One of the several issues that has been consider and studies in

the Industry is taxability on transfer of development rights

(hereinafter referred to as “TDR”). In this technical paper, As we all

are aware that Real Estate Industries are prune to a lot of tax

disputes and complexities of transactions. Thus, let us discuss in



Introduction to Real Estate Practice – Development Rights

The Real estate sector of the country is growing at an exponential

way and housing is the one of the crucial necessity of every citizen of

the country. With the development in the real estate sector the most

adopted model remains to be developer – land owner – customer

model. There are majorly two reasons for adopting this model:-


  1. The developer company itself sometimes would be capable to

acquire the complete land but cannot do so due to land ceiling

provisions applicable to the state. In such scenarios different group

companies buy the land and pool their development rights to a

single developer company.


  1. In other case, on the merit that investment reduces drastically for

both the developer and land owner and it is mutually beneficial


The Model:

 The model of operation in such a scenario is as under:-


  1. a) The land owner shall acquire land on which the development is to

be undertaken. The Developer enters into an agreement with land



  1. b) Pursuant to this agreement, land owner transfers his

‘Development Rights’ to the developer.


  1. c) These development rights are generally transferred to the

developer permanently, exclusively and on irrevocable basis.


  1. d) The consideration charged by land owner for such transfer of

development rights may be in pure monetary terms or may be as a

revenue share arising out of the sale proceeds of the project by the



  1. e) The development rights of the land entitle the developer to enter

the land, develop the land, obtain license for land conversion /

development, sell the units of the projects and enter into flat buyer’s

agreement with the buyers.


What are Development Rights?


Development right is fundamentally a right to develop the land for

agricultural, residential or commercial use. Several rights one may

identify with land are development rights, possession right,

cultivation right etc.


By transferring the development rights it shall not result into

transfer of ownership of the land but only the aspectual right to

develop the land.


How was the Taxability prior to 1st July, 2014 {Prior to

Negative List Regime}?


Prior to negative list regime a service was liable to service tax only if

it was covered in the specified set of services on which service tax

was applicable. Out of several services related to real estate industry

including commercial construction, real estate agent or preferential


location services the said activity of transfer of development rights

find nearest taxability contentions in ‘Renting of Immovable

Property”. Whether it was taxable under this category or not follows

in this discussion.

As per section 65(105)(zzzz),

‘Any services provided or to be provided to any person, by any other

person, by renting of immovable property or any other service in

relation to such renting, for use in the course of or, for furtherance

of, business or commerce’

Where “Immovable property” includes—

(i) building and part of a building, and the land appurtenant thereto;

(ii) land incidental to the use of such building or part of a building;

(iii) the common or shared areas and facilities relating thereto; and

(iv) in case of a building located in a complex or an industrial estate,

all common areas and facilities relating thereto, within such

complex or estate, but does not include-            

.  vacant land solely used for agriculture, aquaculture, farming,

forestry, animal husbandry, mining purposes

.  vacant land, whether or not having facilities clearly incidental

to the use of such vacant land;

.  land used for educational, sports, circus, entertainment and

parking purposes; and

.  building used solely for residential purposes and buildings

used for the purposes of accommodation, including hotels,

hostels, boarding houses, holiday accommodation, tents,

camping facilities if any,


.  vacant land, given on lease or license for construction of

building or temporary structure at a later stage to be used for

furtherance of business or commerce;

Now, to understand the taxability of the transfer of development

rights it is imperative for us to discuss that whether irrevocable

transfer of development right would lead to lease or license of

vacant land.

Lease and License:

Section 105 of Transfer of Property Act, 1882 defines lease as:

“A lease of immovable property is a transfer of a right to enjoy such

property, made for a certain time, express or implied, or in

perpetuity, in consideration of a price paid or promised, or of

money, a share of crops, service or any other thing of value, to be

rendered periodically or on specified occasions to the transferor by

the transferee, who accepts the transfer on such terms” Essentially

the periodicity, perpetuity and right to enjoy such property for

certain time are the main elements of a lease.

In case of ‘Jaswantsinh Mathurasinh & anor v. Ahmedabad Municipal

Corpn & ors (1992) 1 SCC 5’ it was held by that “A lease creates a

right or an interest in the enjoyment of demised property and a

tenant or sub-tenant is entitled to remain in possession thereof until

the lease is duly terminated, and eviction takes place in accordance

with law.”

A license is defined in Section 52 of Indian Easements Act 1882 as:

‘A right to do or continue to do, in or upon the immovable property

of the grantor, something which would in the absence of such right


be unlawful, such right does not amount to an easement or an

interest in the property. {Muskett v. Hill (1839) 5 Bing (HC) 694 }

In Associated Hotels of India v. R N Kapoor {AIR 1959 SC 1262}, it

was held that

“The following propositions may, therefore, be taken as well-


(1) To ascertain whether a document creates a licence or lease, the

substance of the document must be preferred to the form ;

(2) the real test is the intention of the parties-whether they intended

to create a lease or a licence;

(3) if the document creates an interest in the property, it is a lease

but, if it only permits another to make use of the property, of which

the legal possession continues with the owner, it is a licence; and

(4) if under the document a party gets exclusive possession of the

property, prima facie, he is considered to be a tenant; but

circumstances may be established which negative the intention to

create a lease.”

On an understanding of the law laid down by various Courts, of the

term ‘immovable property, it can be safely stated that TDR’s are the

benefits arising out of the land and the same is an immovable


By Jointly reading above, It can be carved a view that Transfer of

TDR on Permanent basis is transfer of “Title” in “Immovable

Property” and shall be outside the Ambit of Service Tax in Negative



Taxability of Development Rights under GST Regime:

As per Section 9 of the CGST Act, 2017 (CGST Act), Central GST shall

be levied on all intra-state supply of goods or services or both. The

aspect that needs discussion is the specific changes GST Law that

has brought in terms of taxability of Such Land Related



Hence, it would be interesting to note that Schedule III to the CGST

Act contains a negative list, enlisting activities which shall neither be

treated as supply of goods nor supply of services.

. Paragraph 5 of Schedule III covers ‘sale of land and, subject to

clause (b) of paragraph 5 of Schedule II, sale of building’.

. Paragraph 6 covers actionable claims, other than lottery,

betting and gambling.

At this point, it shall be important to understand whether the grant

of development right and subsequent transfer of interest in land by

land owner amounts to sale of land or not? It may be noted that the

expressions ‘land’ or ‘sale of land’ has not been defined under the


Let us first analyze the word ‘sale’ as per Section 54 of Transfer of

Property Act, 1882:

‘’sale’ is a transfer of ownership in exchange for a price paid or

promised or part- paid and part-promised. Hon’ble Bombay High

Court in the case of Provident investment Co. Ltd v/s Commissioner

of income tax – AIR 1954 Bom 95 observed that a sale or transfer

presupposes the existence of the property which is sold or

transferred. It presupposes the transfer from one person to another

of the right in the property.


The apex Court in the case of Sunil Siddhartha Bhai v. CIT – AIR

1986 SC 368 observed that in its general sense, the

expression ‘transfer of property’ connotes passing of the entire

bundle of rights from the transferor to the transferee. In another

case, the transfer may consist of one of the estates only, out of all

may be a reduction of the exclusive interest in the totality of rights

of the original property is a larger interest than a share in that

property. To the extent to which exclusive interest is reduced to a

shared interest it would seem that there is transfer of interest

Syndicate Bank vs Estate Officer – AIR 2007 SC 3169, the Supreme

Court held that a jurisprudential title to a property may not be title

of an owner. A title which is subordinate to an owner and which

need not be created by reason of a registered deed of conveyance

may at times create title. The title which is created in a person may

be a limited one, although conferment of full title may be governed

upon fulfilment of certain conditions. Whether all such conditions

have been fulfilled or not would essentially be a question of fact in

each case

On an understanding of the above judgements, we can infer that the

word ‘sale’ denotes transfer of title which is irrevocable and

permanent. Hence ‘sale of land’ denotes ‘transfer of title in land.



Since, GST is a new law and its interpretations are still developing.

Thus, Untill settled principles emerge by way of judicial precedents

and more clarity is arrived at on the above discussed issues one may

decide to:


  1. Either take a conservative approach by paying GST on

Developmental Right’s; or

  1. Pay GST under protest and make an application seeking refund

(subject to the principle of unjust enrichment); or

  1. Seek an Advance Ruling in all States, and if such a ruling goes in

favour of revenue, then move the Appellate Authorities / Courts for

redressal of such grievance.

It appears that this vexed issue will settle only with the intervention

of Courts or the Government.