Construction of Units on 99-Year Leased Land Taxable as Construction Services: AAR Rules in the Absence of Title Deed [Read Order]

The bench of the West Bengal Authority for Advance Ruling (AAR) ruled that in the absence of transfer of title in land or execution of a conveyance deed, the transaction cannot be regarded as a sale of immovable property. Accordingly, the construction in such units on 99- year lease land was held to be taxable as construction services under the Goods and Services Tax.

The applicant, Om Prakash Mahawar, proposed to obtain land from West Bengal Housing Infrastructure Development Corporation Ltd. (WBHIDCO) on a 99-year lease to develop a hotel-cum-shopping complex along with certain residential units. Under the terms of the lease deed, the ownership of land remains with WBHIDCO, while the applicant is permitted to construct and assign rights in the built-up area to prospective clients.

The applicant intended to offer constructed units either through a one-time lump sum consideration or through periodic payments without ultimately transferring title. Seeking clarity on the tax treatment, the applicant approached the Authority to determine whether such transactions amount to a sale of property or a taxable supply of construction services under the Central Goods and Services Tax Act, 2017 and the West Bengal Goods and Services Tax Act, 2017.

Represented by Sunil Kumar Jain, the applicant argued that although the land is held on a 99-year lease from WBHIDCO, the applicant is permitted to construct and assign rights in the completed units to prospective clients. Since the constructed portion and not the land is capable of being sub-leased or assigned, it was submitted that the transfer of built-up units, especially where a lump sum consideration is paid and the client secures long-term possession and economic rights, is effectively a transfer similar to sale.

It was contended that the duration of the lease, together with the right to assign the constructed area and the right of the client to receive value of the constructed portion in case of non-renewal of the lease, demonstrates that the transaction is not merely a temporary renting arrangement. It was submitted that judicial authorities have recognized that very long-term leases with substantial upfront consideration may be treated as equivalent to sale.

It was therefore argued that the essence of the transaction is transfer of an ownership-like interest in the constructed units, and should not be treated as a supply of construction services under the Goods and Services Tax law.

The bench comprising of Dr. Tanisha Dutta, Joint Commissioner and Jaydip Kumar Chakrabarti, Senior Joint Commissioner ruled that the assignment of constructed units on leased land does not amount to a transfer of ownership and therefore does not constitute a sale of immovable property. The Authority considered the lease deed terms and noted that the applicant does not acquire ownership of land, and no transfer of title in land or building occurs in favour of prospective clients.

The rights that are assigned are limited to use or sub-leasing rights. Since transfer of ownership is essential to constitute a “sale” as per the Transfer of Property Act, 1882, the absence of conveyance of title leads to the conclusion that the transaction is not a sale. Therefore, the activity falls within the scope of “supply” under Section 7 of the Central Goods and Services Tax Act, 2017.

Additionally, regardless of whether one charges a lump sum or periodic payments, the activity is liable to tax as SAC-9954-construction services and the applicable tax rate on the supply under consideration shall be 18%. Subsequently, the applicant is eligible for a deduction as attributable to land portion,i.e., 1/3 of consideration on the total value of supply for the purpose of payment of applicable tax as per Paragraph 2 of Notification No. 11/2017-Central Tax (Rate), dated 28.06.2017 as amended by Notification No. 03/2019 Central Tax (Rate) dated 29.03.2019.

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