Assignment of leasehold rights by lessee to third party for consideration exempt from GST under Section 9

Gujarat HC held that assignment of leasehold rights by lessee to third party for consideration constitutes transfer of benefits arising from immovable property, not taxable supply under GST. Court ruled that provisions under Section 7(1)(a) read with Schedule 2 Clause 5(b) and Schedule 3 Clause 5 do not apply to such transactions, making them exempt from GST levy under Section 9. Consequently, demand order under Section 73, recovery notice, and show-cause notice were quashed and petition was allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the assignment by sale and transfer of leasehold rights in an industrial plot allotted by the Gujarat Industrial Development Corporation (GIDC) amounts to a "supply of service" under Section 7(1)(a) of the State Goods and Services Tax Act (GST Act) and is therefore subject to GST levy under Section 9 of the Act;
• Whether such assignment/transfer of leasehold rights is to be treated as transfer of "immovable property" and hence excluded from the scope of "supply of services" under the GST Act, particularly under Clause 5 of Schedule III;
• The applicability and interpretation of relevant provisions of the GST Act, including Sections 2(102), 7, 9, 17, Schedule II and Schedule III, in relation to leasehold rights and their assignment;
• The relevance and impact of prior judicial precedents, including the Gujarat Chamber of Commerce decision and Supreme Court rulings, on the interpretation of leasehold rights and their tax treatment under GST;
• Whether the petitioner's liability to pay GST on the assignment of leasehold rights was correctly confirmed by the tax authorities under Section 73 of the GST Act;
• The permissibility of utilization of input tax credit for discharging any such GST liability arising from the assignment of leasehold rights.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature of Assignment of Leasehold Rights - Supply of Service or Transfer of Immovable PropertyRs.

Relevant Legal Framework and Precedents: The Court examined Section 7(1)(a) of the GST Act defining "supply" to include transfer, sale, barter, exchange, license, rental, lease or disposal made for consideration in the course or furtherance of business. Clause 5 of Schedule II treats renting of immovable property as supply of service. However, Clause 5 of Schedule III excludes sale of land from supply of goods or services. The Court also relied on the Gujarat Chamber of Commerce judgment, which analyzed the distinction between allotment of leasehold rights by GIDC and subsequent assignment of those rights by the lessee to a third party. The Supreme Court's ruling in Gopal Saran v. Satya Narayana was referenced to define "assignment" as a transfer of whole property rights, including lease rights.

Court's Interpretation and Reasoning: The Court noted that allotment of land by GIDC on lease is a supply of service as the ownership remains with GIDC and the lessee only acquires limited rights for a fixed term. However, when the lessee assigns the leasehold rights to a third party, it amounts to an absolute transfer of immovable property rights, extinguishing the assignor's estate and transferring all rights and liabilities to the assignee. Such assignment is akin to sale or mortgage of immovable property and is therefore outside the scope of "supply of service."

Key Evidence and Findings: The petitioner had executed a Deed of Assignment transferring leasehold rights to M/s. Acquire Chemicals for a consideration of Rs. 75 lakhs. The tax authorities treated this as a taxable supply of service, demanding GST. The Court found from the facts and legal provisions that this transaction is a transfer of immovable property rights rather than a supply of service.

Application of Law to Facts: The Court harmonized the GST Act provisions, noting that while leasing is a service, assignment of leasehold rights is a transfer of immovable property, excluded from GST. The legislative intent, as reflected in Schedule III and GST Council decisions, supports exclusion of sale or transfer of immovable property from GST levy.

Treatment of Competing Arguments: The respondents argued that leasehold rights are intangible interests and thus supply of service. The Court rejected this, holding that assignment conveys full ownership rights and liabilities, making it a transfer of immovable property. The Court also referred to the definition of "property" as including rights guaranteed by law, and the principle that leasehold rights for long terms are equivalent to sale or mortgage.

Conclusions: Assignment of leasehold rights by the lessee is a transfer of immovable property, not a supply of service, and hence outside the GST levy under Section 9.

Issue 2: Interpretation of GST Act Provisions and Legislative Intent

Relevant Legal Framework and Precedents: The Court analyzed Sections 2(102), 7, 9, 17, and Schedules II and III of the GST Act. It also considered the IGST Act, Finance Act, 1944 (Service Tax regime), and GST Council meeting minutes.

Court's Interpretation and Reasoning: The Court emphasized the legislative intent to subsume indirect taxes under GST but exclude sale of immovable property from GST levy. The definition of "service" excludes goods, money, and securities, and prior service tax laws excluded transfer of title in immovable property from service tax. The GST Council deferred GST on land and building sales, reflected in Schedule III exclusion. The Court held that assignment of leasehold rights is akin to sale of immovable property and thus excluded from GST.

Key Evidence and Findings: The Court referred to GST Council minutes where tax on land and building sales was deferred, and the exclusion in Schedule III. It noted that under the service tax regime, development rights (benefits arising from land) were not taxable, and leasehold rights are greater rights than development rights.

Application of Law to Facts: The Court applied these principles to the facts, holding that the assignment of leasehold rights by the petitioner falls outside GST levy, consistent with legislative intent and prior tax regimes.

Treatment of Competing Arguments: The respondents contended that the assignment is a supply of service as per GST provisions. The Court rejected this, highlighting the specific exclusion of sale of immovable property and the nature of assignment as transfer of ownership rights.

Conclusions: The GST Act's provisions, legislative history, and Council decisions confirm that assignment of leasehold rights is not taxable under GST.

Issue 3: Validity of Tax Authorities' Order Confirming GST Liability

Relevant Legal Framework and Precedents: Section 73 of the GST Act empowers authorities to recover tax on supplies made without payment of tax. The Court considered whether the demand for GST on assignment of leasehold rights was legally sustainable.

Court's Interpretation and Reasoning: Since the assignment is not a supply of service under the GST Act, the tax demand and confirmation orders under Section 73 are invalid.

Key Evidence and Findings: The petitioner had not charged or collected GST on the assignment. The tax authorities issued a show-cause notice and confirmed liability. The Court found that the underlying premise for levy was erroneous.

Application of Law to Facts: The Court quashed and set aside the show-cause notice and order confirming GST liability.

Treatment of Competing Arguments: Respondents relied on the tax demand and classification of the transaction as supply of service. The Court rejected this based on the above analysis.

Conclusions: The tax demand and confirmation order are quashed as the transaction is not taxable under GST.

Issue 4: Utilization of Input Tax Credit (ITC) for GST Liability on Assignment

Relevant Legal Framework and Precedents: Input tax credit utilization is permissible only when GST liability exists on a taxable supply.

Court's Interpretation and Reasoning: Since the assignment is not a taxable supply, no GST liability arises, and hence utilization of ITC to discharge such liability does not arise.

Conclusions: The question of ITC utilization is rendered moot and does not arise.

3. SIGNIFICANT HOLDINGS

The Court held:

"Assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favour of third party-assignee for a consideration shall be assignment/sale/ transfer of benefits arising out of 'immovable property' by the lessee-assignor in favour of third party-assignee who would become lessee of GIDC in place of original allottee-lessee. In such circumstances, provisions of section 7(1)(a) of the GST Act providing for scope of supply read with clause 5(b) of Schedule II and Clause 5 of Schedule III would not be applicable to such transaction of assignment of leasehold rights of land and building and same would not be subject to levy of GST as provided under section 9 of the GST Act."

Core principles established include:

• Leasehold rights assigned by a lessee constitute transfer of immovable property, not supply of service;
• Sale or assignment of leasehold rights is excluded from GST levy under Clause 5 of Schedule III;
• Legislative intent and GST Council decisions confirm exclusion of sale/transfer of immovable property from GST;
• Tax authorities' demand for GST on such assignment is unsustainable and liable to be quashed;
• Input tax credit utilization for such non-existent GST liability does not arise.

The final determination was that the petitioner's assignment of leasehold rights is not subject to GST, and the impugned notices and orders demanding GST were quashed and set aside with no order as to costs.

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