Development Agreement Grants Construction Rights, Not Land Ownership: Patna HC Upholds GST on Construction Services [Read Order]

In a recent judgment, the Patna High Court upheld the imposition of Goods and Services Tax (GST) on construction services rendered under a development agreement, holding that no transfer of land ownership occurred through such an agreement.

Shashi Ranjan Constructions Private Limited, a builder engaged in constructing residential apartments in Bihar, filed a writ petition challenging a tax demand of over Rs. 4.6 crore. This demand was raised through an order dated 30.11.2023 by the Assistant Commissioner of State Tax, Muzaffarpur, under Section 73(9) of the Bihar GST Act, alleging that the company owed GST, interest, and penalty on the supply of construction services provided to a landowner under a development agreement executed in 2014.

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The petitioner’s counsel argued that the agreement was executed before the implementation of GST in July 2017, and the construction was completed in December 2018. So, the transaction fell outside the radar of GST. They further argued that Notification No. 04/2019 dated 29.03.2019, which clarified the taxability of development rights, could not be applied retrospectively to projects completed before April 2019.

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The department’s counsel argued that the developer was not being taxed for the transfer of development rights but for construction services provided to the landowner. They cited Notification No. 11/2017, which made such services taxable unless the entire consideration was received after the issuance of the completion certificate.

The department submitted that the petitioner received consideration in the form of development rights before project completion, so GST was applicable. They relied on a recent judgment of the Telangana High Court, which upheld GST on similar transactions.

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A division bench of Justices Rajeev Ranjan Prasad and Ashok Kumar Pandey observed that the development agreement did not transfer ownership of land to the developer but only permitted construction activity. The landowner remained the titleholder until possession of the constructed property was handed over. The court distinguished the case from Balbir Singh Maini, cited by the petitioner, observing that it related to income tax and involved different facts.

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Referring to the statutory scheme and relevant GST notifications, the court ruled that construction services provided in lieu of development rights were indeed taxable, and the transaction was covered under the GST regime from its inception in July 2017. The court rejected the petitioner’s argument that the tax demand was time-barred, stating that the assessment order was issued within the prescribed three-year period.

The court dismissed the writ petition, holding that all essential elements for the levy of GST, taxable event, person liable, rate, and value, were present. The court also found no grounds to invoke its writ jurisdiction under Article 226, particularly since statutory appeal mechanisms were available to the petitioner. No costs were awarded.

To Read the full text of the Order CLICK HERE

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