Summary: The Gujarat High Court, in Gujarat Chamber of Commerce And Industry & Ors. Vs Union of India & Ors.; R/Special Civil Application No. 11345 of 2023, addressed the GST implications of assigning leasehold rights. The case involved a lessee transferring leasehold rights and a constructed building to a third party for a lump sum payment. The petitioners argued that such transactions are transfers of immovable property and do not constitute “supply of service” under the GST Act. They emphasized that leasehold rights are a benefit arising from immovable property and equate to ownership rights, making GST inapplicable. The respondents contended that leases are taxable services under GST, as they involve a transfer of the right to enjoy immovable property for a period, not its sale. The court ruled that the assignment of leasehold rights, particularly long-term leases like 99 years, constitutes a transfer of immovable property akin to a sale. Consequently, such transactions fall outside the ambit of “supply” under GST. The judgment clarified that the transfer of leasehold rights is not a service but an alienation of property and is exempt from GST.
Brief facts of the case:
- A certain land was allotted by the Gujarat Industrial Development Corporation (GIDC) on lease to the lessee and lessee further, after constructing building on the land, assigned the leasehold rights to third party against a lumpsum consideration.
- On assignment of leasehold rights by lessee to third party was considered as “supply of service” by the respondent.
- The petitioners, led by Gujarat Chambers of Commerce and Industries, contended that these transactions are not subject to GST, as they involve the transfer of rights in immovable property, not a supply of goods or services.
Legal issues:
- Whether the assignment of leasehold rights constitutes a “supply of service” under the GST Act ?
- Whether interest in immoveable property be considered as immoveable property?
- Whether the legislature has intended to cover assignment of leasehold rights under the ambit of GST Act?
Arguments of the Petitioners:
- Leasehold rights in an immoveable property is a “benefit arising out of immoveable property” and thus assignment of such leasehold rights be considered as transfer of immoveable property.
- Another argument is that property refers not only to physical objects but also to the rights of ownership such as the right to possess and to alienate, indicating that a leasehold right is a type of property.
- Assignment, in the context of its legal definition, is not a service but a sale. Since, sale and service are not interchangeable, the levy of GST on assignment of leasehold rights would be ultra vires the GST Law and specifically the Section 54 of Transfer of Property Act would be applicable on such assignment.
- It was also argued that the GST law was enacted to subsumed the existing indirect tax laws and not to introduce new taxes related to transfer of property.
Arguments of the Respondents:
- Respondents argued that the transfer of leasehold rights is a transfer of an interest in immovable property and it is not equal to sale of immovable property.
- The lease or license, irrespective of the duration for construction of building in the course or furtherance of business or commerce is a taxable service. A lease is a transfer of right to enjoy immovable property for a certain time in consideration of a price and therefore not a sale.
- Since lease is a service, the provisions of Section 7 of GST Act shall be applicable and supply of Service would attract the respective GST.
- The meaning of “immovable property” should be understood in the context of the GST Act, not in the context of other Acts meant for different purposes.
Verdict of the Hon’ble High Court of Gujarat:
1. When leasehold right is transferred by the lessee-assignor in favor of a third person-assignee by execution of deed of assignment, it would be nothing but transfer of an “immovable property” in view of the settled legal position to the effect that lease for 99 years or for a long term in consideration of premium paid is as much an alienation as sale or mortgage.
2. As the assignor transfers leasehold rights after receiving the consideration as determined on the basis of value of such leasehold rights, such transaction therefore would of an “immovable property” and cannot be considered as “supply of services“.
3. When leasehold right is transferred by the lessee-assignor in favor of a third person-assignee by execution of deed of assignment, it would be nothing but transfer of an “immovable property” in view of the settled legal position to the effect that lease for 99 years or for a long term in consideration of premium paid is as much an alienation as sale or mortgage.
4. As the assignor transfers leasehold rights after receiving the consideration as determined on the basis of value of such leasehold rights, such transaction therefore would of an “immovable property” and cannot be considered as “supply of services“.
Conclusion:
1. The assignment of leasehold rights, along with the transfer of the building, does not constitute a “supply of service” under the GST Act
2. The assignment of leasehold rights is a transfer of an “immovable property” as it transfers all rights in the land and building, and therefore, it is outside the scope of the definition of “supply” under the GST Act.
3. The assignment of leasehold rights is not equivalent to renting of immoveable property but has the same characteristics of a sale of immoveable property.
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