Assignment of Leasehold Rights under GST: Key Takeaways from Bombay High Court Ruling

1. Context: Why Assignment of Leasehold Rights Became a GST Flashpoint

Ever since the Goods and Services Tax regime commenced, one recurring dispute has been whether assignment of leasehold rights in land amounts to a taxable supply of service or a transfer of immovable property outside the GST net.

Departments in multiple States have tried to bring such transactions within GST by relying heavily on Schedule II to the Central Goods and Services Tax Act, 2017 (CGST Act), which classifies “lease, tenancy, easement, licence to occupy land” as a supply of services.

This issue is particularly acute in relation to:

  • Industrial plots allotted on long-term leases (60, 90, 99, 999 years), and
  • Transfers permitted by statutory industrial development authorities such as:
    • Maharashtra Industrial Development Corporation (MIDC)
    • Gujarat Industrial Development Corporation (GIDC)
    • Rajasthan State Industrial Development and Investment Corporation (RIICO)
    • CIDCO and similar agencies

These authorities commonly permit lessees to assign or transfer leasehold rights, subject to payment of transfer charges, additional premium, and compliance with prescribed conditions. The substantial consideration involved has made such assignments an attractive target for departmental GST demands.

In this backdrop, the judgment of the Nagpur Bench of the Bombay High Court in Aerocom Cushions Private Limited v. Assistant Commissioner (Anti-Evasion) has emerged as a critical precedent. The subsequent dismissal of the Revenue’s Special Leave Petition by the Supreme Court has further solidified the legal position.

This decision draws a clear line between:

  • Lease/letting as a service, and
  • Assignment of existing leasehold interest as transfer of immovable property.

2. Factual Matrix of the Aerocom Cushions Case

2.1 How the Transaction Was Structured

The assessee, a company engaged in industrial activity, had obtained leasehold rights over an industrial plot from MIDC under a long-term lease. At a later stage, the assessee decided to assign its leasehold interest in favour of another entity.

Key aspects of the transaction:

  • Assignment was effected with prior approval of MIDC, in accordance with MIDC regulations on transfer of industrial plots.
  • MIDC levied and recovered:
    • Transfer charges, and
    • Additional premium
      as a condition for permitting assignment of leasehold rights.

Thus, the transaction was a secondary transfer – not a fresh grant of lease by MIDC, but an assignment by an existing lessee to a new party.

2.2 Department’s Stand: Assignment as Supply of Service

The GST authorities initiated anti-evasion proceedings and issued a show cause notice under Section 74 of the CGST Act alleging:

  • The assignment of leasehold rights constituted a “supply” under Section 7 of the CGST Act.
  • By virtue of Schedule II, leasing-related benefits are to be treated as supply of services.
  • The assessee had allegedly suppressed this taxable supply, warranting recovery of:
    • GST on the assignment consideration,
    • Interest, and
    • Penalty under the extended period.

The core plank of the department’s reasoning was that:

Leasehold rights are in the nature of a benefit arising from land/lease. Therefore, any assignment of such rights must also be treated as a service.

Aggrieved by this approach and questioning the very jurisdiction of the authorities to levy GST on such assignment, the assessee invoked the writ jurisdiction of the Bombay High Court.

3.1 Competing Provisions: Schedule II vs Schedule III

The dispute required the Court to reconcile two key features of the GST framework:

  1. Exclusion for sale of land/building

    • Schedule III to the CGST Act specifically excludes:
      • “sale of land”, and
      • “sale of building” (subject to certain exceptions)
        from the concept of “supply”.
        Such transfers are therefore not exigible to GST.

  2. Deeming fiction for leases as services

    • Entry 2 of Schedule II declares that:
      • “lease, tenancy, easement, licence to occupy land”
        shall be treated as supply of services.

The department argued that assignment of leasehold rights should be analogised to continuation, extension or transfer of a leasing service, and therefore automatically falls within supply of services under Schedule II.

3.2 Central Question Before the Court

The High Court had to decide:

  • Whether the assignment of an existing leasehold interest in land:
    • is itself a continuation/variant of a leasing service, or
    • is in substance a transfer of an interest in immovable property, akin to transfer of land, which is outside the GST net.

In other words:

Does the assignment amount to supply of service, or is it a transaction in immovable property beyond the scope of GST?

This required the Court to harmonise property law concepts (under the Transfer of Property Act, 1882) with the taxing provisions of the CGST Act.

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