2025 (5) TMI 1505 - AAR - GST

Liability for payment of GST on construction work for prospective clients - 99 years lease -applicable tax rate on the supply - Services by way of renting of residential dwelling - Exemption on accommodation services - Accommodation Services (SAC 9963) or Real Estate Services (SAC 9972) - monthly/annual maintenance charges - term sale - HELD THAT - In this case the applicant has already submitted that he intends to get the land from WBHIDCO on 99 years lease for the purpose of setting up of Hotel-cum Shopping and Multiplex under the principal use-Assembly-Mercantile Retail. oreover as per the Draft Lease Deed as per tender relating to this case the lessee is not permitted to sub-lease land or part thereof. However the applicant will be permitted to sublease/ assign right on constructed area. Moreover Clause no. (xi) of the draft says lessee shall not sub-divide or sub-lease the demised land/ or any part thereof. However the building constructed thereon or the structure constructed thereon / or any part thereof may be allowed for sub-leasing/sub-letting/assignment by the lessor i.e. WBHIDCO on result of specific proposal keeping the principal use unchanged and on payment of prescribed fees if any. Thus from the very contract itself it is clear that there can be no occasion of any transfer of title or transfer of ownership of the land on which the constructed property will stand and that the said constructed property also can only undergo a sub-leasing or sub-letting or assignment of right. It is beyond any debate that sub-leasing or sub-letting or assignment of right does not involve any transfer of title or transfer of ownership and hence cannot be connected to the term sale . Hence the condition of intended for sale to a buyer according to the entries vide Sl. no. 3(ia) 3(ib) 3(id) and 3(if) of notification no. 11/2017 Central Tax (Rate) dated 28.06.2017 as amended by 03/2019 Central Tax (Rate) dated 29.03.2019 shall not be applicable in this case and the applicant shall not qualify for paying tax at a lower rate. The instant supply shall thus be guided by the entry vide Sl. no. 3(xii) of notification no. 11/2017 Central Tax (Rate) dated 28.06.2017 as amended by 03/2019 Central Tax (Rate) dated 29.03.2019. In view of our discussion we rule as under GST on construction work for prospective clients regardless of whether one charges a lump sum or periodic payments is liable to be paid. The applicable SAC (and not HSN Code) on this supply is 9954 (Construction Services) and the applicable tax rate on the supply under consideration shall be 18%.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. It will not fall under Accommodation Service (SAC 9963) and hence the question of exemption under entry in sl. No. 12 of Notification No. 12/2017-Central Tax (Rate) dated June 28 2017 as asked for by the applicant does not arise. GST is payable on monthly/annual maintenance charges as per entry in sl. no. 33 of Notification No. 11/2017-Central Tax (Rate) dated June 28 2017. The SAC Code (and not HSN code) in this case would be 9995 and the applicable GST rate is 18%.

Summary

The core legal questions considered by the Authority for Advance Ruling (AAR) pertain to the applicability and rate of Goods and Services Tax (GST) on construction services provided by the applicant under a 99-year lease arrangement from a government entity, specifically:

1. Whether the applicant is liable to pay GST on construction work for prospective clients when payments are made (a) as a lump sum and (b) as periodic payments.

2. If GST is payable, what is the applicable Harmonized System of Nomenclature (HSN) or Services Accounting Code (SAC), the GST rate, and whether the tax should be calculated on the entire amount received or after deducting the land portion (one-third of consideration) as per the relevant rate notification.

3. Whether the supply qualifies as accommodation service and if so, whether the applicant is eligible for exemption under clause 12 of Notification No. 12/2017 dated 28-6-2017.

4. Whether GST is payable on monthly or annual maintenance charges and if yes, the applicable HSN/SAC and GST rate.

Issue-wise Detailed Analysis:

Issue 1: Liability to pay GST on construction work under lump sum or periodic payment models

The applicant plans to lease land for 99 years from a government company to construct a Hotel-cum-Shopping and Multiplex complex with residential flats. The lease deed prohibits sub-leasing the land but permits sub-leasing or assignment of constructed buildings or parts thereof. The applicant may transfer rights to constructed units either by a lump sum payment (with registry and ownership rights) or periodic payments (without registry and no ownership transfer).

The legal framework involves the GST Act, particularly Section 7 defining 'supply' and the rate notifications (No. 11/2017 and 03/2019) specifying GST rates on construction services. The Real Estate (Regulation and Development) Act, 2016 (RERA) and its definition of Real Estate Project (REP) were also considered.

The Court examined whether the transactions fall under sale or lease. It noted that the applicant does not have ownership of land but holds rights over constructed property, which can be sub-leased or assigned. Transfer of ownership rights in constructed property to clients was considered akin to sale of constructed units.

Notification No. 11/2017 provides concessional GST rates for construction services intended for sale to buyers. However, the Court emphasized that the condition "intended for sale to a buyer" is pivotal for concessional rates.

Drawing from the Transfer of Property Act and legal precedents, sale involves transfer of ownership/title. Since the land ownership remains with the lessor and the applicant only sub-leases or assigns rights on constructed property, the transaction is not a sale of land.

However, the applicant's assignment of constructed units with ownership rights to prospective clients was treated as transfer of ownership in the constructed property, thus constituting supply of construction services liable to GST.

The Court concluded that GST is payable on construction services regardless of whether payment is lump sum or periodic, with applicable SAC 9954 and GST rate of 18%.

Issue 2: Applicable HSN/SAC, GST rate, and valuation basis including land portion deduction

The Court clarified that the applicable code is SAC 9954 (Construction Services), not an HSN code, with GST rate at 18% for the supply under consideration.

Regarding valuation, Para 2 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 provides that GST shall be calculated on the value of supply excluding the value of land, which is deemed to be one-third of the total amount charged.

The Court interpreted "total amount" to include consideration charged for construction services plus amount charged for transfer of land or undivided share thereof, including by way of lease or sublease. Since the applicant's lease is for 99 years, the land portion is relevant for deduction.

Therefore, the applicant is entitled to deduct one-third of the consideration attributable to land from the taxable value for GST purposes.

Issue 3: Classification as accommodation service and eligibility for exemption

The applicant queried whether leasing constructed units qualifies as accommodation service under SAC 9963 and if exemption under clause 12 of Notification No. 12/2017 applies.

The Court examined the definition of accommodation services under Notification No. 12/2017 and noted that accommodation services include renting residential dwellings for use as residence, with certain exemptions and conditions effective till and after 15.07.2024.

However, the Court found that leasing constructed property on leased land does not fall under "Accommodation Service" as defined, since the applicant's activity is more akin to real estate services involving transfer or assignment of rights in constructed property rather than mere renting of residential dwelling.

Hence, exemption under clause 12 of Notification No. 12/2017 does not apply.

Issue 4: GST on monthly/annual maintenance charges

The Court observed that maintenance services provided to unit holders are taxable under SAC 9995 (Services of membership organisations) as per Notification No. 11/2017, with GST rate at 18%.

Therefore, GST is payable on monthly or annual maintenance charges at 18% under SAC 9995.

Significant Holdings and Core Principles:

"GST on construction work for prospective clients, regardless of whether one charges a lump sum or periodic payments is liable to be paid."

"The applicable SAC (and not HSN Code) on this supply is 9954 (Construction Services) and the applicable tax rate on the supply under consideration shall be 18%."

"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."

"Leasing out of constructed property on leased land does not fall under the category of 'Accommodation Service' (SAC: 9963) and hence the question of exemption under entry in sl. No. 12 of Notification No. 12/2017 does not arise."

"GST is payable on monthly/annual maintenance charges as per entry in sl. no. 33 of Notification No. 11/2017. The SAC Code in this case would be 9995 and the applicable GST rate is 18%."

The ruling establishes that long-term lease of land with construction of buildings and transfer of rights in constructed property to clients is treated as supply of construction services liable to GST at 18%, with deduction allowed for land portion at one-third of consideration. Leasing constructed units does not qualify as accommodation service for exemption purposes. Maintenance services attract GST at 18% under membership services.