-CA Keval ShahSeptember 05,

2015

Issues in Joint Development Agreement

2

Basics of Service Tax Law

FrameworkDissecting the “CHARGE”

Service Tax shall be levied at 14% on the value of all services

other than those services

specified in the negative list

provided or agreed to be

provided

in the taxable territory

by one person to another

and collected in such manner as

may be prescribed

Service

means

any activity

carried out by a person for

another

for consideration

and includes

declared service

shall not include

any activity which

constitutes merely

transfer of title in goods or immoveable

property

Transaction of Deemed Sales

transaction in money or

actionable claim

provision of service by

employee to employer

fees taken by Court or Tribunal

5

Development Agreements

Development Agreement

6

Landowner DeveloperDevelopment Rights

End Customer

Under constructed Property

7

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

8

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

9

Transfer in TitleCBEC 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.

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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

11

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

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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?

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Valuation & Credits12. 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,-

 Taxable Portion of Service

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004

  (a) for a residential unit satisfying both the following conditions, namely :-

25 (ii) The value of land is included in the amount charged from the service receiver  (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. 30 

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Joint Development Agreements

Model 1

15

Landowner Developer

End Customer

Under constructed

Property

Joint Venture

Contributes land Construction Activity

16

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?

Model 2

17

Landowner Developer

End Customer

Under constructed

Property

Development Rights

Allots Flats

18

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?

19

Section 67 – Valuation of Taxable Services

Valuation Consideration

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

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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

Model 3

21

Landowner Developer

End Customer

Under constructed

Property

Construction Activity

Allots Flats

22

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 of tax paid by Builder available

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