23 July 2019

Guest Article- Tax ZOne

Taxability of Development rights – A Pandora’s Box



Now that GST has survived its first year in the Indian economy, the issue of taxability of development rights is awaiting clarity. Being the most debated topic in past few months, it has invited mixed views from one and all. The controversy has resulted in a scenario wherein people have started avoiding joint development agreements.



Development Right is a right given to a developer to develop the land without transfer of property in land. Now that GST has survived its first year in the Indian economy, the issue of taxability of development rights is awaiting clarity. Being the most debated topic in past few months, it has invited mixed views from one and all. The controversy has resulted in a scenario wherein people have started avoiding joint development agreements. This is because the stakes are high and the industry has already suffered alot of trauma from the tax authorities in the past especially by way of retrospective amendments.  Taking all these facts into account, in this article, we have made an attempt to decode the taxability of development rights as per the Indian Constitution and the GST laws in place.



The Parliament and the States are jointly deriving their powers to levy GST from Article 246A of the Constitution of India.


Article 246A is reproduced below:- “Article 246A - (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.


(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”

Article 246A empowers Center and State to levy tax on Goods and Services. Goods and Services taxis defined in Article 366 of the Constitution. The definition is reproduced below:-

‘(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;’

The terms goods and services are defined as:-

‘(12) “goods” includes all materials, commodities and articles;’

‘(26A) “Services” means anything other than goods;’

The definition of goods includes all sorts of movable properties and services includes anything which are not goods.



In exercise of the powers prescribed in Article 246A, the CGST, IGST and SGST Acts have been passed. The preamble of these Acts describe GST as a levy of tax on goods and services. The definition of goods and services under GST Act differs from theone mentioned under the Constitution. Goods and services under GST are defined as:-


“Section 2(52):-  “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;”


“Section 2(102) :- “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;”



Let’s now see what has resulted into creation of a controversy:-



Government had issued a notification differing time of supply for transfer of development rights in exchange of constructed space. Notification 4/2018-CGST (Rate) dated 25.01.2018 notifies that the liability to pay in case of transfer of development rights in exchange of constructed space shall be the date of allotment of constructed complex i.e. the letter of allotment issued by the developer after the construction is complete. The notification clearly expounds the Government’s intent to tax the development rights by treating it as a service. This leads us to a conclusion that the Lawmakers are enlarging the definition of service, to cover everything that lacks movability, as a service including immovable properties. This may sound strange but can they do so?


The problem seems to have arisen because of usage of the word “anything”in the definition of Service, which has created a lot of confusion. When it is said ‘anything’ other than goods is service, it is important to know what is the meaning of ‘anything’. Whether anything means everything? If so everything other than goods is service and accordingly liable for GST unless exempted. It is important to look into the meaning of service from GST perspective. To understand what service is, it is more important to understand the term ‘anything’.


•             Any is not limited to one [Gariner v. Colyer (1864) 10 LT 715, per Cockburn CJ].

•             The word ‘any’ in the context can mean ‘all’ but also mean ‘some’ (1952) 2 All ER. 548 (Barron v. Littman).

•             The word has a diversity of meanings and may be employed to indicate “all” or “every” as well as “some” or “one” and its meaning in a given statute depends upon the context and the subject-matter of the statute. Sahyadri SSK Ltd V. CCE, Pune 2003(153) ELT 18 (S.C.)

•             Recently the Hon. Apex Court, in the case of Govt of Delhi V. UOI, while deciding on the executive powers of the Lt. Governor of Delhi, analysed the meaning of ‘any’ and ‘anything’.




The relevant paras are reproduced herein below;


224………It has been highlighted in the earlier part of this judgment that while interpreting a constitutional provision and construing the meaning of specific word(s) occurring in a constitutional provision, the Court must read the same in the context in which the word(s) occurs by referring to the annexing words of the said provision and also bearing in mind the concepts that we have adverted to. As regards the importance of context while deciphering the true meaning and importation of a term, Austin has made the following observations: “When I see the word “any” in a statute, Immediately know it’s unlikely to mean “anything” in the universe. Any” will have a limitation on it, depending on the context. When my wife says, “there isn’t any butter.” I understand that she’s talking about what is in our refrigerator, not worldwide. We look at context over and over, in life and in law.”



225. In this context, the observations made in the case of Small v. United States are relevant to be noted:” The question before us is whether the statutory reference “convicted in any court” includes a conviction entered in a foreign court. The word “any” considered alone cannot answer this question. In ordinary life, a speaker who says, “I’ll see any film,” may or may not mean to include films shown in another city. In law a legislature that uses the statutory phrase “’any person’” mayor may not mean to include “’persons’” outside “the jurisdiction of the state.”



227. At home, it has also been acknowledged that the word ‘any’ can have different meanings depending on the context in which it has been used and the Courts must not mechanically interpret it to mean ‘everything’. In Shri Balaganesan Metals v. M.N. Shanmugham Chetty and others87, this Court has observed:” The word “any” has the following meaning.


Some; one out of many; an indefinite number. One indiscriminately of whatever kind or quantity.” Word “any” has a diversity of meaning and may be employed to indicate “all” or “every” as well as “some” or “one” and its meaning in a given statute.” It is often synonymous with “either”, “every” or “all”. Its generality may be restricted by context; (Black’s Law Dictionary; Fifth Edition).”



233. It has to be clearly understood that though ‘any’ may not mean ‘every’, yet how it should be understood is extremely significant.……..”



From the above, it is clear that ‘anything’ cannot be ‘everything’ always. ‘Anything’ needs to be understood depending upon the context where it is being used. While interpreting any statute taking the contextual meaning is very important.



Let us also concede the fact that it is very difficult to define services. In such situation, a prudent legislature must not define something which is impossible to define. In every statue, just a handful words are defined, and definition of all other words are left for judiciary. There would have been nothing wrong if services may not have been defined in the Statue, rather than defining in such manner. Such definitions create more problems than they solve.



Further, let us look at the decision of the Supreme Court in the case of Lucknow Development Authority v. M.K. Gupta [1994] 1 SCC 243, wherein the following observation is found:-



“4. What is the meaning of the word ‘service’? Does it extend to deficiency in the building of a house or flat? Can a complaint be filed under the Act against the statutory authority or a builder or contractor for any deficiency in respect of such property. The answer to all this depend on understanding of the word ‘service’. The term has variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc. The concept of service thus is very wide. How it should be understood and what it means depends in the context in which it has been used in an enactment....”



Let us go a step further and look into the intent of implementation of GST. Statements of Objects and Reasons of CGST Act, 2017, provides the following:-


“In view of the aforesaid difficulties, all the above mentioned taxes are proposed to be subsumed in a single tax called the goods and services tax which will be levied on supply of goods or services or both at each stage of supply chain starting from manufacture or import and till the last retail level. So, any tax that is presently being levied by the Central Government or the State Governments on the supply of goods or services is going to be converged in goods and services tax which is proposed to be a dual levy where the Central Government will levy and collect tax in the form of central goods and services tax and the State Government will levy and collect tax in the form of state goods and services tax on intra-State supply of goods or services or both.”



The object, as envisaged behind implementation of GST was mere consolidation of taxes. Immovable property which was not taxable in earlier regime cannot be intended to be taxed under GST by merely stretching the definition of services. If the legislature intended to do so, it should have added a separate deeming fiction, for which it was very well empowered. Further, this intent is also spelt out from the definition of works contract.



The expression “works contract” is defined under Section 2(119) of CGST Act, 2017. The definition is, “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property……...



The definition covers the activities performed in relation to or for bringing into existence an immovable property. If the intention of legislature was to include the immovable property in the GST net, the definition would have been different.



For example: - A contract of installation of a machinery (assuming it to be an immovable property) can-not be classified as goods and it can-not be classified as service. The only thing that can be eligible to GST in this transaction is the activity of “installation” of an immovable property.



It is interesting to note that India is not the only country to have such a wider definition of “Service”. Article 24 of the COUNCIL DIRECTIVE 2006/112/EC of 28 November 2006 on the common system of Value Added Tax of the Council of European Union also defines supply of service in the same way. It states that - ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.



The European Union has very wide definition of services however, the transactions in immovable properties are treated as supply of goods by specific insertion. The irony is that in India, the authority is intending to tax immovable property in the form of development rights without any specific insertion. But the question which may arise is that whether the constitution approves the inclusion of development rights in the tax net?



In the pre-GST regime, the distribution of powers of taxation were governed by the three lists prescribed in Schedule VII of the Constitution. The 101st Constitutional Amendment Act introduced Article 246A. Post GST, the taxing powers are derived from Article 246A read with the three lists prescribed under Schedule VII of the Constitution.



It is well settled that if any subject is not covered under List II and List III, the Parliament is empowered to ley tax on such subject. This has been upheld by the Apex Court in the case of Union of India Vs. Harbhajan Singh Dhillon as reported in (1971) 2 SCC 779 wherein it was held that only question to be asked while examining the legislative competence of Parliament with regard to a particular enactment is: Is the matter sought to be legislated or included in List II or in List III or is the tax sought to be levied mentioned in List II or in List III.



There are two relevant entries in List II which needs our attention when it comes to subjects related to real estate sector. These are:-


“Entry 18-  Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization.”



“Entry 49- Taxes on lands and buildings.”


The subject matters in lists specified in Schedule VII of the Constitution is bifurcated in two categories viz. the fields of legislation and the fields of taxation. In the case of State Of West Bengal vs Kesoram Industries Ltd. And Ors as reported in Appeal (civil) 1532 of 1993, the Apex Court has held that:-



(1) the various entries in the three Lists are not ‘powers’ of legislation but ‘fields’ of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States.



 (3) Taxation is considered to be a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power.



Applying the above stated principle pronounced by the Apex Court, Entry 18 is cloaked as a legislative entry and entry 49 covers the taxing powers and the scope of entry 49 is not affected by the scope pronounced by the legislative entry. So the question that is relevant for the interpretation of Entry 49 of List II is what is the scope of the word “land” covered therein? Will it cover development rights as well?



The Constitution has not explicitly defined land. As per Article 367(1) of the Constitution, Unless the context otherwise requires, the General Clauses Act, 1897 , shall, subject to any adaptations and modifications that may be made therein under Article 372, apply for the interpretation of this Constitution as it applies for the interpretation of an Act of the Legislature of the Dominion of India. Accordingly, one has to refer General Clauses Act for the meaning of those expressions which remains undefined under the Constitution. The expression land is not defined even under the General Clauses Act.



When an expression is not defined under the Constitution and General Clauses Act, the definition may be borrowed from other statues enacted by the parliament. Accordingly, we may refer to Section 3(a) of Land Acquisition Act, 1894 or Section 3(4) of The Gujarat Land Revenue Code, 1879. The definition is as reproduced below:-


“land includes benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth;”


The expression land under the said Act covers benefits arising out of land.


The same view was upheld by the Apex Court in case of Anant Mills Co. Ltd vs State Of Gujarat & Ors. The Apex Court held that, there can, therefore, be no doubt that land in entry 49, of List It would include the underground strata. It may be stated that the word “land” has also been defined in clause (30) of section 2 of the Corporations Act to include land which is being built upon or is built upon or covered with water, benefits to arise out of land, things attached to the earth or permanently fastened to anything attached to the earth and rights created by legislative enactment over the street. The definition is of inclusive nature and does not exclude from its ambit the underground strata of the land.



Further, the coverage of Entry 49 is explained by the Apex Court in the case of Assistant Commissioner of Urban Land Tax Madras and Ors. etc. v. Buckingham and Carnatic Co. Ltd. etc., as reported in  1970 AIR 169, 1970 SCR (1) 268, the Apex Court had held that, for the purpose of attracting the applicability of Entry 49 in List II, so as to cover the impugned levy of tax on lands and buildings, the Constitution Bench laid down twin tests, namely,


(i) that such tax is directly imposed on lands and buildings, and

(ii) that it bears a definite relation to it


Benefits to arise out of land are classified as land itself. Whether the development rights constitute the benefits arising out of land?


The expression “benefits arising out of land” remains undefined. However, we may find a plethora of precedents defining the scope of this expression. Let us check some of them:-


In case of State of Orissa vs Titaghur Paper Mills reported in 1985 AIR 1293, the Apex Court has subscribed to the following definition of the expression “benefit arising out of an immovable property” :-


“A ‘benefit to arise out of land’ is an interest in land and therefore immovable property. The first Indian Law Commissioners in their report of 1879 said that they had ‘abstained from the almost impracticable task of defining the various kinds of interests in immovable things which are considered immovable property. The Registration Act, however, expressly includes as immovable property benefits to arise out of land, here diary allowances, rights of way lights, ferries and fisheries’. The definition of immovable property in the General Clauses Act applies to this Act. The following have been held to be immovable (1) 11955] 2 S. C. R. 919 property:-varashasan or annual allowance charged on land; a right to collect dues at a fair held on a plot of land; a hat or market; a right to possession and management of a saranjam; a malikana; a right to collect rent or jana: a life interest in the income of immovable property; a right of way; a ferry; and a fishery; a lease of land.The Bamboo contract is a grant of a profit a pendre which in Indian law is a benefit to arise out of land and thus creates an interest in immovable property.



In case of Shiv Dayal vs Putto Lal And Ors. as reported in AIR 1933 ALL 50, 140 Ind Cas 491, Honourable Allahabad High Court held that The principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit…………..to be afforded by land, the contract is to be considered as for an interest in land.


In case of Chheda Housing Development Vs Bibijan Shaikh Farid, as reported in 2007 (3) MhLj 402, Honourable Bombay High Court had held that, From these judgments what appears is that a benefit arising from the land is an immovable property. FSI/TDR being a benefit arising from the land, consequently must be held to be an immovable property.



In the case of Sadoday Builders Private Ltd vs The Jt. Charity Commissioner, as reported in, WRIT PETITION NBO.4543 OF 2010, it was held that, in view of the judgments of this court (supra), in my view, the order of the Charity Commissioner that no permission under Section 36 is required as TDR is a movable property cannot be sustained.



Taking a shelter from above precedents, it would be prudent to conclude that development rights are benefits arising out of land and as benefits arising out of land is included in the definition of land itself, the power to tax development rights lies with the State Government under List II, Entry 49. The State has already subjected development rights to tax under the respective State stamp duty acts.



However, Article 246A is a non-obstante clause and can it be said that by the 101th Constitutional Amendment Act, 2016, the Parliament has gained the power to tax the land?


It is well-known that a non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or any other enactment, that is to say, to avoid the operation and effect of all contrary provisions.


So Article 246A has an overriding effect but only with respect to Article 246 and Article 254. Effect of this article in the Constitution is as follows:-


1. Law relating to GST, that is tax on supply of goods or services or both can be made under the provision of Article 246A only.


2. Parliament or a state legislature has no power under Article 246 of the Constitution to legislate on GST.


3. Parliament has no power to legislate on GST under residual power of legislation.


4. Any legislation with respect to GST can be made only as per the provisions of Article 246A of the Constitution. 



The non obstante clause under Article 246A gives joint powers to tax Goods and Services. Goods and service tax as defined, include tax on supply of goods or services or both. The words goods and services, as defined under the CGST Act and the Constitution respectively, does not cover land (including rights arising out of land) in its scope.



The 101st Constitution Amendment Act, 2016 made a lot of changes in several entries, however it did not amend Entry 49 of List II. Therefore, we are of the opinion that the land is still the subject matter of the State Government. The industry is also recommending to subsume the Real Estate sector under GST regime. This is again representative of the fact that the taxes on land and building remain to be a state subject. Besides, the question whether tax on land and building under Entry 49, List II covers both direct and indirect taxes is still pending consideration before a Nine Judges Bench of the Supreme Court in Mineral Area Development Authority case and therefore in UOI vs UTV News, 2018 (13) GSTL 3 (SC), the Apex Court has deferred the question of validity of Service Tax on rental receipts on land which will be considered after this bench decision.



Having said so, the Parliament is not empowered to levy tax on the transfer of development rights.


One may argue that taking shelter from the aspect theory, the Parliament can still levy GST on transfer of development rights. However, it should be noted that the aspects theory comes into picture wherein two different events are taxed under two different entries. However, by levying GST on transfer of development rights here the same event i.e. transfer of development rights is made taxable under Entry 49 by way of levy of stamp duty and the same event i.e. transfer of development rights is intended to be taxed under GST under Article 246A by way of Notification 04/2018-CGST (Rate) dated 25.01.2018. To add to the similarities as far as levy of GST on transfer of development rights is concerned, the valuation under both the laws is also generally preferred to be the same. So the aspect theory is not going to provide any shelter as far as levy of GST on transfer of development right is concerned.



A Constitution Bench of the Apex Court in Federation of Hotel & Restaurant Associate of India, Etc. Vs. Union of India and others, (1989) 3 SCC 634, held that a law with respect to a subject might incidentally affect another subject in some way, but that is not the same thing. There might be overlapping but the overlapping must be in law. The fact that there is an overlapping does not detract from the distinctiveness of the aspects. Therefore, if the taxes are separate and distinct imposts and levied on the different aspects, then there is no overlapping in law.



FCR 179 P.C. at 193, in the context of concepts of Duties of Excise and Tax on Sale of Goods said: “...The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale....””



The principle that two laws cannot impose tax on the same aspect is upheld in above precedents and therefore, we believe that the levy of GST on transfer of development rights is constitutionally invalid.



To add to the worse, the Government has intended to tax development rights on Stamp Duty value of the development rights which approximately is equal to the value of land itself. However, one must not miss the fact that the transfer of development rights is followed by sale of land and Central Government can-not levy GST on sale of land.



To conclude with, we completely vouch to the fact that understanding and deciphering the taxability of development agreement is an onerous task for it has taken a lot of time for us to reach at this reasonable conclusion, we can certainly expect the judiciary to take its own time. However, our only hope at this juncture is that the industry should not suffer more trouble due to lack of clarity. It would also be prudent to say that the lawmakers have intended to tax development rights without any consideration to the Pandora’s Box that it will open and the negative impact it will have on the real estate industry. Government needs to assess whether it will stand to make any significant gains by such overly predatory tactics.




CA Sandesh Mundra & Maitri Thakkar, Sandesh Mundra & Associates.


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