Deduction of ‘actual land-value’ from ‘transaction-value’ not allowed to builder/developer

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Categories: Advance Ruling
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The Hon’ble AAR, Gujarat in Re: Karma Buildcon [Case No.- GUJ/GAAR/R/33/2020 dated July 2, 2020] held that value of supply for transaction of supply of services to residential/commercial property with undivided rights of land is to be arrived in terms of deeming provision of Para 2 of Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017 (as amended) (“Services Rate Notification”). Further, deduction of actual value of land from the supply value cannot be allowed.

Facts:

Karma Buildcon (“the Applicant”) is engaged in the business of construction. For the purpose of the business they buy land and develop residential/ commercial property on that land. For the purpose, they engaged architects, consultants, structural engineers to prepare plan for the development of residential/commercial property. Further, the prescribed approval from various authorities are procured to develop residential/commercial property on such land.

The Applicant further submitted that on the basis of such plan and approvals they enter into the agreement with prospective buyers for such residential /commercial property. The agreements entered into are for inclusive of land or undivided share of land basis. The Applicant constructs such residential/commercial property by engaging labour, machinery for the purpose and transfers such property to the buyers.

Furthermore, argued that the cost of land that is being transferred to the buyers on inclusive of land or undivided share of land basis need to be allowed to be deducted as a whole as per actual value and not as provided in Services Rate Notification as one third (33.33%) of the value, because in Applicant’s case the cost of land is distinctly determinable and is more than one third (33.33%) of the consideration value.

Issue:

What will be the value of supply for the transaction of supply of services to residential/commercial property with undivided rights of land?

Held:

The Hon’ble AAR, Gujarat in Case No.- GUJ/GAAR/R/33/2020 dated July 2, 2020 held as under:

  • In para 2 of the Services Rate Notification (as amended), the value of land or undivided share of land required to be deducted from the total amount charged for the subject supply has been clearly provided.
  • Further, there is deemed provisions that the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.
  • Accordingly, the Applicant’s contention to allow the deduction of actual value of land from the supply value on the grounds that their land value is ascertainable and other grounds is not legal in terms of para 2 of Services Rate Notification (as amended).
  • Further, the reliance of Rule 18(A)(A) of the erstwhile Gujarat Value Added Tax Rules, 2006 is not warranted in the instant case since the Value Added Tax Act is no more in existence. The Value Added Tax Act does not have any legal value in determination of GST liability since the value of supply is to be arrived in terms of the provisions of the GST Act.
  • Thus, the Applicant is required to deduct one third value of land or undivided shares from the total value charged for the subject supply in terms of Para 2 of the Services Rate Notification (as amended).

Relevant provisions:

Para 2 of the Services Rate Notification:

2. In case of supply of service specified in column (3), in item (i); (i) (ia), (ib), (ic), (id), (ie) and  (if) against serial number 3 of the Table above, involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

Explanation:– For the purposes of this paragraph and paragraph 2A below, “total amount” means the sum total of,-

(a) consideration charged for aforesaid service; and

(b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sublease.

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