Supreme Court Ends GST Dispute on Long-Term Immovable Property Lease Assignments: A Landmark Victory for Industry
1. Setting the Context
Ever since the Goods and Services Tax regime took effect in India in July 2017, one of the most fiercely contested questions in indirect taxation has been whether the assignment of long-term leasehold rights over immovable property attracts GST. The controversy particularly centred around plots allotted on long-term lease (commonly 99 years) by Government development bodies such as MIDC, GIDC, CIDCO, AIA, and similar corporations to business entities.
These statutory bodies typically charge a substantial one-time upfront premium—variously referred to as "Salami," "premium," or "development charges"—along with nominal annual lease rentals. The upfront premium, in most cases, mirrors the prevailing market value of the underlying land. Further, when lessee-companies choose to exit, consolidate operations, or restructure, they often transfer their leasehold rights to third-party buyers for a lump-sum consideration, with the incoming party continuing to pay the annual rentals directly to the Government body.
This created a two-front tax dispute:
- GST authorities took the position that such assignments constitute a "supply of service" under
Section 7(1)of the CGST Act, 2017, attracting GST at 18%. - Income-tax authorities simultaneously treated the payments as lease rentals liable to tax deduction at source under
Section 194-Iof the Income-tax Act, 1961.
This twin-front attack by revenue authorities created significant uncertainty, chilled transactions, and imposed heavy compliance burdens on industrial and infrastructure participants. The matter finally reached its logical conclusion when, in May 2026, a two-member Bench of the Supreme Court dismissed the Special Leave Petition filed by the GST authorities and upheld the Bombay High Court's ruling in the case of Assistant Commissioner (Anti-Evasion) v. Aerocom Cushions (P.) Ltd. (January 2026), decisively settling the law on this subject.
2. The GST Legislative Framework: Understanding the Battleground
2.1 What Constitutes "Supply" Under GST Law
The starting point of any GST analysis is the definition of 'supply'. 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."
A crucial phrase embedded in this definition is "in the course or furtherance of business." This is not a mere formality—it is a substantive pre-condition. For any transaction to fall within the ambit of GST as a 'supply,' it must have a direct nexus with the business activity of the person making the supply.
2.2 Schedule II — Activities Classified as Supply of Services
Schedule II to the CGST Act, 2017 specifies transactions that are deemed to be supply of services:
- **Clause 2(a)😗* Any lease, tenancy, easement, or licence to occupy land is treated as a supply of services.
- **Clause 2(b)😗* Lease or letting out of any building—whether commercial, industrial, or residential—for business or commerce (wholly or partly) is a supply of services.
2.3 Schedule III — Exclusions from GST
Clause 5 of Schedule III to the CGST Act carves out an important exclusion: the sale of land and completed buildings is treated as neither a supply of goods nor a supply of services. This exclusion reflects the legislative intent that pure transfers of immovable property rights should not fall within the GST net.
2.4 The Notification Granting Nil GST on Long-Term Leases
Through Notification No. 12/2017-CT, the Government prescribed a Nil rate of GST on the one-time upfront amounts (including premium, salami, and development charges) payable for long-term leases of 30 years or more granted by State Government Industrial Development Corporations or Undertakings to industrial units.
This meant that even where MIDC or GIDC allots land on long-term lease—which could technically qualify as a 'supply of services' under Schedule II—the transaction effectively attracts zero GST by virtue of the exemption notification.
The Revenue's attempt to then impose GST on the subsequent assignment of such leasehold rights by the original lessee to a third party made the situation even more anomalous and commercially unworkable.