In one of the recent judgments, in Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors. (2025) 1 TMI 516; (2025) 170 taxmann.com 251 (Gujarat), where the Gujarat Industrial Development Corporation (GIDC) allotted industrial plots on long-term lease (99 years) to entities for industrial purposes under certain conditions and after fulfilling these lease terms, the lessee may assign leasehold rights to third parties, subject to GIDC’s approval, the GST Department sought to levy GST @ 18% on the assignment of leasehold rights, claiming these to be taxable as “supply of service,” it was held that the 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” and the provisions of Section 7(1)(a) of the CGST Act, 2017 providing for scope of supply read with Clause 5(b) of Schedule II 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 CGST Act, 2017.
The scope of ‘supply’ under GST is defined in section 7(1) of the CGST Act, 2017 as – the expression ‘supply’ includes 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. Further, as per sub-section (1A), where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. Also, as per sub-section (2), activities or transactions as per Scheduled III shall be treated neither as a supply of goods nor a supply of services.
Clause 5(b) of Schedule II provides that construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier shall be treated as supply of service. Further, as per clause (5) of Schedule III, sale of land and sale of building subject to clause 5(b) of Schedule II, shall not be treated as supply of goods or supply of services.
In the instant case, GIDC entered into lease agreement of 99 years for allotment of land for industrial purpose in the industrial estate developed by it. The ownership of the plot of land allotted by GIDC remained with it and only the right of possession and occupation were transferred by way of leasehold rights in favour of allottee-lessee.
The petitioner had 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.
The court held that 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.
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.
According to the legislative intention, section 7 of the CGST Act, 2017 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, 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 CGST Act can be left out of the net of tax. When the GIDC allots the plot of land on lease of 99 years and charges premium for such allotment followed by periodical lease rent to be paid, is to be considered as supply of service in relation to land and building read with clause 5(a) of Schedule-II which specifically provides that renting of immovable property shall be treated as supply of services.
In the instant case, GIDC had only allotted the plot of land to the lessee who constructed the building and developed the land to run the business or industry for which such plot of land was allotted. Therefore, what is assigned by the lessee/assignor to the assignee for a consideration is not only the land allotted by GIDC on lease but the entire land along with building thereon which was constructed on such land. The entire land and building was therefore, transferred along with leasehold rights and interest in land which was a capital asset in form of an immovable property and the lessee/assignor earned benefits out of land by way of constructing and operating factory building/shed which constitutes a “profit a pendre” which is also an immovable property and therefore, would not be subject to tax under the CGST Act, 2017.
Further, it was observed that Clause 5 of Schedule III of CGST Act, 2017 clearly provides that sale of land cannot to be treated as supply of goods or services and 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 CGST Act, 2017.
To conclude, high court held that 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.
The impugned show cause notices and orders in original or appeal as the case may be, were quashed and set aside and the petition allowed.
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