1. Several notices have been issued recently by the GST Authorities seeking to recover GST on the assignment of the leasehold rights by the occupiers of the industrial plots owned by GIDC. In the present article, we analyze the issues concerning (a) the levy of GST on such transactions and (b) the availability of the ITC if GST has been charged. Before we undertake the analysis, it is worthwhile to appreciate the background of the typical transactions in question.
Background
2. Gujarat Industrial Development Corporation (GIDC) is established under the Gujarat Industrial Development Act, 1962. As a nodal agency of the Government of Gujarat for the development of industrial estates in the State, GIDC acquires land all over Gujarat for industrial purpose and develops industrial estates, constructs sheds and housing quarters and gives it to various industries after creating basic infrastructure facilities such as roads, streetlights, water supply, effluent disposal, stormwater drainage, etc. The land is given on a lease basis for 99 years extendable for a further period of 99 years. On the other hand, the industrial sheds and quarters are sold by GIDC and a conveyance deed is executed.
3. GIDC issues an allotment letter to the entity desiring to obtain the industrial plot in a given estate. The said letter includes various terms of allotment including the upfront premium to be paid by the allottee. Based on payment of the said premium (fully or partly and balance in instalments as permitted), GIDC executes a licensing agreement whereby GIDC grants a license to the allottee (now licensee) to enter upon the land and commence the activity of setting up the unit subject to approvals from various regulatory authorities. The said agreement also contains a clause whereby GIDC agrees to execute the lease deed in respect of the given industrial plot subject to the fulfilment of the licensing agreement. Upon the fulfilment of the terms of the licensing agreement, GIDC executes a lease deed (registered with payment of applicable stamp duty) for granting the industrial plot on lease for a period of 99 years extendable for a further period of 99 years on a token annual rental amount. The said lease deed incorporates all the terms indicated in the allotment letter as well as a licensing agreement as well as the consideration in the form of an upfront premium and the nominal yearly rental amount. The said lease deed also gives the right to GIDC to reclaim the possession of the plot if the lessee breaches any of the stipulations contained in the given agreement. The said lease deed also permits the lessee to assign his interest in the given plot (right of possession for 99 years) to any other person subject to the approval of GIDC.
4. With the above brief background, the following issues will arise under GST:
Levy of GST
5. First issue to address is whether GST is leviable on (a) the initial allotment of the industrial plot as well as (b) the assignment of the leasehold rights in the given plot by the original allottee to the second allottee.
6. 9(1) of the CGST Act, 2017 provides for the levy of GST on the intra-state supply of goods or services or both. The scope of ‘supply’ u/s 7(1)(a) of the said Act includes all forms of supply made in the course or furtherance of business. The term ‘supply’ denotes giving something. The definition of ‘service’ u/s 2(102) of the said Act is expansive as it covers anything other than goods. Further Sec. 7(1A) read with Entry No. 2(a) of Schedule II to the said Act states that any lease or license to occupy land is a supply of services. On the other hand, Sec. 7(2)(a) read with Entry No. 5 of Schedule III to the said Act provides that sale of land and subject to paragraph 5(b) of Schedule II, sale of building shall not be regarded as supply. In other words, the given provisions state that the sale of land and completed building shall not attract GST.
7. Now the background indicated earlier illustrates that GIDC initially grants a license (i.e., right to enter upon its land for a particular purpose (viz. commence the activity of setting up the unit)) and subsequently grants a lease (i.e., right to possess the industrial plot) for a period of 99 years. The consideration for the said granting of given rights by GIDC is paid by way of an upfront premium and nominal yearly lease rent. It may be noted that GIDC reserves the right to repossess the plot if there is a breach in any of the conditions stipulated in the lease agreement. Further, it may also be noted that in certain cases GIDC upon payment of additional consideration grants full ownership rights to the occupier. The said context illustrates that till the time GIDC does not part with the full ownership rights, the transaction in question cannot qualify as ‘sale of land’ so as to be excluded from the levy of GST by virtue of Entry No. 5 of Schedule III. Further, the scope of ‘supply’ as discussed above includes supply by way of licence or lease of land. Hence the said transaction appears to be covered within the charging provisions under GST.
8. It must however be noted that Government vide Sr. No. 41 of Notification No. 12/2017-CT (Rate) dated 28.06.2017 has granted an exemption to the upfront amount payable in respect of service by way of granting of long-term lease of thirty years, or more of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 20 per cent. or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area. Since GIDC is a State Government Industrial Development Corporation, the upfront amount payable to GIDC shall be exempted from GST by virtue of the given notification. It may, however, be noted that one of the conditions stipulated in notification to claim the exemption is that the lease agreement executed between GIDC and the original allottee must contain a clause to the effect that GST has been exempted subject to the condition that the given plot is used for the purpose for which it has been allotted and any misuse shall result into joint and several liabilities between the original allottee as well as subsequent allottee’s of the GST which was exempted earlier at the time of initial allotment. We submit that such a clause is missing in the lease deeds which are presently executed. Hence at this stage, it is suggested to incorporate the given clause to protest the claim of exemption.
9. Now in the context of the assignment of the leasehold rights for the balance period by the original allottee, as discussed in the background, the lease deed permits the said assignment subject to approval from GIDC. Further the expression ‘assignment’ implies that the rights vested in the original allottee (including the obligations stipulated in the lease deed) shall stand transferred to the second allottee. In other words, the assignment shall result in creating a lessor and lessee relationship between GIDC and the second allottee without any formal execution of a new lease deed. The assignment, therefore, replaces the original lessee for the new lessee on the same terms for the balance period of the lease. Now as discussed earlier, the said assignment will fall within the broad scope of the term ‘supply’ and also cannot fall within the expression ‘sale of land’ and hence shall be liable to GST. Further, the aforesaid exemption (Sr. No. 41 of NN 12/2017) only applies to the upfront amount payable to GIDC. It expressly does not apply to the amount payable to the original allottee by the second allottee on the assignment of the leasehold rights. Hence the transaction of assignment of the leasehold rights by the original allottee shall be liable to GST.
10. An argument was plausible that the consideration paid by way of an upfront premium (which is akin to the market value of the given plot) can imply that the given transaction is in the nature of conveyancing of the plot and hence even the transaction of assignment of the leasehold rights for a lumpsum amount is akin to conveyancing and hence is in the nature of the sale of land which is outside the scope of GST. Hon’ble Bombay High Court in the case of Builders Association of Navi Mumbai vs. Union of India 2018 (12) G.S.T.L. 232 (Bom.) held that the once the law treats a transaction as a supply, particularly in relation to land and building and includes a lease, then, the consideration therefor as a premium/one-time premium is a measure on which the tax is levied, assessed and recovered and hence the Court cannot then probe into the legislation any further. The said decision of the Hon’ble Bombay High Court has been affirmed by the Hon’ble Supreme Court vide order dated 09.11.2022 (Special Leave to Appeal (c) No. 23068/2018) keeping the following two issues open viz. (a) question of exemption granted by Notification No. 12 of 2017-CT (Rate) dated 28.06.2017 and (b) scope and ambit of the expression in Clause 2 (a) of Schedule-II “licence to occupy land is a supply of services”.
11. Now as regards the question of exemption granted by Notification No. 12/2017, as discussed earlier only the upfront amount payable to GIDC shall stand exempted from the levy of GST. As regards the competence of Parliament to formulate a law to levy GST on the given transaction, the said issue stands pending before the 9-member Constitution bench (SLP 6080/2022). The issue involved before the Constitution bench is whether the subject of the levy of GST on license or lease of land is akin to ‘taxes on lands and buildings’ and hence falls in the exclusive domain of the State under Article 246 read with Entry no. 49 of List II to Seventh Schedule of the Constitution and therefore Parliament cannot make any law in this regard. It may however be noted that Article 246A overrides Article 246 and grants dual power to the Parliament as well as State to formulate the laws related to GST. Hence in our view, the acceptability of the proposition that the Parliament lacks the power to impose GST on a licence or lease of land appears to be dim. However, one may consider relying on the given issue if the matter is to be kept open.
12. Before concluding the given subject, it may be noted that the sale of a completed building is outside the scope of GST. Accordingly in our view, the GST on the assignment of leasehold rights can be levied only on the consideration attributable to the said assignment.
Availability of ITC
13. If GST has been charged by the original allottee while assigning the leasehold rights to the second allottee, a question will arise as to whether the second allottee can avail of the input tax credit (ITC) of the said GST.
14. 16(1) of the CGST Act, 2017 permits a registered person to avail of the ITC of the GST charged on the goods or services which are used or intended to be used in the course or furtherance of the business. Hence it can be said that the second allottee can avail of the ITC by virtue of Sec. 16(1) if the said allottee is using the leasehold land for the purpose of business.
15. 17(5) of the CGST Act, 2017, however, overrides Sec. 16(1) to provide that the ITC shall be restricted in case of certain supplies. Clause (d) of the said provisions is relevant and hence reproduced below:
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.—For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;
16. The aforesaid provisions seek to block the ITC of goods or services which are ‘for construction of an immovable property (other than plant or machinery)’ on own account including when such goods or services are used in business. An issue arises as to whether the supply by way of assignment of leasehold rights can be said to be for the construction of a factory building and hence the ITC of the GST paid on such supply shall be blocked by virtue of clause (d) supra? The following aspects are required to be considered:
17. The object of introducing GST as evident from the Statement of Objects and Reasons while introducing the CGST Bill in the Parliament is to permit a seamless transfer of tax till the consumption stage. It is for this reason that Sec. 16(1) permits ITC of all the inward supplies having a nexus with business and does not limit ITC only to such supplies having nexus with the activity of manufacturing or trading or service provision. Therefore, the restriction placed u/s 17(5) is required to be narrowly construed and in case of ambiguity, the interpretation favouring the objective is to be preferred.
18. 17(5)(d) blocks ITC of the supply received by a taxable person for the construction of an immovable property (other than plant or machinery). Hence the given supply of goods or services must go into the constructed immovable property. In other words, the given goods or services must form and result in coming into existence of an immovable property. Therefore, only the goods or services having direct nexus with the construction of the immovable property can be included under the said restriction. Reference can be made to the decision in the case of CCE vs. Tata Engineering & Locomotives Ltd. (2003) 158 ELT 130 (SC) wherein the word ‘for’ has been interpreted to mean direct nexus. Further Sec. 105 of the Transfer of Property Act, 1882 defines ‘lease’ to mean the right to enjoy the property for a certain time in consideration of a price paid or promised to be rendered periodically or on specified occasions to the transferor by the transferee. In the context of our issue, it may be noted that the leasehold right (on the assignment of which GST has been paid) is a right to occupy the land and hence distinct from the right to construct (such as development right). It is also a settled law that the classification adopted at the end of the supplier (assignor) cannot be changed at the end of the recipient (assignee) (SAIL vs CCE (2022) 9 TMI 740 (SC). Hence the right to occupy at the end of the assignor cannot be treated as the right to construct at the end of the assignee so as to attribute a nexus with the construction of the immovable property to deny ITC. Further, the given right does not go into the constructed immovable property since the said right survives and is exercised even after the construction is complete as it is in the nature of a right to occupy the plot for the balance period of 99 years. Therefore, it can be contended that such a right cannot be said to be for the construction of a factory building so as to come within the ambit of clause (d).
19. 17(5)(d) restricts ITC only in respect of the goods or services for the ‘construction’ of immovable property. The Explanation to Sec. 17(5)(d) defines ‘construction’ to include the cost ‘to the extent of capitalisation to the said constructed immovable property’. A perusal of Indian Accounting Standard 116 in respect of ‘leases’ demonstrates that the cost of an upfront lease premium as well as the present value of the future lease payment is to be considered as a separate right-of-use asset. Further, the upfront premium is then amortized over the entire lease term (i.e., the balance period of 99 years). Hence it can be contended that the restriction u/s 17(5)(d) can apply only to the extent of the cost capitalized in the factory building and not to the cost which is separately recognized as a right-of-use asset.
20. The Explanation of the expression ‘plant and machinery’ u/s 17 excludes land. The said exclusion cannot be read in a manner to say that the ITC of the GST paid on the assignment of the leasehold rights is in respect of ‘land’ and hence stands excluded from ‘plant and machinery’ and hence included in clause (d). It may be noted that clause (d) restricts ITC in respect of goods or services for the construction of an immovable property (other than plant or machinery). Hence to invoke the said clause the object of the inward supply of goods or services should be to construct the immovable property (other than plant or machinery). It is in respect of the said object that the expression ‘plant and machinery’ excludes land. Hence the intention to exclude ‘land’ is to deny ITC in respect of supplies which are capitalized in the own land (e.g., land levelling charges paid on the owned land). Now it cannot be said that the availment of the leasehold rights of the plot is to construct ‘land’ as it is never capitalized as own land but is recognized as a right-to-use asset. In fact, the plot continues to remain on the books of GIDC as its asset. Therefore, it can be contended that the ITC of the GST paid on the assignment of the leasehold rights cannot be restricted relying on the given Explanation of ‘plant and machinery’.
21. Even under the Income Tax Act, 1961, Courts have held that the upfront premium paid to acquire such GIDC land is a revenue expenditure. One can refer to the decision in the case of DCIT vs. Sun Pharmaceutical Ind. Ltd. [2010] 329 ITR 479 (Gujarat). Hence even on this ground, it can be contended that the ITC of the GST paid on the assignment of the leasehold rights is not restricted u/s 17(5)(d) since it does not result in any capital asset (immovable property).
22. Hence to conclude the issue, in our view, there are very strong grounds to contend that the ITC of the GST paid on the assignment of the leasehold rights is available to the second allottee if the said allottee is using the plot in the course or furtherance of business. At this stage, we may also say that the Authority for Advance Rulings as well as Appellate Authority have failed to consider or appreciate the aforesaid contentions while holding that ITC is not available. In our humble view, the said Authorities must consider and appreciate the aforesaid contentions. In any case, the decisions rendered by the said Authorities have limited applicability since it only binds the applicant and the jurisdictional officer qua the applicant.
Conclusion
23. The aforesaid analysis indicates that GST issues surrounding the industrial plots allotted by GIDC are manifold. In the interest of encouraging manufacturing activity (as part of the flagship Make in India program), Government must consider granting exemption even to the transaction of assignment of the leasehold rights at par with the exemption granted in case of original allotment as that can avoid a lot of hardships. Treating the assignment differently is to say the very least discriminatory.
(Views are strictly personal)
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