, 2017: Residual Method for Determination of Value of Supply of Goods or Services or Both
Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:
Provided that in the case of a supply of services, the supplier may opt for this rule, ignoring rule 30.