Recent Ruling by Appellate Authority for Advance Ruling
Whether the ‘Other Charges’ recovered by the Developer from customers ought to be treated as naturally bundled with main construction services (hence liable to the same rate of GST as applicable to construction services)
In a recent ruling, the Maharashtra Appellate Authority for Advance Ruling (MAAAR), in the matter of Puranik Builders Limited (the Appellant), held that other charges such as electricity meter installation, water connection, development charges and legal fees recovered by the Appellant are inextricably connected with construction services as part of bundled services (with principal service being the construction of A residential apartment). These services can therefore be liable to of the same rate of GST as applicable to that of construction services – i.e. 12%/5% . This ruling is a welcome one – both for developers and consumers. First, it addresses the ambiguity which developers were faced with given diverse rulings of the AAR and second it reduces the tax burden on Other Charges for the customer. The note below provides further details.
FACTS OF THE CASE
- Puranik Builders Ltd. (the Appellant) is engaged in the business of construction and sale of residential apartments. The Appellant, charges Goods and Services Tax (GST) in respect of supply of construction of residential apartments sold to flat buyers prior to receipt of the Occupancy/Completion Certificate.
- As a part of the overall scheme of the transaction, the Appellant, as part of the construction services, also collects various other charges which inter-alia includes electric meter installation, water connection charges, share of municipal taxes, advance maintenance, club house maintenance, development charges, share money, application and entrance fee of the organization, formation and registration of the organization, infrastructure charges and legal fees (collectively referred to as Other Charges).
- Typically, a builder/developer in the course of construction of residential apartments, not only collects consideration towards the construction of the apartments but also recovers the Other Charges. The Other Charges are generally mentioned in the sale deed executed with the customer and are recovered separately from the customers.
- In the present facts, to attain certainty on the applicable rate of GST on the Other Charges, the Appellant filed an advance ruling before the AAR contending that the Other Charges are classifiable under the chapter heading – ‘9954’ along with the construction services. Therefore, the rate of GST applicable to construction services ought to be applicable also in respect of Other Charges.
- The Appellant had approached the Authority for Advance Ruling (the AAR) for seeking an advance ruling under Section 97 of the CGST Act, on the following issues –
a) Whether Other Charges received by the Appellant will be classified under the HSN Code: 9954 along with the main residential construction services (and hence eligible to a GST of 12%/5%) or whether the same will be treated as a consideration for independent service(s) under the respective heads (and hence treated to a GST of 18%);
b) Consequently, what would be the applicable effective rate of GST on Other Charges.
- The AAR however held that ‘Other Charges’ received will not be classified under the HSN Code: 9954 along with the main residential construction services since these services are not interlinked with construction services but are independent services. Further, the AAR held that consideration towards construction services is only taken into account for the purpose of payment of stamp duty and therefore different and conflicting stands about considerations for the same activity cannot be adopted. It was also held that the agreement was intended to transfer the ownership right to flats only and not of the adjoining area as well as other amenities for which charges are collected. Therefore, the Other Charges will not be part of a composite supply. The AAR further stated that Other Charges are to be classified independently under the respective chapter headings and consequentially, the rate of GST as applicable to such chapter headings would be leviable.
- Being aggrieved by the Impugned Order, an appeal was filed before the Maharashtra Appellate Authority for Advance Ruling (the MAAAR).
- Economic Laws Practice (ELP) represented the Appellant before the MAAAR.
RULING BY MAAAR
- The perception of the consumer or the services receiver is an important factor in determining whether the services provided are bundled or not. In case of construction of residential apartments, services in relation to water supply connection charges, electricity meter installation and security deposit for meter, development charges paid to Government authority/local authority, legal fees for transaction of sale of residential apartments can reasonably be expected to be supplied by the builder/developer/promoter of a residential project. They are inextricably linked to a residential apartment or dwelling. Without these aspects, the property may not be used.
- Further, the type of supplies or charges like advance maintenance charges, club house charges, share of municipal taxes (pertaining to period after occupancy), share money, application & entrance fee of the organization, formation and registration of the organization, legal charges and infrastructure charges are independent from construction service.
- Hence, in view of the above facts and discussion, MAAAR held that some services are inextricably linked while other services are independently provided to the customer. The primary object of the transaction and the intention of the parties known as ‘Dominant intention test’ and principles for determination of naturally bundled services (i.e. services which are generally provided or expected to be provided in conjunction with the main services) point out the independent nature of some of the services. Therefore, following services are clearly identifiable as bundled services:
(i) Water connection charges
(ii) Electric meter installation and deposit for meter
(iii) Development charges
(iv) Legal fees
- On the other hand, the following charges are to be construed as independent supplies:
(i) Club House Maintenance
(ii) Advance Maintenance
(iii) Share of Municipal Taxes (pertaining to period after occupancy)
(iv) Formation and registration of the organization and legal charges in connection there with
(v) Share money, Application & entrance fee of the organization
(vi) Infrastructure charges
- The adverse ruling by AAR, confused the real estate industry considering the fact that there has been a favorable ruling by the same authority i.e. AAR in the similar matter of Joyville Shapoorji Housing Private Limited [2020 (33) G.S.T.L. 306 (A.A.R. – GST – Mah.)].
- However, the matter has now been put to rest by the MAAAR, wherein MAAAR, taking cognizance of the concept of composite supplies, has inter alia held that services that are inextricably linked to the construction services fall within the purview of composite supply. Resultantly, charges recovered in lieu of such services will be classifiable under the chapter heading – ‘9954’ and the rate of GST as applicable to the construction services shall be applicable in respect of such charges -i.e. 12%/5% vis-à-vis 18 %. The MAAAR order is available here- AAAR Order.pdf
- This is a welcome ruling for the real estate industry which has finally got clarity in this matter. The lower rate of GST – 12%/5% – can now also be passed onto the consumers. However, one must note, the appeal is partially allowed, and therefore some of the services, especially services in relation to common amenities such as advance maintenance, club house maintenance are going to still held an independent service, for which the GST rate is 18%. As a result, even though being intricately linked to construction services, the tax rate of 18% will be required to be levied and discharged by the Developer on such services. All in all, however, the ruling by MAAAR has set the tone for the appellate authorities position on the issue of GST on Other Charges. A welcome relief to builders and flat buyers.
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