Liability to tax arises on date of transfer of possession of building to supplier of development rights: Telangana AAR

Read ruling: M/s. Vajra Infracorp India Private Limited 

Pankaj Bajpai

New Delhi, July 28, 2021: The Telangana Authority for Advance Ruling (AAR) has held that the date of transfer of possession of the building or the right in it, to the person supplying development rights, will be the time of supply and the liability to pay tax on the said services shall arise on that day. 

The Coram of S.V. Kasi Visweshwar Rao, Additional Commissioner (State Tax) and B. Raghu Kiran, IRS, Additional Commissioner (Central Tax) observed that when the building was handed over to the supplier of developmental rights after inception of CGST & SGST, then the liability to pay tax will arise under CGST & SGST. 

The AAR noted that according to a notification dated January 25, 2018, the liability to pay central tax on supply of development rights to a developer, builder, construction company shall arise at the time when the said builder, developer, construction company or any other person as the case may be, transfers possession or the right in the constructed complex, building or civil structure to the person supplying development rights by entering into a conveyance deed or similar instrument. 

The Applicants in the instant case are providers of taxable services of construction of residential complexes. They have averred that they have entered into a supplementary agreement with the land owner, duly fixing the total number of flats to be shared with the land owner. This was prior to the introduction of GST. 

Hence, they approached the AAR seeking clarification as to time of supply and point of taxation with respect to flats allotted to land owner by the builder by way of supplementary agreement, whereas the construction will be completed during GST regime.

“A plain reading of the Notification makes it clear that, a) there shall be a constructed complex or a building or a civil structure in existence; b) possession or right in the above shall be transferred; c) such transfer of possession or right shall be affected by way of a conveyance deed or a similar instrument like an allotment letter,” found the AAR. 

The Coram noted from the submissions made by the applicant that he requires a clarification regarding his liability under the CGST & SGST Acts, in a situation where he has entered into an agreement with the land owner as a builder and later transferred the possession or right in the buildings so constructed. 

At the outset, the clarification for his liability must start from the question raised in the end of the application regarding the meaning of the phrase ‘Constructed complex’. This necessitates the application of principal of literal construction of statutes, added the Coram.

The Apex court in the case of Chandavarkar S R Rao Vs Ashalata S Gautam [(1986) 4 SCC 477] held that, when the grammatical construction is clear and manifest without doubt, that construction must prevail unless there are strong and obvious reasons to the contrary. 

Therefore, the phrase ‘Constructed complex’ is understood in its natural, ordinary and popular sense to mean a building.

“Further, after the phrase ‘Constructed complex’ the words building or civil structure is used to convey the intention in the notification i.e., a constructed complex. So this entails application of the principle of noscitur a sociis,” found the AAR. 

From the above understanding of the phrase ‘Constructed complex’ it follows that such a complex, building or civil structure should first be in place so that its possession or the rights in it may be transferred by the developer to the person supplying development rights. And such transfer of possession or transfer of right in the building shall be accomplished by a conveyance deed or similar instrument such as allotment letter, added the Coram. 

It follows from the same that as per the above mentioned notification dated January 25, 2018, the time of supply to determine liability to pay tax on development rights by a land owner to a developer is the date on which the building or the rights in an existing building are handed over to the land owner by way of a conveyance deed or an allotment letter, concluded the AAR.

Further, the AAR also reiterated that if the applicant has handed over the building after inception of CGST & SGST, then the liability to pay tax will arise under CGST & SGST.