Assignment of leasehold rights is a supply under Section 7/Schedule II; GST leviable on transferee's payment to transferor

AAR held that assignment of leasehold rights constitutes a supply of service under Section 7/Sch II of the CGST Act, so GST is leviable on the consideration paid by the transferee to the transferor. Reimbursement/recovery of land-development and allied civil works is a taxable supply of services and attracts GST. The transfer/permission fee payable to the land authority is a taxable "other miscellaneous service" and GST charged on it qualifies as input tax credit to the applicant.

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ISSUES PRESENTED AND CONSIDERED

1. Whether assignment/transfer of leasehold rights in leasehold land falls within the scope of "supply" under Section 7 of the CGST Act (i.e., taxable) or is excluded as "sale of land" under Schedule III.

2. Whether recovery of cost of land development and related civil infrastructure by the transferor constitutes a supply of service under Section 7 / Schedule II of the CGST Act and is taxable.

3. Whether GST paid on the transfer fee/commission payable to the original lessor in connection with the transfer of leasehold rights is eligible as Input Tax Credit under Section 16 of the CGST Act.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Taxability of assignment/transfer of leasehold rights

Legal framework: Section 7 of the CGST Act defines "supply" broadly to include all forms of supply of goods or services for consideration, made or agreed to be made in the course or furtherance of business. Schedule II classifies certain activities as "supply of services", including the grant of the right to use immovable property for any purpose for consideration. Schedule III excludes "sale of land" from supply. The legislative scheme distinguishes outright sale of land from grants of rights to use immovable property.

Precedent treatment: Authorities and AARs referenced in the material (several State AARs and CBIC circulars) have consistently treated assignments of leasehold rights as taxable supplies. A High Court decision (Gujarat HC) was cited by the applicant as treating assignment of leasehold rights as transfer of immovable property outside GST; that decision is under challenge before the Supreme Court and therefore not treated as binding.

Interpretation and reasoning: The Authority examined the distinction between transfer of ownership in land and assignment of leasehold rights which confer a limited right to use/occupy. The Authority concluded that assignment of leasehold rights does not transfer ownership but transfers the right to use immovable property for a term, which squarely falls under Schedule II classification of supply of services (grant of right to use immovable property). The Authority emphasized substance over form and legislative intent to tax economic transfers of rights and interests, noting that long-term, consideration-backed assignments operate as de facto transfers of property use and are within the GST net. The Authority rejected the applicant's reliance on decisions treating such transfers as "sale of land", observing divergent jurisprudence and pending challenges to such decisions.

Ratio vs. Obiter: Ratio - Assignment of leasehold rights constitutes a "supply" under Section 7 and is taxable as a supply of services under Schedule II. Obiter - Observations on pending higher court challenges to contrary High Court decisions and policy considerations regarding economic substance.

Conclusion: The assignment/transfer of leasehold rights of leasehold land is taxable under Section 7 of the CGST Act; GST is applicable on the consideration received for transfer of leasehold rights.

Issue 2 - Taxability of recovery of cost of land development and related civil infrastructure

Legal framework: Schedule II and Para 5(b) of Schedule II treat construction of a building or civil structure intended for sale as a supply of service. CBIC circulars and administrative pronouncements address land development, levelling, drainage and similar civil works as taxable services. Section 7's broad definition captures services rendered for consideration in the course of business.

Precedent treatment: CBIC Circular No. 177/09/2022-GST (as cited) and various AARs classify land development and civil works as taxable services. The Authority relied on these administrative interpretations in concluding taxability.

Interpretation and reasoning: The Authority distinguished the development/ infrastructural activities from the right to use land. Development work (roads, drains, compound walls, utilities) are active civil works creating tangible improvements and are separately valued and reimbursed. Such activities are services under Schedule II and taxable under Section 7. Recovery of these costs by the transferor is consideration for such services and therefore taxable at applicable rates.

Ratio vs. Obiter: Ratio - Recovery of cost of land development and related civil infrastructure is a taxable supply of services under Section 7 / Schedule II. Obiter - None material beyond administrative citations confirming similar treatment.

Conclusion: Recovery of cost of land development and related other costs is a supply of service and attracts GST.

Issue 3 - Entitlement to Input Tax Credit on transfer fee/commission paid to original lessor

Legal framework: Section 16(1) of the CGST Act permits registered persons to take credit of input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business, subject to prescribed conditions and restrictions. Classification of the transfer fee determines whether it is a taxable supply to the applicant for which ITC can be claimed.

Precedent treatment: Administrative practice and AARs recognise transfer/transfer fees and charges for toleration/consents by lessors as taxable services (SAC 999794 / "Other miscellaneous service") attracting GST; ITC eligibility follows where the service is used in course or furtherance of business and other conditions of Section 16 are met.

Interpretation and reasoning: The Authority characterized the transfer fee/commission payable to the lessor as consideration for tolerating an act (granting consent/transfer permission) and as "other miscellaneous service" taxable at the notified rate. Since the transfer fee is a consideration for a service rendered in the course or furtherance of business (i.e., enabling the transfer of leasehold rights), it qualifies as an input (service) and GST paid thereon is admissible as input tax credit subject to fulfilment of standard statutory conditions (invoice, payment, usage in course/furtherance of business, and other prescribed conditions).

Ratio vs. Obiter: Ratio - GST paid on the transfer fee/commission payable to the lessor is eligible as Input Tax Credit under Section 16, subject to the conditions and restrictions of the Act. Obiter - Classification as SAC 999794 and rate applicability referenced from notifications and AAR practice.

Conclusion: The transfer fee/commission paid to the original lessor is a taxable supply of service and the GST paid thereon is admissible as Input Tax Credit in accordance with Section 16, subject to compliance with prescribed conditions and restrictions.

Cross-References and Inter-issue Observations

- The issues are interlinked: taxability of assignment (Issue 1) underpins the characterization of related charges; classification of land development reimbursement (Issue 2) and transfer fee (Issue 3) as services supports both tax levy and ITC entitlement.

- Administrative rulings, CBIC circulars and multiple AAR precedents were relied upon to interpret statutory provisions; contrary High Court authority was noted but its differing view was not followed due to pending appellate adjudication and perceived inconsistency with statutory text and legislative intent.

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