The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has ruled that the transfer of land development rights to a developer is a transaction involving immovable property and cannot be subjected to service tax.
The Bench comprising Dr Rachna Gupta, Officiating President, and P.V. Subba Rao, Member (Technical), observed that development rights constitute a benefit arising from land and, therefore, fall within the definition of immovable property under Section 3(26) of the General Clauses Act, 1897.
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However, the Tribunal upheld the denial and recovery of CENVAT credit of ₹30,40,929, restricting the recovery to the normal limitation period. It also permitted the company to seek a refund of the service tax it had wrongly paid by treating the transaction as a construction service.
The appellant/assessee which trades in lubricants and motor vehicles, had entered into an agreement with Bestech India Limited along with certain other landowners. Under the agreement, the company transferred the development rights attached to its land situated in Wazirpur village, Gurugram, in consideration for a specified share in the built-up area of the proposed project.
The company was entitled to market and sell its share of the constructed area. It subsequently sold its share of flats through the developer for ₹8,15,43,987.
The assessee treated the amount as consideration received towards construction services or the sale of flats. It accordingly paid service tax after claiming a 75% abatement under Notification No. 26/2012-ST.
The company also availed CENVAT credit of ₹30,40,929 on service tax charged by the developer for administrative and construction services.
During the verification of the company’s records and service tax returns, the department took the view that the company had incorrectly classified the transaction as a construction service and wrongly claimed the benefit of abatement.
According to the department, the relevant taxable activity was the transfer of development rights itself. Since the transaction was not covered by the negative list, the company was allegedly required to pay service tax on the entire value without claiming the abatement available for specified construction services.
The department also alleged that the administrative and construction services supplied by the developer were not eligible input services for the company’s activity of transferring development rights.
A show cause notice dated July 17, 2018 was consequently issued to the company.
The Joint Commissioner confirmed the service tax demand of ₹1,06,66,772 under Section 73 of the Finance Act, 1994 and imposed an equivalent penalty under Section 78. A further penalty of ₹10,000 was imposed under Section 77(2).
The adjudicating authority also disallowed the CENVAT credit of ₹30,40,929 under Rule 14 of the CENVAT Credit Rules and imposed a corresponding penalty under Rule 15 read with Section 78 of the Finance Act.
The Commissioner (Appeals-II), Delhi, upheld the adjudication order on December 7, 2022, following which the company approached the CESTAT.
The Tribunal identified the principal issue as whether a transaction involving the transfer of development rights in land amounts to the provision of a service.
It relied upon the Bombay High Court’s judgment in Chheda Housing Development Corporation v. Bibijan Shaikh Farid, in which it was held that floor space index and transferable development rights constitute benefits arising from land.
Section 3(26) of the General Clauses Act defines immovable property as including land, benefits arising out of land and things attached to the earth or permanently fastened to anything attached to the earth.
Applying this principle, the Tribunal held that development rights are immovable property. Their transfer, therefore, represents a transaction in immovable property rather than the provision of a taxable service.
The Bench also referred to CESTAT’s decisions in Genius Probuild Private Limited v. Commissioner of Central Excise and CGST, Jaipur and Raipur Development Authority v. Commissioner of Customs, Central Excise and Service Tax, Raipur, where it was similarly held that no service tax is payable on the transfer of development rights.
“We hold that the transfer of development rights by the appellant to the developer was not a service at all but was only a transaction in immovable property,” the Tribunal observed.
It clarified that the transaction was neither a construction service, as originally treated by the company, nor another category of taxable service, as claimed by the department.
While ruling that the transfer of development rights was not a taxable service, the Tribunal held that the company was not entitled to claim CENVAT credit on the administrative and construction services supplied by the developer.
Since the transfer of development rights was not an output service, the services received from the developer could not qualify as input services in the hands of the company.
The Bench, therefore, upheld the denial and recovery of the CENVAT credit.
It nevertheless rejected the department’s invocation of the extended limitation period. The Tribunal found that the company had acted under the belief that it was liable to pay service tax by classifying the transaction as a construction service. It had availed the CENVAT credit on the same understanding.
In these circumstances, the extended period under Section 73 of the Finance Act, as made applicable to Rule 14 of the CENVAT Credit Rules, could not be invoked. Recovery of the inadmissible credit was consequently restricted to the normal limitation period.
The penalty imposed under Rule 15 of the CENVAT Credit Rules was also set aside.
The Tribunal further noted that the assessee had itself wrongly treated the transfer of development rights as a construction service and paid service tax.
Since the transaction was ultimately found not to be a service at all, the Bench held that the company could seek a refund of the service tax paid.
Significantly, the Tribunal clarified that, for computing the limitation period under Section 11B of the Central Excise Act, 1944, as applicable to service tax matters, the relevant date would be the date of the CESTAT’s order.
The refund would, however, remain subject to the principle of unjust enrichment. To the extent the company had passed the service tax burden on to other persons, the refundable amount would be credited to the Consumer Welfare Fund in accordance with Section 11B.
Accordingly, the CESTAT set aside the service tax demand of ₹1,06,66,772 and the penalties imposed under Sections 77 and 78 of the Finance Act. It upheld the recovery of CENVAT credit only for the normal limitation period while setting aside the associated penalty.
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