CASE LAW UPDATE

"Consideration received on the sale of flats received after the issuance of completion certificate is exempted from GST."

[Citation - AAR- Karnataka, Sri. B.R. Sridhar, ruling no: KAR ADRG 55/2020, dated 07 November 2020]

Facts of the case

• Mr B.R. Sridhar ("the applicant") entered into a Joint Development Agreement dated 19 May 2016 ('JDA') with M/s. Suprabhat Constructions (Developer) granting authorization for construction of residential flats by incurring the necessary cost.
•  Further, it was agreed that, upon the development of the said property, the applicant is entitled to 40% share of undivided right, title and interest in the land proportionate to a super built-up area along with 40% of car parking spaces.
• Moreover, the applicant has provided an irrevocable license to the developer to complete the project. Till completion, the developer's share is entirely conveyed to developer or his nominees. The developer shall at its sole costs, expense and responsibility, develop the schedule property as per the specifications set out therein and the commitment to obtain conversion orders, construction plans and other permissions from the respective authorities.
• The developer is liable to pay GST on construction service (construction of complex) intended for sale to a buyer, wholly or partly, at the rate of 18% in terms of the notification no:11/2017-CT(R) dated 28 June 2017 as amended by notification no:04/2018 CT(R) dated 25 January 2018. Further, the valuation of the services is to be determined in terms of paragraph 2 of the Notification No. 11/2017-CT(R) dated 28 June 2017, before 01 April 2019.

Question for consideration

Whether the total amounts received by the taxpayer towards the advance or sale consideration of the flats fallen to his share @ 40% in terms of the JDA and the following area sharing agreement are amenable for payment of GST since the taxpayer has sold or agreed to sell or be gifted, the flats after obtaining occupancy certificate dated 26 August 2019 and that the taxpayer has not received any part of sale consideration before the said date of occupancy certificate, thus falling under the Entry No. 5 of Schedule III of GST Act, 2017 read with Notification No. 11/2017-CT(R) dated 28 June 2017 and the corresponding provisions of SGST Act, 2017?

Applicant's Submissions

• The taxpayer submitted that the liability to pay GST would not arise as the taxpayer has not entered any agreement with prospective buyers before receiving the completion certificate from the competent authority, i.e. BBMP.
• The taxpayer further submitted that clause 1.7 of area sharing deal restricts the right to execute any sale agreements or any conveyancing deeds till the taxpayer takes over their units and the occupancy certificate is issued. Hence, the taxpayer had no occasion to enter into any transaction for transferring his right, title or interest in respect of the share of the flats till the occupancy certificate is issued by the concerned authority.
•  Given the above, the applicant contended that there is no liability to pay GST in respect of the 40% of the super built area received, in terms of notification no:11/2017-CT(R) dated 28 June 2017 as it stood before 01 April 2019 and in terms of notification no:4/2018 CT(R) dated 25 January 2018.
• The applicant further submitted that the transaction of sale of residential flat amounts to "sale of land" and the same is neither a supply of goods nor supply of services, in terms of entry no:5 of schedule III. Also highlighted that the time of supply of service as per section 13(2)(c) is receipt of the service from the developer reflected in his books of accounts based on contractual obligations mentioned at JDA and area sharing agreement and the date on which developer made an application for issue of occupancy certificate.

Findings and Observations

• The AAR observed that since the share of residential flat have been handed over by the developer after the issuance of the completion/occupation certificate dated 26 August 2019 and also clause 1.7 of the area sharing agreement restrict the right of the taxpayer to execute any sale agreements or any conveyancing deeds till the issuance of the completion certificate, the sale of said flats is not exigible to GST, if and only if they are sold after issuance of completion/occupancy certificate, in which case the said transaction is to be treated neither as a supply of good nor supply of services, in terms of clause 5 of Schedule III of the GST Act. 
• The AAR also placed on record that it is an admitted fact that the developer had the exclusive right of marketing the entire project. The taxpayer is silent about the fact that whether the developer had executed any sale deeds on behalfs of the taxpayer in respect of the taxpayer's share of units/flats. 
• Thus, if the taxpayer or the developer on behalf of the taxpayer have sold the taxpayer's share of units/flats before issuance of the completion certificate, then the transaction amount to supply of "Works Contract Service" are liable to taxGST. The value of the supply, as mentioned earlier, is to be ascertained from the open market and would be equal to the open market value as per rule 27 of the CGST Rules, 2017. 
• Further, it is also clarified vide notification no:4/2019-CT(R) dated 29 March 2019 at paragraph (iii)IB, which states that "value of a portion of the residential / commercial apartment remaining un-booked on date of issuance of the completion certificate or the first occupation, as case may be, shall be deemed to be equal to the value of a similar apartment charged by the promoter nearest to date of issuance of completion certificate or first occupation. 
• The AAR also stated that the time of supply in the instant case would be the time at which the developer to the taxpayer's hands over the constructed flats.

Ruling by the AAR

The amounts received by the applicant, either by himself or through his agents, towards the sale of their share of flats, are not eligible to GST, if and only if the entire consideration related to such sale of apartments is received after the issuance of Completion Certificate dated 26.08.2019, as the said activities have treated neither supply of goods nor supply of service in terms of schedule III of the CGST Act 2017 subject to Clause 5(b) of the Schedule-II of the CGST Act, 2017.

In conclusion, as per the ruling by AAR-Karnataka, consideration received on the sale of flats after the issuance of the completion certificate is exempt from GST, provided that the entire consideration is received after the certificate's issuance. [AAR- Karnataka, Sri. B.R. Sridhar, ruling no: KAR ADRG 55/2020, dated 07 November 2020]

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Disclaimer: The information given in this article is for general guidance to the readers. This information should not be sought as a substitute for legal opinion.