The Nagpur Bench of the Bombay High Court has ruled that services involving the transfer of land development rights or Floor Space Index (FSI) are not subject to Goods and Services Tax (GST).
The case involved a show cause notice and tax demand issued to the petitioner regarding a development agreement dated 07.01.2022, under which the petitioner was designated as a developer for a land parcel in Nagpur. The GST Department sought tax under Entry 5B of the Notification dated 28.06.2017, as amended on 29.03.2019, which relates to services provided through transfer of development rights or FSI for construction by a promoter.
The bench of Justice Avinash G. Gharote and Justice Abhay J. Mantri observed, “A perusal of the language of entry 5B, above would indicate, that it relates to services which can be said to be supplied by any person by way of transfer of development rights or Floor Space Index (FSI) [including additional FSI] for construction of a project by a promoter. The expression “transfer of development rights” read in conjunction with ‘FSI’ as indicated in entry 5B, would only relate to a TDR (Transferable Development Rights) as contemplated by clause 11.2.2 under the regulations for grant of TDR in the Unified Development Control and Promotion Regulations for the State of Maharashtra, clause 11.2.1 of which defines transferable development rights, to mean compensation in the form of Floor Space Index (FSI) or development rights, which shall entitle the owner for construction of built up area subject to the provisions in the said regulations. It therefore, follows, that the TDR / FSI as contemplated by entry 5B, cannot be related, to the rights which a developer derives from the owner under the agreement of development for constructing the building for the owners, in lieu of the owner agreeing to permit the developer to transfer certain built up units for consideration to be appropriated by the developer.”
The Court, while allowing the petition, held that the transaction outlined in the development agreement dated April 7, 2022, does not fall within the scope of Entry 5B of the Notification dated June 28, 2017, as amended by the Notification dated March 29, 2019. Consequently, the show cause notice and the subsequent tax order are unsustainable and have been quashed and set aside.
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