Can Service Tax Be Levied On Transfer of Development Rights? Delhi High Court To Decide

The Delhi High Court on Monday took up a Revenue appeal that squarely raises the question of whether the transfer of development rights constitutes a taxable service under the Finance Act, 1994.

A Division Bench of Justices Nitin Wasudeo Sambre and Ajay Digpaul issued notice in an appeal filed by the Service Tax Department against an order of the Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had quashed a service tax demand of nearly Rs 5 crore raised on a real estate developer.

The bench granted the developer two weeks to place the joint development agreements on record.

The dispute arises from two joint development agreements entered into by the developer with Splendor Landbase Limited and Advance India Projects Limited. Under the agreements, the developer was granted an exclusive license to develop the land, market and sell saleable units, and receive sale proceeds, while ownership of the land remained with the landowners. The developer received consideration of approximately Rs 34 crore between May 2011 and February 2013.

Certain payments made to the developer were subjected by the landowners to tax deduction at source under Section 194J of the Income Tax Act, treating the amounts as fees for professional or technical services.

The developer, however, did not obtain registration under the service tax regime and did not disclose these receipts in its service tax returns. The Service Tax Department initiated an investigation, alleging that disclosure of income under the Income Tax Act did not amount to compliance under the Finance Act, 1994, and that the non-disclosure of receipts amounted to suppression of material facts.

The Department contended that such suppression justified invocation of the extended period of limitation under the proviso to Section 73 of the Finance Act, 1994, which permits the issuance of a show-cause notice for recovery of unpaid or short-paid service tax for up to five years instead of the normal limitation period.

In 2020, a service tax demand of Rs 4,99,98,586 was raised against the developer. On appeal, CESTAT Delhi set aside the entire demand as time-barred. While deciding the appeal on limitation, the tribunal observed that the mere deduction of tax at source under Section 194J does not automatically render a transaction taxable under the service tax law. It clarified that taxability must be determined based on the true nature of the transaction and not on the TDS provision applied by the payer. This prompted the Service Tax Department to file the present appeal.

Key arguments

Senior Counsel Anurag Ojha, appearing for the Service Tax Department, submitted that deduction of TDS under the Income Tax Act does not absolve liability for service tax on the transfer of development rights. He relied on Section 66E(e) of the Finance Act, 1994, to argue that transfer of development rights constitutes an intangible benefit falling within the scope of “agreeing to an obligation to do an act or to tolerate an act or to refrain from doing an act.”

He contended that by permitting the developer to exploit the development potential of the land while the landowners refrained from exercising those rights, the transaction amounted to a “declared service” under the Act. He further submitted that advances received towards transfer of development rights were not covered by the exclusion under Section 65B(44) of the Finance Act.

The department also argued that where the right to develop land for agricultural, residential, or commercial purposes does not involve transfer of ownership of the land, the consideration received under a joint development agreement becomes exigible to service tax.

Further, it was contended that suppression and non-disclosure were evident since the developer had neither obtained service tax registration nor disclosed the receipts in its service tax returns.

On these grounds, the Service Tax Department sought setting aside of the CESTAT order and restoration of the Order-in-Original confirming the service tax demand along with interest and penalties.

The appeal will be taken up for further consideration after the developer places the agreements on record.