Ser­vice Tax on Trans­fer of De­vel­op­ment Rights of Land – A De­tailed Le­gal Anal­y­sis

Ser­vice tax leg­is­la­tion has seen a lot many changes from the days it was in­tro­duced and has al­ways been evolv­ing to en­sure ef­fec­tive rev­enue col­lec­tion. A large num­ber of is­sues tend to be mat­ter of dis­agree­ment be­tween the rev­enue au­thor­i­ties, trade at l

Accommodation Times - - Front Page - By Ankit Gul­gu­lia (Jain)

In­tro­duc­tion to Real Es­tate Prac­tice – De­vel­op­ment Rights

The Real es­tate sec­tor of the coun­try is grow­ing at an ex­po­nen­tial way and hous­ing is the one of the cru­cial ne­ces­sity of ev­ery cit­i­zen of the coun­try. With the de­vel­op­ment in the real es­tate sec­tor the most adopted model re­mains to be de­vel­oper – land owner – cus­tomer model. There are ma­jorly two rea­sons for adopt­ing this model:a. The de­vel­oper company it­self some­times would be ca­pa­ble to ac­quire the com­plete land but can­not do so due to land ceil­ing pro­vi­sions ap­pli­ca­ble to the state. In such sce­nar­ios dif­fer­ent group com­pa­nies buy the land and pool their de­vel­op­ment rights to a sin­gle de­vel­oper company. b. In other case, on the merit that in­vest­ment re­duces dras­ti­cally for both the de­vel­oper and land owner and it is mu­tu­ally ben­e­fi­cial sit­u­a­tion. The Model The model of op­er­a­tion in such a sce­nario is as un­der:a) The land owner shall ac­quire land on which the de­vel­op­ment is to be un­der­taken. The De­vel­oper en­ters into an agree­ment with land owner. b) Pur­suant to this agree­ment, land owner trans­fers his ‘De­vel­op­ment Rights’ to the de­vel­oper. c) Th­ese de­vel­op­ment rights are gen­er­ally trans­ferred to the de­vel­oper per­ma­nently, ex­clu­sively and on ir­re­vo­ca­ble ba­sis. d) The con­sid­er­a­tion charged by land owner for such trans­fer of de­vel­op­ment rights may be in pure mon­e­tary terms or may be as a rev­enue share aris­ing out of the sale pro­ceeds of the project by the de­vel­oper. e) The de­vel­op­ment rights of the land en­ti­tle the de­vel­oper to en­ter the land, de­velop the land, ob­tain li­cense for land con­ver­sion / de­vel­op­ment, sell the units of the projects and en­ter into flat buyer’s agree­ment with the buy­ers.

The Is­sue The is­sue that this ar­ti­cle aims to an­a­lyze and dis­cuss is the tax­a­bil­ity of trans­fer of de­vel­op­ment rights by land owner to de­vel­oper un­der the ser­vice tax laws. Whether such trans­fer of de­vel­op­ment rights is li­able to ser­vice tax? It is learnt that ser­vice tax au­thor­i­ties have con­ducted search op­er­a­tions against few de­vel­op­ers and land own­ers and de­manded ser­vice tax for trans­fer of de­vel­op­ment rights. They hold a view that trans­fer of de­vel­op­ment rights is li­able to ser­vice tax. Even DGCEI has booked case on one of the lead­ers of Real Es­tate in­dus­try in Delhi / NCR on the same is­sue al­leg­ing non-pay­ment of ser­vice tax over trans­fer of de­vel­op­ment rights. {Source: – Me­dia}

What are De­vel­op­ment Rights? De­vel­op­ment right is fun­da­men­tally a right to de­velop the land for agri­cul­tural , res­i­den­tial or com­mer­cial use. Es­sen­tially, land like any other as­set is a bun­dle of sev­eral rights that ac­crues to it. Sev­eral rights one may iden­tify with land are de­vel­op­ment rights, pos­ses­sion right, cul­ti­va­tion right etc. By trans­fer­ring the de­vel­op­ment rights it shall not re­sult into trans­fer of own­er­ship of the land in toto but only the as­pec­tual right to de­velop the land. Tax­a­bil­ity prior to 1st July, 2014 {Prior to Neg­a­tive List Regime} Prior to neg­a­tive list regime a ser­vice was li­able to ser­vice tax only if it was cov­ered in the spec­i­fied set of ser­vices on which ser­vice tax was ap­pli­ca­ble. Out of sev­eral ser­vices re­lated to real es­tate in­dus­try in­clud­ing com­mer­cial con­struc­tion, real es­tate agent or pref­er­en­tial lo­ca­tion ser­vices the said ac­tiv­ity of trans­fer of de­vel­op­ment rights finds near­est tax­a­bil­ity con­tentions in ‘Rent­ing of Im­mov­able Prop­erty”. Whether it was tax­able un­der this cat­e­gory or not fol­lows in this dis­cus­sion. As per sec­tion 65(105)(zzzz), Any ser­vices pro­vided or to be pro­vided to any per­son, by any other per­son, by rent­ing of im­mov­able prop­erty or any other ser­vice in relation to such rent­ing, for use in the course of or, for fur­ther­ance

of, business or com­merce “Im­mov­able prop­erty” in­cludes— (i) build­ing and part of a build­ing, and the land ap­pur­tenant thereto; (ii) land in­ci­den­tal to the use of such build­ing or part of a build­ing; (iii) the common or shared ar­eas and fa­cil­i­ties re­lat­ing thereto; and (iv) in case of a build­ing lo­cated in a com­plex or an in­dus­trial es­tate, all common ar­eas and fa­cil­i­ties re­lat­ing thereto, within such com­plex or es­tate, but does not in­cludea. va­cant land solely used for agri­cul­ture, aqua­cul­ture, farm­ing, forestry, an­i­mal hus­bandry, min­ing pur­poses b. va­cant land, whether or not hav­ing fa­cil­i­ties clearly in­ci­den­tal to the use of such va­cant land; c. land used for ed­u­ca­tional, sports, cir- cus, en­ter­tain­ment and park­ing pur­poses; and d. build­ing used solely for res­i­den­tial pur­poses and build­ings used for the pur­poses of ac­com­mo­da­tion, in­clud­ing ho­tels, hos­tels, board­ing houses, hol­i­day ac­com­mo­da­tion, tents, camp­ing fa­cil­i­ties (v) va­cant land, given on lease or li­cense for con­struc­tion of build­ing or tem­po­rary struc­ture at a later stage to be used for

fur­ther­ance of business or com­merce; Now, to un­der­stand the tax­a­bil­ity of the trans­fer of de­vel­op­ment rights it is im­per­a­tive for us to dis­cuss that whether ir­re­vo­ca­ble trans­fer of de­vel­op­ment right would tan­ta­mount to lease or li­cense of va­cant land.

Lease and Li­cense Sec­tion 105 of Trans­fer of Prop­erty

Act, 1882 de­fines lease as “A lease of im­mov­able prop­erty is a trans­fer of a right to en­joy such prop­erty, made for

a cer­tain time, ex­press or im­plied, or in per­pe­tu­ity, in con­sid­er­a­tion of a price paid or promised, or of money, a share of crops, ser­vice or any other thing of value, to be ren­dered pe­ri­od­i­cally or on

The ser­vice tax am­bit was en­hanced sig­nif­i­cantly with the in­cep­tion of neg­a­tive list regime w.e.f 1st July, 2012. Un­der this regime all the ac­tiv­i­ties are li­able to ser­vice tax ex­cept those which are out­side the am­bit of def­i­ni­tion of ser­vice or are cov­ered in neg­a­tive list (sec­tion 66D) or un­der mega ex­emp­tion no­ti­fi­ca­tion (Not. 25/2012-ST as amended). Hence all other ac­tiv­i­ties not cov­ered above gets

tax­able re­sult­ing in en­larg­ing ser­vice tax’s scope dras­ti­cally.

spec­i­fied oc­ca­sions to the trans­feror by the trans­feree, who ac­cepts the trans­fer on such terms” Es­sen­tially the pe­ri­od­ic­ity, per­pe­tu­ity and right to en­joy such prop­erty for cer­tain time are the main el­e­ments of a lease. In case of Jaswantsinh Mathuras­inh & anor v. Ahmed­abad Mu­nic­i­pal Corpn

& ors (1992) 1 SCC 5 it was held by that “A lease cre­ates a right or an in­ter­est in the en­joy­ment of demised prop­erty and a ten­ant or sub-ten­ant is en­ti­tled to re­main in pos­ses­sion thereof un­til the lease is

duly ter­mi­nated, and evic­tion takes place in ac­cor­dance with law.” A li­cense is de­fined in Sec­tion 52 of In­dian Ease­ments Act 1882 as ‘a right to do or con­tinue to do, in or upon the im­mov­able prop­erty of the grantor, some­thing which would in the ab­sence of such right be un­law­ful, such right does not amount to an ease­ment or an in­ter­est in the prop­erty. {Mus­kett v. Hill (1839) 5 Bing (HC) 694 } In As­so­ci­ated Ho­tels of In­dia v. R N

Kapoor {AIR 1959 SC 1262}, it was held that “The fol­low­ing propo­si­tions may, there­fore, be taken as well-es­tab­lished: (1) To as­cer­tain whether a doc­u­ment cre­ates a li­cence or lease, the sub­stance of the doc­u­ment must be pre­ferred to the form ; (2) the real test is the in­ten­tion of the par­tieswhether they in­tended to cre­ate a lease or a li­cence; (3) if the doc­u­ment cre­ates an in­ter­est in the prop­erty, it is a lease; but, if it only per­mits another to make use of the prop­erty, of which the le­gal pos­ses­sion con­tin­ues with the owner, it is a li­cence; and (4) if un­der the doc­u­ment a party gets ex­clu­sive pos­ses­sion of the prop­erty, prima fa­cie, he is con­sid­ered to be a ten­ant; but cir­cum­stances may be es­tab­lished which neg­a­tive the in­ten­tion to cre­ate a lease.” In a catena of judge­ments in­clud­ing Qudraiul­lah v. Mu­nic­i­pal Board Bareily (1974) 1 SCC 202 ; Ra­jbir Kaur v. S Chokosiri & Co. AIR 1988 SC 1845 and sev­eral oth­ers, the fol­low­ing prin­ci­ples to un­der­stand the con­cept of lease and li­cense has been seen as good law :“There is no sim­ple lit­mus test for dis­tin­guish­ing a lease from a li­cense. The character of the trans­ac­tion turns on the

oper­a­tive in­tent of the par­ties. If in­ter­est in the im­mov­able prop­erty, en­ti­tling the

trans­feree to its en­joy­ment, is cre­ated, it is a lease; If per­mis­sion to use land with­out the right to ex­clu­sive pos­ses­sion is alone granted, the trans­ac­tion is a li­cense” In MN Club­wala v. Fida Hus­sain Sa­heb AIR 1965 SC 610, it has been held that the the­ory of ex­clu­sive pos­ses­sion is a mat­ter of con­sid­er­able sig­nif­i­cance in de­cid­ing whether the trans­ac­tion is a lease or a li­cense. Whether Trans­fer of De­vel­op­ment rights is lease or li­cense of Va­cant Land Based on above dis­cus­sion, two con­clu­sions can be carved, a) Per­ma­nent & Ir­re­vo­ca­ble Trans­fer of De­vel­op­ment Rights is not a trans­ac­tion of Lease • Lease gives re­vo­ca­ble right to en­joy prop­erty to lessee, while in case of trans­fer of de­vel­op­ment rights (TDR) the right is trans­ferred per­ma­nently and ir­re­vo­ca­bly. • Lease gives right to en­joy while TDR give right to de­velop. • Lessor re­gains pos­ses­sion after lease term, while in TDR it is not the case. • Lease rights do not per­mit de­vel­op­ment but mere pos­ses­sion, while TDR per­mits de­vel­op­ment. • Lease in­volves re­cur­ring com­pen­sa­tion, while TDR in­volves fixed and gen­er­ally sin­gle com­pen­sa­tion. b) Per­ma­nent & Ir­re­vo­ca­ble Trans­fer of De­vel­op­ment Rights is not a trans­ac­tion of Li­cense • Li­cense can­not cre­ate in­ter­est in prop­erty while TDR cre­ates in­ter­est. • Li­censee can­not trans­fer the prod­uct while un­der TDR the de­vel­op­ers can en­ter in flat buy­ers agree­ment with the cus­tomers.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.