GST demand under Section 74 quashed; leasehold rights assignment not supply under Sections 7 and 9

HC quashed the impugned order passed u/s 74 of the CGST Act, holding that assignment of leasehold rights in a plot allotted by GIDC to a third-party assignee for consideration constitutes assignment/sale/transfer of benefits arising out of immovable property. Such transaction does not fall within "supply" under Section 7(1)(a) read with Clause 5(b) of Schedule II and Clause 5 of Schedule III, and therefore is not exigible to GST under Section 9. Consequently, the show cause notice and order demanding GST were set aside and the petition was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether assignment of leasehold rights in industrial plots originally allotted by a statutory development corporation on long-term lease constitutes "supply of services" under Section 7(1)(a) of the Central Goods and Services Tax Act, 2017, attracting GST.

1.2 Whether such assignment of leasehold rights is to be treated as transfer/sale of "immovable property" (akin to sale of land) falling under Clause 5 of Schedule III to the Act and thereby outside the scope of "supply".

1.3 Whether, in view of the binding precedent of the Court in an earlier decision on identical facts and legal provisions, the show cause notice issued under Section 74 of the Act demanding GST on such assignment can be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Characterisation of assignment of leasehold rights - "supply of services" or transfer of immovable property

Legal framework (as discussed by the Court through reliance on earlier decision):

2.1 Section 7 of the Central Goods and Services Tax Act, 2017, defining "scope of supply", including lease, licence, rental etc. as "supply of services".

2.2 Clause 5 of Schedule II, treating certain activities relating to land and building (including renting of immovable property) as "supply of services".

2.3 Clause 5 of Schedule III, excluding "sale of land" from the scope of supply of goods or services.

2.4 Reference to provisions and concepts under the Transfer of Property Act (lease, assignment and transfer of interest in immovable property), and to earlier indirect tax regime and GST Council deliberations, as noted and applied from the prior precedent.

Interpretation and reasoning:

2.5 The Court adopted and applied in extenso the ratio of its earlier decision that distinguished two types of transactions: (i) allotment of land on a long-term lease by the development corporation (GIDC) to the original lessee, and (ii) subsequent assignment of leasehold rights by such lessee to a third-party assignee.

2.6 It was reiterated that: (a) allotment of plot by GIDC on 99-year lease, with premium and periodic rent, constitutes "supply of services" in relation to land/building under Section 7 read with Clause 5(a) of Schedule II, and is taxable; but (b) assignment/transfer of leasehold rights by the lessee-assignor to a third party, together with all incidents and benefits arising out of the land and building, amounts to transfer of "immovable property" and not a "supply of services".

2.7 The Court reaffirmed that a long-term lease (e.g., 99 years) for consideration and its subsequent assignment divests the assignor of all rights and interest in the property and vests them in the assignee; such transaction is legally treated as an alienation akin to sale or mortgage, i.e., as transfer of immovable property.

2.8 The Court accepted that leasehold rights constitute an interest in immovable property of such nature that their assignment is "assignment/sale/transfer of benefits arising out of immovable property" and, hence, is covered by the concept of sale/transfer of land and building which is excluded from GST under Clause 5 of Schedule III.

2.9 On this reasoning, the Court held that provisions of Section 7(1)(a) read with Clause 5(b) of Schedule II cannot convert such assignment of leasehold rights (which operates as a transfer of immovable property) into a "supply of services".

2.10 Consequently, the consideration received by the petitioner for assignment of its leasehold rights in favour of the assignee was held to be consideration for transfer of immovable property and not for any taxable "supply of services" under the Act.

Conclusions:

2.11 Assignment by sale and transfer of leasehold rights of industrial plots originally allotted by the development corporation to the lessee, in favour of a third-party assignee for consideration, is a transfer of immovable property (benefits arising out of land and building) and is not "supply of services".

2.12 Such transactions fall within the exclusion in Clause 5 of Schedule III ("sale of land") and, therefore, lie outside the scope of "supply" under Section 7(1)(a) and are not liable to GST under Section 9 of the Act.

Issue 3: Effect of binding precedent and validity of the show cause notice under Section 74

Interpretation and reasoning:

3.1 The petitioner specifically relied on the earlier judgment of the Court which had already decided, on materially identical facts (GIDC long-term industrial lease and subsequent assignment), that assignment of leasehold rights is not exigible to GST.

3.2 The Court noted that the respondent's counsel could not dispute that the issue was squarely covered by that earlier judgment.

3.3 The Court observed that, though a Special Leave Petition against the earlier judgment had been filed before the Supreme Court and remained at the "diary number" stage without further steps, there was no order staying or overruling that decision. Hence, the earlier decision continued to bind the authorities and the Court.

3.4 Applying the ratio of the earlier decision to the facts of the present case, the Court held that the show cause notice issued under Section 74, seeking GST on the consideration received for assignment of leasehold rights, proceeded on an erroneous legal premise that such assignment constituted "supply of services".

Conclusions:

3.5 In view of the binding precedent of the Court holding that assignment of such leasehold rights is a transfer of immovable property outside the scope of GST, the impugned show cause notice under Section 74 demanding GST on the transaction is unsustainable in law.

3.6 The impugned show cause notice dated 15.09.2025 issued under Section 74 of the Act is quashed and set aside, and the petition is allowed without any order as to costs.

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