Bombay HC Relief To Developers, GST Demand On TDR Quashed In Key Ruling

Nagpur: In a key ruling from the Nagpur bench of Bombay High Court, a significant GST demand on a real estate developer concerning Transferable Development Rights (TDR) has been quashed. The case involved a developer who, on April 7, 2022, entered into a development agreement with a landowner. Under this agreement, the developer would construct a multi-storeyed complex on the land in exchange for INR 7 crores and two completed apartments.

Crucially, the developer did not obtain any TDR or Floor Space Index (FSI) from a government or third-party authority. Instead, the development was undertaken purely based on the contractual rights granted by the landowner.

GST Demand Raised Under Reverse Charge Mechanism

Despite this, tax authorities issued a show cause notice followed by a demand notice, asserting that the arrangement involved a taxable supply of TDR or FSI. Citing Entry 5B of Notification No. 13/2017 – Central Tax (Rate), they claimed the transaction attracted GST under the reverse charge mechanism.

Bombay High Court's Key Observations

The Hon’ble Bombay High Court examined the applicability of Entry 5B, which pertains to services involving supply of TDR/FSI by one party to a promoter. It held that this entry applies only when the development rights are granted by a statutory planning or regulatory authority—typically in lieu of land relinquishment or regulatory compliance.

In the present case, however, the court found that the petitioner merely utilized the existing development potential of the plot as per the agreement with the landowner. Since no rights were acquired from a regulatory authority, the transaction did not qualify as a transfer of TDR/FSI under the meaning of the GST notification.

The court also dismissed the respondent's reliance on Clause 18 of the development agreement, stating it only mandates compliance with the Maharashtra Apartment Ownership Act and does not constitute a transfer of statutory rights.

Implications and Legal Contrast

This ruling creates a noteworthy distinction between development rights granted contractually by landowners and those issued under statutory schemes by planning bodies. However, it stands in contrast to the Telangana High Court’s decision in Prahitha Constructions Pvt. Ltd., upheld by the Supreme Court, which ruled GST applies to TDRs.

As such, while the Bombay HC decision provides relief, developers are advised to tread cautiously. Especially in commercial developments, a comprehensive evaluation of tax liabilities is essential before relying on this judgment.