Issues in Joint
Development
Agreement
-CA Keval Shah
September 05,
2015
Basics of Service Tax
Law
2
Framework
Dissecting the “CHARGE”
Service Tax shall
be levied at 14%
provided or
agreed to be
provided
on the value
in the taxable
territory
of all services
other than those
services
specified in the
negative list
by one person to
another
and collected in
such manner as
may be
prescribed
Service
means
any activity
and includes
declared service
shall not include
any activity
which
constitutes
merely
carried out by a
person for
another
transfer of title
in goods or
immoveable
property
for consideration
Transaction of
Deemed Sales
transaction in
money or
actionable claim
provision of
service by
employee to
employer
fees taken by
Court or Tribunal
Development
Agreements
5
Development Agreement
Landowner
Development Rights
Developer
Under constructed
Property
End
Customer
6
Development Rights
› Means
› Activity
› carried out by one person for another
› consideration
› Exclusion
› a transfer of title in goods or immovable property, by
way of sale, gift or in any other manner
7
Transfer in Title
CBEC Education Guide……….
2.6.1 What is the significance of the phrase ‘transfer
of title’?
‘Transfer of title’ means change in ownership. Mere
transfer of custody or possession over goods or immovable
property where ownership is not transferred does not
amount to transfer of title. For example giving the
property on rent or goods for use on hire would not
involve a transfer of title
8
Transfer in Title
CBEC Education Guide………
6.2.1 What would be the liability to pay service
tax on flats/houses agreed to be given by
builder/developer to the land owner towards the
land /development rights and to other buyers?
Here two important transactions are identifiable: (a)
sale of land by the landowner which is not a taxable
service and (b) construction service provided by the
builder/developer.
9
Judicial Precedents
› In Canbank Financial Services v. Custodian, 2004 (8) SCC 355 =
2004 (7) SC 507, it was held by the apex court that the word ‘Title’
generally used in the context to the property means a right in the
property. Title in a property connotes a bundle of rights
› ‘Title’ is a broad expression in law, which need not be always understood
as akin to ownership. The said expression conveys different forms of a
right to a property which can include right to possess such property. In
case of Rajendra Kumar v. Poosamal AIR 1975 Mad. 379 the
Hon’ble Madras HC has laid that ‘Title’ means a present right or interest
in an immovable property capable of contracting to convey and cannot
be understood as something equivalent to the process of making of title
10
Under Construction Flats
› Larsen & Toubro & Anr. vs. State of Karnataka &
Anr. [TS-156-SC-2013-NT
› upheld the levy of VAT on sale of under-construction flats on
the grounds that it involves an element of works-contract
› work was undertaken by the developer for and on behalf of the
purchaser, and not for himself and the owner of the land
› Article 366 (29A) (b) covers all genre of works contract and is
not limited to one specie of the contract
› The Court further clarified that the activity of construction
undertaken by the
› developer would be works contract only from the stage the
developer enters into a contract with the flat purchaser
11
Declared Services…66D
(b) construction of a complex, building, civil structure or a part
thereof, including a complex or building intended for sale to a buyer,
wholly or partly, except where the entire consideration is received
after issuance of completion-certificate by the competent authority
(h)
service portion in the execution of a works contract
Whether more specific would prevail over the general?
Whether service tax payable only after entering into
agreement?
12
Valuation & Credits
12.
Construction of a complex, building, civil
structure or a part thereof, intended for a
sale to a buyer, wholly or partly, except
where entire consideration is received after
issuance of completion certificate by the
competent authority,(a)
for a residential unit satisfying both the
following conditions, namely :(i)
the carpet area of the unit is less than
2000 square feet; and
(ii)
the amount charged for the unit is less
than rupees one crore
(b)
for other than the (a) above.
Taxable Portion of (i) CENVAT credit on
Service
inputs
used
for
providing
the
taxable service has
not
been
taken
under the provisions
of
the
CENVAT
Credit Rules, 2004
25
(ii) The value of land is
included in the amount
charged
from
the
service receiver
30
13
Joint Development Agreements
14
Model 1
Landowner
Developer
Construction
Activity
Contributes land
Joint
Venture
Under
constructed
Property
End
Customer
15
Taxability under Model 1
› Joint Venture to Pay VAT & Service Tax
› Need for a separate existing in order to
obtain registrations
› Payments made under separate categories
› In sync with Direct Taxes?
16
Model 2
Development Rights
Landowner
Developer
Allots Flats
Under
constructed
Property
End
Customer
17
Taxability under Model 2
› Transfer of Development Rights not to be
taxed in hands of LandOwner
› Sale to End Customer taxable in the hands
of Developer as per earlier understanding
› Allotment of flats to LandOwner will be
taxes under Service Tax Law
› Barter Transactions are included
› What shall be the value for flats allotted?
18
Section 67
Services
Valuation
–
Valuation
Consideration
of
Taxable
Wholly in
Money
Gross Amount
Charged
Wholly or
Partly not in
Money
Equivalent
Monetary
consideration
Not
Ascertainable
Value of
services
provided to
third parties
Market Value
as determined
19
CBEC Circular 151/2/2012-S.T., dated 10-2-2012
› (B) Valuation :
› (i) Value, in the case of
flats given to first category of service receiver, is
determinable in terms of section 67(1)(iii) read with rule 3(a) of Service Tax
(Determination of Value) Rules, 2006, as the consideration for these flats i.e.,
value of land/development rights in the land may not be ascertainable
ordinarily. Accordingly, the value of these flats would be equal to the value
of similar flats charged by the builder/developer from the second category of
service receivers. In case the prices of flats/houses undergo a change over the
period of sale (from the first sale of flat/house in the residential complex to the
last sale of the flat/house), the value of similar flats as are sold nearer to
the date on which land is being made available for construction should be
used for arriving at the value for the purpose of tax
20
Model 3
Allots Flats
Landowner
Under
constructed
Property
Developer
Construction Activity
End
Customer
21
Taxability under Model 3
› Construction service provided by Developer
is taxable
› Sale to End Customer taxable in hands of
Landowner as per earlier understanding
› CENVAT Credit
available
of
tax
paid
by
Builder
22
THANK YOU !