GST on Interest Free Maintenance Security

[pooja jajwani]

Introduction

Interest Free Maintenance Security ('IFMS') is a sum collected by the builder from the buyer of  units in a real-estate project. The builder collects IFMS to ensure availability of funds in case  unit holder fails to pay maintenance charges or in case of any unprecedented expenses. Upon establishment of the Co-operative society, the builder is liable to transfer such deposits to the society. If a unit holder sells his unit then, IFMS collected from the unit holder is transferred to new buyer.

Levy of GST on collection of IFMS

After completion of construction, a builder is liable to form a co-operative society wherein all unit holders become members of the society. A co-operative society is nothing but a group of all members. It has no separate identity. Hence, society and members of the society cannot be considered as two distinct persons.

Further, GST is levied on supply of goods and services. The definition of supply is prescribed under Section 7 of CGST Act, 2017 ('The Act'). The same is as follows :-

"(1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration.............."

The activities listed above envisage availability of two persons viz. the recipient and the supplier. However, a society and its members are not two distinct persons.

It is also noteworthy that doctrine of mutuality entails that a person cannot make profit from oneself. Applying the same analogy, a person cannot make a supply to oneself.

Therefore, until a deeming provision is prescribed in law, the transactions between a co-operative society and its members cannot be considered as supply under GST.

Furthermore, a co-operative society may be incorporated or unincorporated. Let us analyse GST impact for both kinds of co-operative societies:-

1. Unincorporated societies:- As per Entry 7 of Schedule II of the Act, supply of goods between any unincorporated association or body of persons to a member thereof shall be taxable as supply of goods.

   This deeming friction does not apply to supply of services. Therefore, supply of service    between an unincorporated society and a member is not exigible to GST.  

2. Incorporated societies:-  The above deeming friction does not include incorporated societies. The deeming fiction introduced in GST is similar to the deeming fiction that was created-

• under Article 366(29A)(e) of the Constitution of India, for levying sales tax and
• under Explanation to Section 65 of the Finance Act, 1994, for levying service tax.

While interpreting the above provisions, in STATE OF WEST BENGAL & ORS. VERSUS CALCUTTA CLUB LIMITED AND CHIEF COMMISSIONER OF CENTRAL EXCISE AND SERVICE & ORS. VERSUS M/S. RANCHI CLUB LTD. [2019 (10) TMI 160 - SUPREME COURT], the Apex Court has held that:-

"77. However, Explanation 3 has now been incorporated, under sub-clause (a) of which unincorporated associations or body of persons and their members are statutorily to be treated as distinct persons.

79.................the aforesaid explanation is in substantially the same terms as Article 366(29-A)(e) of the Constitution of India. Earlier in this judgment qua sales tax, we have already held that the expression body of persons will not include an incorporated company, nor will it include any other form of incorporation including an incorporated co-operative society."

In an application filled by IN RE: M/S. ROTARY CLUB OF MUMBAI QUEENS NECKLACE - 2020 (6) TMI 627 - APPELLATE AUTHORITY FOR ADVANCE RULING, MAHARASHTRA, Appellate Authority for Advance rulings held that:-

"In the absence of any mechanism to treat the appellant and its members as separate persons the said service does not tantamount to supply"

Therefore, it can be concluded that, as per doctrine of mutuality, supply of service by any co-operative society to its members cannot be taxed.

Furthermore, under section 7 of the Act, supply of service provided for consideration is taxable. Upon receipt of IFMS, the builder is not providing any service to the unit holder. Hence, IFMS cannot be treated as consideration for supply of any service.

IFMS merely represents a deposit collected for unprecedented events against which the supply of service may or may not happen in future. Hence, IFMS cannot be taxed under GST.

Reliance can be placed on UNION OF INDIA AND ANR. VERSUS M/S. INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD. - 2018 (3) TMI 357 - SUPREME COURT wherein the Apex Court has held that:-

"24) .............In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing ‘such’ taxable services.

As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such ‘taxable service’."

Furthermore, the term consideration is defined under Section 2(31) of CGST Act, 2017 as:-

“consideration  in relation to the supply of goods or services or both includes––

................

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;"

As per the abovestated proviso,  deposit received for supply of goods or services shall be considered as consideration only when the supplier applies such deposit as a payment for supply.  Therefore, receipt of IFMS cannot be construed as supply. However, subject to the doctrine of mutuality, if and when the builder applies such deposit for the purpose of providing maintenance service, the said transaction would be taxable as supply of service under GST.

The same principal has been upheld in an advance ruling pronounced in the case of IN RE: E-SQUARE LEISURE PVT. LTD. [2019 (4) TMI 805 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA], wherein Maharashtra Advance Ruling Authorities has held that interest free security deposit cannot be construed as consideration for supply of any service unless the same is applied as a consideration. The relevant observations of the authority are :-

".........Prima facie a conclusion can be drawn without much difficulty that a deposit given in respect of the supply shall not be considered as payment made for such supply unless the supplier appropriates such deposit as consideration for the said supply

.............. Thus for a payment to be considered as security deposit should have following attributes

.........

iii) Security against damage to properties rented.

..........."

Conclusion

Any amount received by a co-operative society, whether incorporated or not shall not be taxable as per the doctrine of mutuality. Further, if one decides to pay tax on such transaction then, on amounts representing deposits like IFMS, tax shall be liable to be paid at the time at which the builder applies such amount as consideration for provision of any service.

This conclusion has also been upheld in number of cases in erstwhile tax regime. A summary of such caselaws is as follows:-

Sr. No.	Citation and Party name	Judicial Pronouncements
1	Commissioner Of Service Tax, Mumbai Vs M/S. Shri Krishna Chaitanya Enterprises, M/S. Green Valley Developers and Kumar Beheray Rathi, 2018 (2) TMI 1056	Bombay High Court has held that collection of IFMS by the builder would not be liable to service tax. The same principal has also been upheld by  in number of cases viz. THE COMMISSIONER OF SERVICE TAX VERSUS M/S. CRESCENDO ASSOCIATES 2018 (9) TMI 1599 - BOMBAY HIGH COURT,  THE COMMISSIONER OF SERVICE TAX, MUMBAI –VII, COMMISSIONERATE VERSUS M/S. OMEGA ASSOCIATES 2018 (9) TMI 321 - BOMBAY HIGH COURT
2	IN RE : M/S LOTUS MAINTENANCE SERVICES PVT. LTD. - 2018 (10) TMI 642 - COMMISSIONER, APPEALS-I, CENTRAL TAX/GST, DELHI	IFMS charged from flat owners, transferrable upon sale of flats by flat owners to third party after adjustments, is not taxable upon receipt of such deposits. However, if the same is adjusted than the amount so adjusted shall be leviable to service tax.
3	M/S EMERALD LEISURES LIMITED VERSUS THE COMMISSIONER OF SERVICE TAX, MUMBAI-II, MUMBAI - 2015 (10) TMI 297 - AUTHORITY FOR ADVANCE RULINGS	It has been held that refundable security deposit and interest there-on should not be subjected to service tax.
4	M/S MAHIMA REAL ESTATE PVT. LTD. VERSUS CCE & ST, JAIPUR-I - 2016 (6) TMI 475 - CESTAT NEW DELHI	Kumar Beheray Rathi (supra) was followed and IFMS was held to be not taxable.
5	M/S BOUGAINVELLEA MULTIPLEX & ENTERTAINMENT CENTER PCT VERSUS COMMISSIONER OF CENTRAL EXCISE & S.T., NOIDA - 2019 (3) TMI 185 - CESTAT ALLAHABAD
6	C.C.E. & S.T. -JAIPUR-I VERSUS SAND DUNES CONSTRUCTION PVT LTD - 2018 (7) TMI 1383 - CESTAT NEW DELHI
7	PRINCE FOUNDATIONS LTD. VERSUS COMMISSIONER OF SERVICE TAX, CHENNAI - 2019 (5) TMI 371 - CESTAT CHENNAI
8	M/S KDP INFRASTRUCTURE PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX, GHAZIABAD - 2018 (11) TMI 984 - CESTAT ALLAHABAD
9	BALLAL DEVELOPERS PRIVATE LTD. VERSUS C.C.E. & S.T., MANGALORE - 2019 (9) TMI 889 - CESTAT BANGALORE	One time deposits collected for future use is not taxable.
10	M/S ATS TOWNSHIP PVT. LTD. VERSUS COMMISSIONER, CENTRAL GST, NOIDA - 2019 (11) TMI 297 - CESTAT ALLAHABAD	As long as the provisions for refund of the said amount in the agreement itself is there, it has to be considered that the said amount is refundable and was towards security deposits and was not for the purpose of providing any services.

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Rakesh Chitkara-Advocate & CA Pooja Jajwani