Assignment by way of sale / transfer of leasehold rights of plot of land would be covered under clause 5 of Schedule III of the CGST Act which provides that sale of land and building would not be considered as supply of goods or services.
BRIEF FACTS OF THE CASE
- As per the facts of the case1 GIDC (‘lessor'), which is established under the Gujarat Industrial Development Act 1962, acquires land and develops the same as an industrial estate by creating infrastructure such as road, water supply, street light, etc., and allots the plot of land to an industrial entity (‘allottee' or ‘Lessee') on long term lease for a period of 99 years.
- A licensing agreement is executed between GIDC and the Lessee to set up an industrial unit on the allotted plot of land pursuant to which a registered lease deed is executed between both the parties subject to fulfillment of certain terms and conditions of the licensing agreement.
- The lease deed also contains a clause which allows the allottees to assign the leasehold right and interest in the plot of land to any other person subject to approval of GIDC.
- The issue under consideration before the Hon'ble Gujarat
High Court was whether GST would be leviable on transfer of
leasehold rights on plot of land and the writ petitions were filed
with the following question of law
- Whether GST is leviable on transaction of assignment of leasehold rights under the provisions of GST law?
- If answer to the above question is yes, then whether ITC would be admissible on tax liability paid on the above-mentioned transaction?
- The Hon'ble High Court after evaluating the definition of ‘immovable property' under the various Statues held that an immovable property includes in addition to the right of ownership, aggregate of rights that are guaranteed and protected by further agreement or contract between the owner and the lessee.
- A distinction was drawn between leasing of immovable property
by a lessor to a lessee and assignment / sale of leasehold right in
an immovable property between the assignor lessee and third-party
assignee. The same has been explained below in brief
- Leasing of immovable property: In this arrangement, the lessor transfers certain rights [not all rights] in an immovable property such as right to occupy land, right to construct and right to possess on long term lease whereas the ownership of the immovable property remains with the lessor. Furthermore, on expiry of lease agreement, all the rights granted to the lessee in an immovable property reverts back to the lessor.
- Assignment of leasehold rights: In this arrangement, the lessee assignor divests all his rights in an immovable property to the third-party assignee and hence, the said transaction cannot be said to be different from sale of immovable property.
- As per Section 65B (44) of Finance Act 1994, there was specific exclusion of transfer of title in immovable property from the definition of service which clearly shows that there was no intention of the legislature to impose tax on transfer of immovable property. Furthermore, in the 22nd and 23rd GST council meeting, it was decided to defer imposition of tax on sale of land and building and thereafter clause 5 of Schedule III of the CGST Act clearly fortifies the intention of the GST council not to levy tax on sale of land and building.
- The lessee has earned benefit out of the land allotted by GIDC by way of setting up factories / industrial unit which constitutes a profit a prendre (i.e. right to take something from the land which is capable of being owned) and subsequent transfer of such Land, factory unit leasehold right and interest in land is a capital asset in form of an immovable property
- The entire dispute originated pursuant to the decision of the Hon'ble West Bengal Advance Ruling Authority in the case of M/s Enfield Apparels Limited [2020(8) TMI 251] which took a view that transfer of leasehold rights is a supply of services. Thereafter, the department issued a slew of notices to the taxpayers to recover tax liability on the transfer of leasehold rights, which also became a subject matter of challenge before the Hon'ble Gujarat High Court.
- The Hon'ble High in the Judgement has equated the assignment of leasehold rights by the original lessee to the assignee as a transfer of legal interest in the land. Such rights have been held to be akin to transfer of title in land and hence would qualify as ‘sale of land/building / immovable property' for the purposes of the CGST Act, 2017
- Universally, all transfers of legal interest in land are generally excluded from the levy of VAT. Similarly, the grant, assignment, or surrender of such interest in or right to occupy land is also exempted / not liable. The legislature and the judiciary in India have always diverged from this premise and have carved out various rights/transfers associated with land and immovable property that would be subjected to VAT / Service Tax / GST. What is specifically excluded under GST is only the ‘sale' of land. Interestingly, the judgment refers to the exclusion entry [as contained in the definition of services] in the Finance Act, 1994 (“the FA”) to stress the intention of the Government to not tax the transfer of immovable property. The exclusion in the FA used a much wider phrase “title in an immovable property”, which could be interpreted to mean all legal rights in a land, including leasehold, however, the entry under GST is much more restrictive and uses the term “sale” of land and/or building, which in various instances has been strictly interpreted to mean permanent transfer or alienation of property by the legal owner of such property.
- It is also interesting to note that in the judgment a fine line of distinction has been drawn for the assignment of leasehold rights vis-a-vis allotment of a plot of land by GIDC on lease by charging a one-time premium which is exempt in specific instances.
- Therefore, the question that merits a debate is whether the long-term grant of lease (say of 99 years) by a taxpayer that is neither a State Government Industrial Development Corporation nor undertaking be liable to GST. Is such a grant of lease not a transfer of an interest in the land even though stamp duty is paid on the same? Further, what would be the applicable GST position on the surrender of leasehold rights for consideration (as opposed to assignment to a third party), as the same is also akin to the transfer of rights in the land? It may also be relevant to note that in the context of the transfer of tenancy rights, the CBIC has issued clarification [Circular No.44/18/2018-CGST dated 2nd May 2018] that the transfer of tenancy rights for a premium is liable to GST.
- It is also interesting to note that the Hon'ble High Court in the judgment has relied on the provisions of service tax law and principles laid down by the courts on the taxability of the transfer of development rights. The Court further held that legal principles laid down in the service tax regime would continue to apply under the GST regime since the object of the introduction of GST is to subsume the existing taxes. The Hon'ble CESTAT Chandigarh in the case of DLF Ltd vs Commissioner of Service Tax [2019(5) TMI 1490] and the Hon'ble CESTAT Kolkata in the case of M/s Amit Metaliks Limited vs Commissioner of CGST [2019 (11) TMI 183] categorically held that development right is not a service but benefit arising out of the immovable property and no service tax is payable as per the exclusion in terms of Section 65B(44) of the Finance Act, 1994. One could argue that the transfer of development rights is not a transfer of legal ownership in the land, but only a grant of the right to carry out construction. The transfer of legal ownership takes place only on the subsequent conveyance of land.
- Another dispute concerning this transaction was the admissibility of input tax credit on the purchase of leasehold rights. Mostly, the leasehold right of land was obtained for setting up industrial units/factories which were immovable property (other than plant and machinery) under the provisions of GST law and entire credit was thereby disallowed under the provisions of Section 17(5)(c) and 17(5)(d) of the CGST Act. In a similar scenario, the Hon'ble Gujarat Authority of Advance Ruling in the case of M/s Bayer Vapi P. Ltd [2023 (9) TMI 165] passed a ruling in favor of revenue authorities to disallow input tax credit on the transfer of leasehold rights under Section 17(5)(d) of the CGST Act
- In view of the aforesaid, it would be important to await decisions from other High Courts on similar matters. Also, the Government may file a review petition or an SLP before the Supreme Court, until such time, the position on taxability may continue to be highly litigious.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
