2020 (8) TMI 251 - AAR - GST

GST Applicability to Leasehold Rights Transfer Fees: Ruling on Tax Classification and Input Credit

The Authority ruled that the assignment of leasehold rights and the transfer fee are taxable under the GST Act, with the activity classified as a service ... Assignment of leasehold rights - supply of services under Schedule II - classification as Other miscellaneous service (SAC 999792 / SAC 999794) - taxable at 18% under Notification No. 11/2017 - CT (Rate) - input tax credit admissibility for GST on transfer feeAssignment of leasehold rights - supply of services under Schedule II - classification as Other miscellaneous service (SAC 999792) - taxable at 18% under Notification No. 11/2017 - CT (Rate) - Whether consideration received on assignment of the applicant's leasehold rights in the Demised Premises is taxable under the GST Act and, if so, its classification and rate. - HELD THAT: - Paragraphs 4.2 and 4.4 explain that for the purposes of the GST Act benefits arising from land in the forms specified in paragraph 2 of Schedule II (including lease, tenancy, license to occupy and letting out) are treated as supply of services and not as transfer of immovable property. The Deed confers only conditional possession and limited rights of sub-lease; the applicant enjoys no title or ownership which would constitute a sale under Transfer of Property principles. The assignment therefore effects transfer only of the applicant's leasehold rights for the unexpired term and does not create any fresh benefit from the land. Consequently, the activity is a supply of service. The Authority holds that such assignment is in the nature of compensation for agreeing to transfer leasehold rights and is classifiable as an Other miscellaneous service (SAC 999792) and taxable at 18% under Sl. No. 35 of Notification No. 11/2017 - CT (Rate). [Paras 4]Consideration for assignment of leasehold rights is a taxable supply of service, classifiable under SAC 999792 and taxable at 18% under the Rate Notification.Transfer fee as consideration for toleration/consent - classification as Other miscellaneous service (SAC 999794) - input tax credit admissibility for GST on transfer fee - Whether the transfer fee charged by the Sub-lessor for permitting assignment is taxable and whether GST paid on such transfer fee is admissible as input tax credit. - HELD THAT: - Paragraph 4.7 finds that the transfer fee charged by the Sub-lessor is consideration for tolerating or consenting to an act (per clause 12.28) which the applicant would otherwise be restrained from doing, and thus constitutes a service provided in the course or furtherance of business. The Authority classifies this service under Other miscellaneous service (SAC 999794) and, being taxable at 18% under Sl. No. 35 of the Rate Notification, the GST paid on the transfer fee is eligible to be claimed as input tax credit, particularly as business includes supply or acquisition of goods or services in connection with closure of business under section 2(17)(d) of the GST Act. [Paras 4]Transfer fee is a taxable service (SAC 999794) taxed at 18%, and GST paid thereon is admissible as input tax credit.Final Conclusion: The Authority rules that assignment of the applicant's leasehold rights is a taxable supply of service (SAC 999792) at 18%, and the transfer fee charged by the Sub-lessor is likewise a taxable service (SAC 999794) at 18%; GST paid on the transfer fee is admissible as input tax credit. This Ruling remains valid subject to the provisions of Section 103 unless set aside under Section 104(1) of the GST Act. Issues:1. Admissibility of the Application2. Submissions of the Applicant3. Submissions of the concerned officer from the revenue4. Observations and findings of the AuthorityIssue 1: Admissibility of the ApplicationThe applicant was admitted by the Authority for Advance Ruling as the Liquidator sought clarification on the GST implications of assigning leasehold rights of a factory unit. The Liquidator inquired about the GST applicability on the consideration received from such an assignment and the input tax credit eligibility for the GST paid on the transfer fee. The questions raised were deemed admissible under the GST Act, and the application was accepted as the concerned revenue officer did not object.Issue 2: Submissions of the ApplicantThe applicant argued that the assignment of leasehold rights should not attract GST as it is akin to the sale of immovable property. Referring to legal precedents, the applicant contended that the assignment transfers possession and title for a price, qualifying as a sale of the building. Additionally, the applicant claimed that input tax credit for the GST paid on the transfer fee should be allowed as it is a consideration for a service provided in connection with business closure.Issue 3: Submissions of the concerned officer from the revenueThe revenue officer did not address the applicant's arguments but classified the assignment of sub-lease as a service under 'Other Miscellaneous Services,' subject to taxation accordingly.Issue 4: Observations and findings of the AuthorityThe Authority analyzed the definitions under the General Clauses Act and the GST Act to determine the nature of the assignment. It concluded that the assignment of leasehold rights does not constitute a transfer of immovable property but a service under the GST Act. The Authority ruled that the assignment activity falls under 'Other miscellaneous service' and is taxable at 18%. Furthermore, the transfer fee charged by the Sub-lessor was deemed a consideration for a service provided in connection with business closure, making the GST paid on it eligible for input tax credit.In conclusion, the Authority ruled that the assignment of leasehold rights and the transfer fee are taxable under the GST Act, with the activity classified as a service and the GST paid on the transfer fee considered admissible as input tax credit.