1. Issues in Joint Development Agreement
-CA Keval Shah
Issues in Joint Development Agreement
September 05, 2015

2. Basics of Service Tax Law

3. Framework Dissecting 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

4. 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

6. Development Agreement
Landowner
Developer
Development Rights
Under constructed Property
End Customer

7. Development Rights Means Exclusion 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 Title
CBEC Education Guide……… 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.

10. 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

12. 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?

13. Taxable Portion of Service
Valuation & Credits
12.
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 square feet; and
(ii) the amount charged for the unit is less than rupees one crore
(b) for other than the (a) above.
30 

14. Joint Development Agreements

15. Construction Activity Under constructed Property
Model 1
Landowner
Developer
Contributes land
Construction Activity
Joint Venture
End Customer
Under constructed Property

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?

17. Under constructed Property
Model 2
Development Rights
Landowner
Developer
Allots Flats
Under constructed Property
End Customer

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
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

20. 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

21. Construction Activity Under constructed Property
Model 3
Allots Flats
Landowner
Developer
Construction Activity
Under constructed Property
End Customer

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

23. THANK YOU !