AAR Holds Construction Service Taxable Despite Outsourcing Under Separate Agreements

Case Details: Varaha Land (P.) Ltd., In re [2026] 186 taxmann.com 507 (AAR-KARNATAKA)

Judiciary and Counsel Details

• Kalyanam Rajesh Rama Rao, Member (Central Tax) & Sivakumar S. Itagi, Member (State Tax)

Facts of the Case

The applicant, engaged in the development of residential villa projects under a joint development agreement (JDA), allocated 75% share to itself and 25% to landowners and entered into separate agreements with buyers, one for the sale of an undivided share in land and another for the construction of villas. It further outsourced the actual construction work to a third-party contractor, while retaining contractual responsibility towards buyers for completion and delivery of villas, with consideration being received on a milestone basis before completion. It contended that since construction was outsourced, its activity did not constitute a taxable supply of construction service, and sought a determination on classification and valuation. The matter was accordingly placed before the Authority for Advance Ruling (AAR).

AAR Held

The AAR held that the agreement entered into by the applicant with customers for the construction of villas constituted an independent supply of service under Section 7 of the CGST Act read with the Karnataka GST Act, notwithstanding outsourcing of actual construction work, as outsourcing only represented the mode of performance and did not extinguish the applicant’s contractual obligation towards buyers. The Authority further held that the construction and sale arrangements were naturally bundled supplies with construction as the principal supply and were classifiable under Heading 9954(ia) of the GST rate notification rather than the general Heading 9954(xii), as consideration was received before completion of construction. It was further held that, for valuation under Section 15 of the CGST Act read with Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017, the value of supply must be determined by deeming one-third of the total amount charged as attributable to land and the remaining as taxable value of construction service, irrespective of separate agreements for land and construction.

List of Cases Referred to

• State of Andhra Pradesh v. Larsen and Toubro Ltd. 2008 taxmann.com 1809 (SC) (para 5.1)
• Munjaal Manishbhai Bhatt v. Union of India [2022] 138 taxmann.com 117/92 GST 327/62 GSTL 262 (Gujarat) (para 5.3).