BRIED FATCS OF THE CASE
- The Petitioner was inter alia engaged in real estate development, executing commercial and residential projects primarily in and around Mangalore, Karnataka.
- The Petitioner purchased an under-construction commercial property ("Lotus Shopping Mall") from the liquidator of Lotus Shopping Centres Pvt. Ltd. during the insolvency proceedings initiated under the Insolvency and Bankruptcy Code.
- The sale was conducted through an e-auction supervised by a courtappointed liquidator. Despite the petitioner's objections, the liquidator demanded GST on the sale in addition to stamp duty. To avoid delay and complete the transaction, the petitioner paid the GST under protest, asserting the transaction was a mere sale of immovable property and not a taxable supply of goods or services under the CGST Act, 2017 and then filed a refund application.
- The GST department rejected the refund claim on the grounds that the transaction fell under Entry 5(b) of Schedule II of the CGST Act, treating it as a taxable supply of construction service since no completion certificate had been issued.
- The issue under consideration before the Hon'ble Karnataka High Court was whether the transaction constituted a "supply" under Section 7(1) of the Act, thus attracting GST liability, or whether it was a sale of immovable property excluded from GST under Schedule III, Entry 5.
KEY OBSERVATION OF THE HON'BLE HIGH COURT
- The Court, post analyzing the statutory framework, judicial decisions, and the minutes of GST Council meetings, which revealed a deliberate decision not to include immovable property sales under GST primarily to preserve state revenues from stamp duties, concurred with the Petitioner's view.
- The Court clarified that Schedule II is a classification tool, applicable only after an activity is first determined to be a "supply" under Section 7(1). It concluded that in this case, no "supply" occurred because the petitioner merely acquired rights in immovable property through a sale and not a construction contract.
- Since the petitioner acquired an already constructed property without any construction service involved, the transaction remained outside the GST regime. The Court found the refund rejection to be arbitrary, without jurisdiction, and contrary to the statutory and constitutional principles. It quashed the impugned order and directed the tax authorities to process and grant the refund with applicable interest, reaffirming the principle that GST cannot be levied without a clear statutory basis and that immovable property transactions, in the absence of construction contracts, are outside its ambit.
AURTUS COMMENTS
- Paragraph 5(b) of Schedule II covers the 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 has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. The key issue was if a partially constructed building is sold (where a CC or OC is not issued), will it get covered under the above paragraph, considering that consideration for the sale is received before the CC / OC.
- The Court correctly distinguished between a taxable "supply" under Section7 of the CGST Act, 2017 and the classification of supplies under Schedule II, holding that classification provisions cannot override the primary requirement of establishing a supply. This distinction is critical as tax liability under GST does not arise merely on the occurrence of an event of sale of under-constructed property, which is nothing but a building [albeit partly constructed]; it must meet the threshold conditions of a "supply" involving goods or services [in this case construction services] rendered by a service provider to a service recipient for consideration in the course of business. Inthe present case, none of these elements were satisfied and the mere absence of a completion certificate could not automatically categorize this supply as a supply of construction services.
- The activities or transactions specified in Schedule III are
neither treated as a supply of goods nor a supply of services.
Paragraph 5 of Schedule III to the CGST Act covers "Sale of
land and, subject to clause (b) of paragraph 5 of Schedule II, sale
of building." This essentially means that until a sale of the
building does not fall under paragraph 5(b) of Schedule II, the
same will not be liable. Paragraph 5(b) is applicable only where
there is an agreement or arrangement for:
- providing services for the construction of complex or buildings
- Intended for sale to a buyer
- In the instant case, the sale was by the liquidator of the under-constructionproperty on an as-is-where-basis. The liquidator has not entered into any agreement or arrangement for providing any construction services. In such a case, paragraph 5(b) does not get triggered. The exception related to the payment of consideration after OC/CC does not determine the taxable event, which is a rendition of construction, and merely states that if while rendering such services, CC/OC is received, the service is deemed to be completed. Another important aspect is the scheme of notifications specifying the rate of applicable tax which indicates that the paragraph applies to services rendered by builders/ promoters. This legislative intent of bringing in the taxing entry (under the pre-GST regime and which entry also continued under GST) was also stipulated in the judgment of the Hon'ble Bombay High Court in Maharashtra Chamber of Housing Industry and Another vs. UOI [Writ Petition no.845 of 2006]
- Considering that the carveout under Schedule III related to paragraph 5(b) does not apply, there will be no GST as the sale is that of a building. Multiple judicial precedents have held that a partially constructed building will alsoqualify as a 'building'.
- This judgment will have significant precedential value, especially for banks/financial institutions/Asset Recovery companies and the like who may have granted loans for the construction of buildings with underlying security/ mortgage of the building/flats therein, and which are then subsequently soldfor recovery of such loans on default. Considering that there is generally a default of the loan amount and interest thereon, and the recoveries are usually lower, the GST amount would have been a significant cost for the lenders.
- Separately, any amount paid as GST on such sales can be claimed as a refundsubject to limitation provisions under the GST law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
