Assignment of Leasehold Rights Equals Sale of Land, Not Liable to GST : Gujarat HC Rules

Issue involved

Whether assignment of leasehold rights qualify as supply of services for the purpose of levy of GST?

Facts of the case

• The Gujarat Industrial Development Corporation (GIDC), acts as a nodal agency for the development of industrial estates in the state of Gujarat.
• A licensing agreement is executed between the GIDC and the lessees for setting up industrial units. Licensing agreement also contains a clause wherein the GIDC agrees to execute lease deed for a tenure of 99 years.
• GIDC executes a registered lease deed in favour of the lessees upon payment of the applicable stamp duty. The lease deed also permits the lessees to assign the leasehold rights and interest in the plot to any other person. Since the CGST Act came into force, revenue authorities have issued show cause notices to petitioners and assignees with leasehold rights and interest in their plots allotted by the GIDC, alleging non-payment of GST at the rate of 18% on such transactions of the assignment of leasehold rights.

Arguments of the Appellant (Assessee)

1. The appellant argued that although Section 7(1)(a) of the CGST Act, 2017 defines “supply” to inter alia includes activities such as “leasing or renting of immovable property”, whereas Schedule Ill of the Act exempts the “sale of land” and “sale of building” from the levy of GST, categorising them as neither a supply of goods nor services.
2. The assessee also submitted that a “permanent lease is as much an alienation or a sale”. The mere fact that lease rent was payable did not make a permanent lease any the less alienation than a sale.
3. Finally, the assessee contended that what was assigned to them was not merely the right to use land, building constructed on the land was also transferred along with the rights and interest in land. They asserted that since the transfer of such immovable property could not be subjected to GST, the sale of leasehold rights could not fall within the scope of supply of goods or services, considering it is not an activity but an event of transfer of leasehold right.

Arguments of the Respondent (Revenue)

1. The Respondents contended that since the transfer of leasehold rights qualified as a supply of services under Section 7(1), it was taxable under the GST regime. They stated that leasehold interest was an intangible asset, which was not the immovable property itself. Contrary to the reliance the Petitioners had placed on the definition of “immovable property” in various legislations, the Respondents submitted that the meaning of the term “immovable property”, more particularly when not defined in the GST legislations, should be understood in context of the provisions of the legislation with which the question had arisen – CGST Act. Furthermore, the exclusion of only the sale of land and building in Schedule III implies that other immovable property transactions, such as leasehold rights, are covered under services.
2. Further, the GIDC, as the owner of the land, enjoyed a bundle of rights over it, including the right to own, right to construct, right to give a license, right to possess and occupy, right to give a lease, etc. Now, when the GIDC transfers one of the rights, i.e., the right to occupy the land, in favour of the lessee, it qualifies as supply of service under the GST Act and is susceptible to GST. Consequently, its further transfer, which is also a transfer of the right to occupy/possess, will continue to remain as a supply of service. Its characteristic will not change even if the lessee elects absolute transfer in favour of an assignee, leaving no rights whatsoever with the lessee in respect of the said lease-hold land.

Decision of the Court

The ownership includes rights such possession, enjoyment of income from, alienation, and recovery any right from the one who has improperly obtained the title. Interest in the immovable property in the form of leasehold rights cannot be said to be different from the immovable property itself.

However, since Entry 5 of Schedule III to the CGST Act clearly provides that sale of land cannot to be treated as supply of goods or services, transfer of leasehold rights (which must be considered as sale of land) could also be out of the purview of the provisions of the scope of supply according to Section 7 of the CGST Act. Accordingly, the HC held that assignment of any land to the assignees would not be subject to GST.

Significant takeaways from judgment

The decision reinforces the exclusion of immovable property transactions from GST. The impact of this judgment extends beyond leasehold assignments to other rights arising derived from land. Transactions, such as the transfer of development rights in real estate projects, are also highly contentious. If such rights are considered benefits arising from land, they could be claimed to not attract GST, based on the rationale of this decision. This could lead to reduced tax costs for developers and builders, significantly impacting the taxation of real estate transactions, potentially lowering project costs, and encouraging investment in urban development.

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