2025 (7) TMI 690 - HC - GST

GIDC lessee's assignment of leasehold rights to third party constitutes property transfer, not taxable service under GST

QUILON REAL INDUSTRIES PVT. LTD. Versus UNION OF INDIA & ORS.

QUILON REAL INDUSTRIES PVT. LTD. Versus UNION OF INDIA & ORS. - TMI The core legal questions considered by the Court in this matter include:1. Whether the assignment or transfer of leasehold rights by the lessee (petitioner) in favor of a third party constitutes a 'supply of service' under Section 7(1A) of the State Goods & Service Tax Act, 2017 (GST Act) and is thus subject to GST.2. Whether such assignment or transfer of leasehold rights amounts to a transfer of 'immovable property' and is therefore excluded from the scope of taxable supply under GST law.3. The applicability of relevant provisions of the GST Act, including Section 7 (scope of supply), Schedule II and Schedule III, and the interpretation of related statutory and judicial precedents.4. Whether the petitioner was liable to pay GST on the consideration received for assignment of leasehold rights without charging GST at the time of transaction.5. The effect of the Supreme Court decision in Gujarat Chamber of Commerce and other authoritative precedents on the present facts.Issue-wise detailed analysis:Issue 1 & 2: Whether assignment of leasehold rights constitutes supply of service under GST or transfer of immovable property excluded from GSTRelevant legal framework and precedents: The Court relied extensively on Section 7 of the GST Act which defines 'supply' to include all forms of supply of goods or services or both such as transfer, sale, barter, exchange, license, rental, lease or disposal made for consideration in the course or furtherance of business. However, Schedule III of the GST Act excludes sale of land and building from supply of goods or services. Clause 5(b) of Schedule II treats renting of immovable property as supply of service.Additionally, the Court considered the Supreme Court ruling in Gujarat Chamber of Commerce which clarified the distinction between allotment of land by GIDC on lease (a supply of service) and subsequent transfer or assignment of leasehold rights by the lessee, which is akin to sale of immovable property and hence outside GST ambit. The Court also referred to authoritative definitions of 'assignment' and 'property' from Black's Law Dictionary and Corpus Juris Secundum, and judicial pronouncements including Byramjee Jeejeebhoy (P) Ltd vs State of Maharashtra and Gopal Saran v. Satya Narayana.Court's interpretation and reasoning: The Court noted that the initial allotment of land by GIDC on a long-term lease is a supply of service under GST since ownership remains with GIDC and the lessee only receives a right to use the land. However, when the lessee assigns or transfers the leasehold rights to a third party, this transaction extinguishes the lessee's rights and transfers all interests in the immovable property to the assignee, effectively amounting to a transfer of immovable property itself.The Court emphasized that such assignment is an absolute transfer of rights, not merely a supply of service. It held that leasehold rights for a long term (such as 99 years) are tantamount to ownership rights and therefore the transfer of such rights constitutes a sale or transfer of immovable property, which is excluded from GST under Schedule III.Further, the Court observed that the GST Council, through its meetings and notifications, has consciously excluded sale or transfer of land and building from GST levy, reinforcing the legislative intent not to tax transfer of immovable property. The Court also noted that under the erstwhile service tax regime, transfer of title in immovable property was specifically excluded from the definition of service, and this principle continues under GST.Key evidence and findings: The petitioner had executed an Agreement for Sale with M/s. Jay Chemical Industries for transfer of leasehold rights and received consideration of Rs.4.26 crore without charging GST. The respondents issued a show-cause notice demanding GST on this transaction treating it as supply of service. The Court found that the transaction was a transfer of immovable property and not a supply of service.Application of law to facts: Applying the legal principles, the Court concluded that the assignment of leasehold rights by the petitioner to a third party was a transfer of immovable property and thus outside the scope of GST levy. The provisions of Section 7(1)(a), Schedule II clause 5(b), and Schedule III clause 5 were not applicable to this transaction.Treatment of competing arguments: The respondents argued that the assignment of leasehold rights is a supply of service because interest in immovable property is intangible and thus taxable. The Court rejected this, holding that assignment conveys all rights and liabilities in the property and is therefore a transfer of immovable property, not a service. The Court also rejected the contention that excluding only sale of land and building from GST does not exclude transfer of leasehold rights, clarifying that leasehold rights for a long term are equivalent to ownership rights.Conclusion: The assignment or transfer of leasehold rights by the lessee to a third party is a transfer of immovable property and not a supply of service under GST. Therefore, such transaction is not liable to GST.Issue 3: Liability to pay GST and input tax credit implicationsRelevant legal framework: Section 9 of the GST Act provides for levy of GST on taxable supplies. The petitioner challenged the demand for GST on the assignment transaction and contended no GST was charged or collected.Court's reasoning: Since the assignment of leasehold rights is not a supply of service, the GST levy under Section 9 does not apply. Consequently, the question of utilization of input tax credit to discharge GST liability on such transaction does not arise.Conclusion: The petitioner is not liable to pay GST on the assignment of leasehold rights and no input tax credit utilization is required.Significant holdings:'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.''The scope of 'supply of services' would not include transfer of leasehold rights as supply of service as it would be transfer of 'immovable property' being a benefit arising out of immovable property consisting of land and building.''Clause 5 of Schedule III of the GST Act clearly provides that sale of land cannot be treated as supply of goods or services. Therefore, leasehold rights which are to be considered as sale of land would be out of purview of the provisions of scope of supply as per section 7 of the GST Act.''Considering the definition of 'service' and the legislative intent, there was no intention of the legislature to impose tax on transfer of immovable property.''The impugned show cause notices and orders are hereby quashed and set aside.'