Transfer of Industrial Land under Assignment Agreement Not Liable for GST: Gujarat HC

Gujarat High Court, in the case of Gujarat Chamber of Commerce and Industry & Ors. vs. Union of India & Ors., held that the transfer of industrial land under an assignment agreement constitutes the sale of immovable property and is not subject to GST.

In recent case of Gujarat Chamber of Commerce and Industry & Ors. vs. Union of India & Ors. Gujrat High Court held that, assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favor 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-assignee who would become lessee of GIDC in place of original allottee-lessee. In such circumstances, 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.

Fact of the case :-

A licensing agreement is executed between GIDC and the allottee /lessees to set up industrial unit subject to approval and permission from the regulatory authorities. Licensing agreement also contains a clause whereby GIDC agrees to execute lease deed for a period of 99 years in favour of the allottee/lessee upon fulfilling the terms and conditions of licensing agreement.

Thereafter on fulfilling the terms and conditions of the license agreement, a registered lease deed is executed by GIDC in favour of the allottee/lessee after payment of applicable stamp duty wherein all terms and conditions  of  the  allotment  letter  and licensing agreement are incorporated. Lease deed also permits the allottees/lessee to assign the leasehold rights and interest in the plot to any other person subject to approval of GIDC.

GST Act with effect from 1.07.2017, respondent authorities have issued the summons/show cause notices to the members of the petitioner no.1 and others who have assigned the leasehold rights and interest in their plots allotted by GIDC to assignee to show cause as to why GST at the rate of 18% should not be levied on such transaction of assignment of leasehold rights.

Analysis of the case

The issue pertains to levy of goods and service tax on assignment of leasehold rights of the plot of land allotted on lease by Gujarat Industrial Development Corporation (GIDC) and building constructed thereon by the lessee or its successor (assignor) to a third party (assignee) on payment of lump-sum consideration considering the same as supply of service under the provisions of Central/State Goods and Service Tax Act, 2017 (For short “the GST Act”).

Entry No. 41 of Notification No.12/2017 dated 28.06.2017 has granted exemption from levy of GST on one Time upfront amount called as premium, salami, cost price, development charges or by any other name leviable in respect of the service, by way of granting long term (30 years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units falling under Chapter Heading 9972 of Tariff Code as under:

Assignment of the Leasehold rights is neither in the course of nor in furtherance of business as mentioned under Section 7(1)(a) of the Act, 2017 and therefore also, it is not “Supply of Services”.

The assignment of Lease hold rights is not a “business” as defined under 2(17) of the Act, 2017 or “input” as defined under 2(59) of the GST Act, 2017.

The transaction of assignment is simpliciter selling/transferring of absolute rights in the land, it has nothing to do with the business of the Assignor nor it is in the course or furtherance of business and therefore, the said transaction does not fall within the purview of Section 7(1)(a) of the Act, 2017 and therefore also, it is not “Supply of Services”.

Upon a proper construction of lease, there was a demise only of the land and not of the building and consequently, the provisions of the Act did not apply to the contract for delivery of possession of the building as the ownership in the building was with the lessees and in which the lessors had no right while the lease subsisted. It was held that there was no absolute rule of law in India that whatever was affixed or built on the soil became part of it and was subjected to the same rights of property as the soil itself. It was therefore,

Court observations and conclusion

As per the terms of the lease deed executed by GIDC, lessee can assign his interest in any lawful manner and such interest itself would be an immovable property which can be validly assigned. However, it is also true that right of lessee is not as much absolute as that of purchaser of property inasmuch as it may be excluded altogether by the parties. It was therefore, submitted that as per the permission of GIDC, lessee has right to assign leasehold rights in the property.

According to section 2 sub section (16) of the Indian Stamp Act, “Lease” means a lease of immovable property and includes a Patta, a kabuliyat or any instrument by which tolls of any description are let, any writing on an application for lease intended to signify that the application is granted and finally any instrument by which mining lease is granted in respect of minor minerals as defined in clause (e) of section 3 of the Mines and Minerals (Regulation and Development) Act, 1957.

Section 3 of the Transfer of Property Act states that when an immovable property such as land  is  transferred  by  way  of  assignment of lease, all appurtenances thereto attached to the earth such as buildings and fixtures thereto would also stand assigned.

Assignment of leasehold rights would be covered by sale, transfer, exchange for a consideration by a person. It would also be required to be considered as to whether such sale, transfer, exchange for a consideration by a person is in course or furtherance of business or not because once the transaction of assignment of leasehold rights takes place, business would be transferred by assignor in favour of the assignee.

Schedule-II of the GST Act provides for activities or transactions to be treated either as supply of goods or supply of services. As per clause 5(a) of Schedule II renting of immovable property is to be treated as supply of services. Therefore, allotment of land which is undisputedly an immovable property on lease would be covered by clause 5(a) of the Schedule II of the GST Act and therefore, the same would be covered by the scope of supply of services liable to levy of tax under the provisions of section 9 of the GST Act. by Notification no.12/2017- Central Tax (Rate) dated 28.06.2017 issued in exercise of powers conferred by sub-section of section 11 of the GST Act, on recommendations of the GST Council, levy of tax under sub-section(1) of section 9 of the GST Act on intra-State supply of services mentioned therein has been exempted.

Therefore, even if the assignment of leasehold rights on the land on charge of one time upfront amount by the GIDC for allotment of plot of land to the industrial unit is covered within the scope of “supply of services” as per clause 5(a) of the Schedule II read with section 7(1) of the GST Act, charging of one time upfront amount as premium by the GIDC would attract Nil rate of tax as per the aforesaid notification. Therefore, when the industrial unit is allotted land by the GIDC, no GST is required to be paid under the provisions of GST Act as per entry no. 41 of Notification No. 12/2017.

As per the lease deed executed by GIDC in favour of industrial unit for allotment of  plot of land, the industrial unit is entitled to transfer such leasehold land in favour of any third party with the prior permission of the GIDC on payment of transfer charges as prescribed by GIDC. However, such transfer fee would be subject to levy of GST at the rate of 18% under the GST Act

It is pertinent to note that what the petitioner has transferred by way of assignment/sale is leasehold rights which is over and above the actual physical plot of land and building, encompasses incorporeal ownership right in such land and building such as the right to possess, to enjoy the income from, to alienate, or to recover ownership of such right from one who has improperly obtained the title. Therefore, immovable property includes in addition to right of ownership, aggregate of rights that are guaranteed and protected by the further agreement or contract between the owner and the lessee. Therefore, as held in case of Schweihs v. Chase Home Finance, LLC reported in 2015 IL App(1st) 140683, property is nothing but a “bundle of sticks”, i.e. collection of individual rights which, in certain combinations, constitute property and law determines only which sticks are in bundle of a person.

The instrument of lease is liable to levy of stamp duty as per Article 30 of the Schedule-I of the Gujarat Stamp Act, 1958, where lease is more than ninety-eight years, same duty is prescribed as is leviable for conveyance under Article 20. Therefore, as per the provisions of the Gujarat Stamp Act, instrument of lease is considered at par with the conveyance for the sale of immovable property.

When the lessee-assignor transfers absolute right by way of sale of leasehold rights in favour of the assignee, the same shall be transfer of “immovable property” as leasehold rights is nothing but benefits arising out of immovable property which according to the definition contained in other statutes would be “immovable property”.

Section 7 of the GST Act which provides for the scope of supply of good or services or both for the purpose of the GST Act includes all forms of supply of goods or services or both by any form such as transfer, sale, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, considering the settled legal position as held by the Hon’ble Supreme Court and other High Courts from time to time, it is true that any lease or letting out of a building including commercial, industrial, residential complex for business either wholly or partly would be “supply of service”. Therefore, reading the provisions of the Act together and harmoniously to understand the nature of levy and the object and purpose of its imposition, no activity of the nature mentioned in the inclusive provision of section 7 of the GST Act can be left out of the net of tax.

When such leasehold right is transferred by the lessee-assignor in favour 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.

Under the GST Act and IGST Act relating to Rate of Tax, Exemption, Reverse Charge Scheme and other matters concerning supply of services are covered by notifications issued in exercise of powers conferred by sub- sections (1), (3) and (4) of section 9, sub-section (1) of section 11, sub-section (5) of section 15 and sub-section (1) of section 16 of the GST Act on the basis of recommendations of the GST Council. the scope of “supply of services” would not include transfer of leasehold rights as supply of service as it would be transfer of “immovable property” being a benefit arising out of immovable property consisting of land and building. Clause 5 of Schedule III of the GST Act clearly provides that sale of land cannot to be treated as supply of goods or services. Therefore, leasehold rights which are to be considered as sale of land would be out of purview of the provisions of scope of supply as per section 7 of the GST Act.

As the GST Act is nothing but a levy of tax upon all the indirect taxes which were levied under different legislation, it would be germane to refer to definition of “service” as provided in section 2(102) of the GST Act to mean as anything other than goods, money and securities. Considering such definition in juxtaposition to provisions of section 65B(44) of the Finance Act, 1944, there was specific exclusion of transfer of title in immovable property from definition of ‘service’ itself which clearly shows that there was no intention of the legislature to impose tax on transfer of immovable property.

The contention of the respondents that by excluding only sale of land and building as per Schedule-III would not amount to transfer of leasehold rights as the interest in immovable property being an intangible form would be covered by the scope of supply of service, is not tenable as transaction  of  assignment  is  nothing  but absolute transfer of right and interest arising out of the land which would amount to transfer/sale of immovable property which cannot be said to be “service” as contemplated under the provisions of GST Act.

Moreover, assignment/transfer of rights would be out of scope of supply of service. Contention of the respondent that activity of lessee/assignor to transfer the leasehold rights is in nature of compensation for agreeing to do the transfer in favour of the assignee is a service classifiable under other miscellaneous service under Group 999792 and taxable at the rate of 18% under serial no.35 of Notification No.11/2017 – Central Tax (Rate) dated 28.06.2017 would not cover the nature of transaction as consideration received by lessee/assignee is not in nature of premium but is a consideration for outright sale of leasehold rights which cannot be equated with subleasing in any manner.

It is true that exemption granted as per Sr no.41 of the Exemption Notification No.12/2017 dated 28.06.2017 would not be applicable to the transaction of assignment of leasehold rights by lessee who is neither a State Government Industrial Development Corporation or undertaking. Fine line of distinction to be drawn for assignment of leasehold rights vis-a- vis allotment of plot of land by GIDC on lease by charging one-time premium which is exempt under the said notification is that subsequent transaction of assignment of leasehold rights is transfer of interest in immovable property which would be equivalent to transfer of immovable property, would be covered by Clause 5 of Schedule III whereas renting of the plot of land by GIDC would be covered by clause 5(b) of Schedule II. Lessee/Assignor is not transferring leasehold right by way of a sub-lease so as to earn rent on such assignment of leasehold rights, so as to apply clause 5(b) of Schedule II to such transaction. As nature of transaction in facts of the case is outright assignment    resulting    into sale/transfer of the leasehold rights in favour of assignee by lessee/assignor for a consideration would be covered by clause 5 of Schedule III which provides that sale of land and building shall not be considered as supply of services. Therefore, it cannot be said that assignment of the outright leasehold rights would be a service or transferring of leasehold right.

In view of foregoing reasons, assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC 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-assignee who would become lessee of GIDC in place of original allottee-lessee. In such circumstances, 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.