The Supreme Court Settles Controversy on Levy of GST on Long-Term Lease Transactions of Immovable Properties – A Sigh of Relief to Real Estate & Infrastructure Sector and Industrial Houses
1. Backdrop:
The introduction of Goods and Services Tax (“GST”) regime in India in July 2017, generated a huge controversy around taxability of transactions involving immovable property specifically the assignment of long-term leasehold rights either by private parties or Government Bodies MIDC, GIDC, CIDCO, AIA, etc. These Corporations allot plots on long-term lease basis (typically 99 years) to different business organisations. Such Government Bodies charge significant lumpsum upfront premium (also called “Salami Premium”) with a minimum annual lease rentals. Invariably such lumpsum upfront premium is as good as market value of the land. Further, in many cases, lessee-companies decide to relocate, restructure, or exit and they transfer their leasehold rights to third parties for a lump sum consideration and the third party continue to pay annual lease rentals to the Government Bodies.
The GST authorities have been taking a position that such transactions amounts to a “supply of service” under Section 7(1) of the CGST Act, 2017 and are subject to a GST levy at 18%. On the other hand, the Income-tax authorities take a view that such payments are in the nature of lease rentals and subject to withholding tax u/s. 194-I of the Income-tax Act, 1961 (“IT Act”). This dual axe of the tax authorities created huge controversy and impacted the transactions in immovable properties.
Thankfully, in May 26, the two-member bench of the Supreme Court dismissed the SLP filed by the GST authorities and affirmed the ruling of the Bombay High Court’s in the case of Aerocom Cushions (January 2026), thereby settling the legal battle on this subject and provided a much needed certainty that the captioned long-term lease transactions of immovable properties are not subject to GST levy.
2. GST Framework:
2.1 Scope of Supply under GST Law:
Section 7(1) of the CGST Act, 2017 defines ‘supply’ to include:
“…all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.”
Attention is invited to the phrase ‘in the course or furtherance of business’ – this is an essential condition for a transaction to qualify as ‘supply’ under GST Act.
2.2 Activities Treated as Supply of Services
Clause 2 of Schedule II to the CGST Act clarifies what constitute supply of services and is summarised as under.
(i) Clause 2(a) – Any lease, tenancy, easement, licence to occupy land is a supply of services.
(ii) Clause 2(b) – Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
Clause 5 of Schedule III the CGST Act excludes the sale of land and completed buildings from the scope of GST. Under this clause, transactions that are exclusively for the transfer of ownership of land are treated as neither a supply of goods nor a supply of services
2.3 Government Notification of Long Term Lease:
The GST Authorities issued a Notification No. 12/2017-CT in 2017 prescribing a Nil rate of GST on one-time upfront amount (premium/salami/development charges) payable for long-term leases (30 years or more) of industrial plots by State Government Industrial Development Corporations/Undertakings to industrial units.
This means even when MIDC/GIDC allots land on long-term lease (which could qualify as ‘supply of services’ under clause 5(a) of Schedule II), the transaction attracts Nil GST. The Revenue’s attempt to impose GST on the further assignment by the industrial unit made the situation even more controversial and anomalous.
3. Divergent Rulings of High Courts:
3.1 Gujarat High Court Ruling:
The issue of assignment of long-term lease rights became the moot point of controversy and it travelled across various high courts, resulting in conflicting rulings given by various high courts levy of GST.
In January 2025, the Gujarat High Court delivered a landmark ruling in the case of G Gujarat Chamber of Commerce and Industry & Others Vs. Union of India and cleared the controversy about levy of GST on transactions of assignment of long-term lease rights in favour of third parties.
The Gujarat High Court, after examining thread-bare provisions of the GST laws as well as various jurisprudence, categorically held that
“the 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.”
3.2 Bombay High Court Ruling:
In January 26, the Bombay High Court had the occasion to examine the identical issue of levy of GST on assignment of long-term lease rights granted by MIDC in the case of Assistant Commissioner (Anti-Evasion) v. Aerocom Cushions (P.) Ltd.
Key observations of the Bombay High Court and the conclusion of the Court are highlighted hereunder.
Key Observations:
(a) Assignment by way of sub-lease:
The Court noted that the Revenue’s own Show Cause Notice recognised that the assignment did not amount to a sub-lease because upon assignment, the original lessee’s (Petitioner’s) rights stood extinguished.
This is a fundamental distinction, a sub-lease creates a derivative interest while preserving the original lessee’s rights and assignment permanently transfers all rights to the assignee.
(b) Nature of the Transaction – Transfer of Immovable Property:
The Court observed that the transaction, on the face of record, constituted a transfer of immovable property by the Petitioner to M/s. Rishita Industries. Long-term leasehold rights over an industrial plot are, in substance, a form of immovable property interest especially given the 95-year lease tenure which constitutes virtual ownership.
(c) Absence of Nexus with Business:
For a transaction to constitute ‘supply of service’ under Section 7(1)(a), it must be carried out in the course or furtherance of business. The Court found that the assignment had no nexus whatsoever with the business activities of the Petitioner company. The Petitioner’s business was manufacture of cushions and not trading in real estate or leasehold rights. This essential element of supply was held to be completely absent.
(d) Inapplicability of ‘Miscellaneous Services’ Classification:
The Revenue had sought to classify the assignment under ‘other miscellaneous services’ at Sr. No. 35 of Notification No. 11/2017-CT (Rate) (covering washing, cleaning, dyeing, beauty, physical well-being services). The Court summarily rejected this, observing that such a residual category of “petty services” cannot be extended to cover assignment of leasehold rights in immovable property.
(e) Reliance on Gujarat HC Precedent:
The Court followed the Gujarat High Court’s ruling in Gujarat Chamber of Commerce and Industry v. UOI [2025] (Gujarat), which had rendered an identical holding in the context of GIDC leases. The Bombay High Court also noted that under the principles laid down in CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 (Bombay), a ruling of another High Court, if not contradicted by any other competent court, is binding on lower authorities.
Final Conclusion of the Bombay High Court:
After analysing the provisions of GST Laws and various judicial precedence, finally, the Bombay High Court quashed and set aside the Show Cause Notice issued by the GST authorities and categorically ruled that –
“…the assignment by sale and transfer of leasehold rights of the plot of land allotted by the Corporation like GIDC or MIDC 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 and in such circumstances, the transaction would not be subject to levy of GST in terms of the GST Act.”
4. Final Hammer of the Supreme Court on the Burning Issue:
As usual, the GST authorities challenged the order of the Bombay High Court by filing a Special Leave Petition (SLP (Civil) Diary No. 26041 of 2026) before the SC.
A two-judge Bench of the SC, after examining the Gujarat HC, Bombay HC and hearing both the parties dismissed the SLP of the GST authorities filed against the ruling of the Bombay HC and passed a terse but definitive order:
“We are not inclined to interfere with the impugned judgment and order of the High Court, hence, the special leave petition is dismissed.”
This gave a finality to the burning issue of levy of GST on transfer of long-term lease arrangements. With this, the Bombay High Court’s ruling has attained finality at the highest judicial level. This settles the law across India not merely in Maharashtra that assignment of MIDC/GIDC-type long-term leasehold rights does not attract GST.
5. Recommendation to the Government:
Since the Supreme Court has laid down a law on the levy of GST on long-term lease transactions of immovable properties, respectfully accepting and following this ruling, the Government should issue an appropriate notification on a priority basis clarifying that the transactions of long-term lease (beyond 30 years), either by way of primary lease or sub-lease, by the Government Bodies or private parties, especially involving payment of upfront significant lease premium (salami or any other nomenclature) and minimal annual lease rentals, should not be regarded as “supply of services” and should be subjected to GST levy on the similar lines of Notification No. 12/2017-CT in 2017 prescribing a Nil rate of GST on one-time upfront amount (premium/salami/development charges). This will end the controversy once for all.
6. Summing Up:
The Supreme Court Ruling cluttered the dense clouds and provided a much-needed clarity and certainty on a burning question of levy of GST on transfer or sub-lease of long-term lease transactions in immovable properties that had troubled industry participants since the advent of GST laws in 2017.
The affirmation by the SC to the ruling of the Bombay HC in Aerocom Cushions (P.) Ltd. Case made crystal clear that –
(i) the transfer or sub-lease of such transactions depicted absence of the ‘course of business’ nexus, and
(ii) the characterisation of the assignment as a transfer of benefits arising out of immovable property are doctrinally sound and consistent with the settled principles of property law and GST jurisprudence.
The Supreme Court’s terse dismissal of the Revenue’s SLP is, perhaps, the most eloquent endorsement of the High Court’s reasoning that in the realm of immovable property, a transfer is a transfer, whatever label the Revenue authorities may seek to affix upon it and such transfer by way of long term lease shall not be subject to any kind of GST levy under the slightest shade of “supply of services”.
This ruling also reinforces the view that payment of lumpsum lease premium under the long-term lease arrangement does not tantamount to payment of rent and consequently not subject to withholding tax under the IT Act. We shall examine this side of the coin is a subsequent article.
This SC ruling provides a great sigh of relief to the real estate and infrastructure sector as well as industrial houses that helps build India and fosters the overall growth of the country thereby taking us faster towards the vision of “Viksit Bharat 2047”.
The Government should also issue an appropriate notification clarifying that GST is not leviable on such transactions in the similar line of Notification No.12/2017-CT.
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Author: Jayesh Kariya, Leader and Partner and Sakshi Jaiswal of BSC Advisors Pvt. Ltd.
