The Bombay High Court has clarified that the assignment of long-term leasehold rights in immovable property does not constitute a taxable supply under GST, reinforcing the distinction between transfer of property and supply of services. This ruling provides critical relief to entities engaged in leasehold transactions and resolves ambiguity in the application of GST to real estate assignments.
Background & Facts
The Dispute
The petitioner, Exploshakti Chemicals Pvt. Ltd., assigned its long-term leasehold rights in industrial land located at MIDC, Hingna, Nagpur, to Mr. Shripad Dattatray Pande through a deed of assignment dated 21.12.2021. The assignment was executed with the prior written consent of the Maharashtra Industrial Development Corporation (MIDC), as required under the lease terms. Subsequently, the respondent, Assistant Commissioner of Sales Tax, Nagpur, issued a show cause notice dated 22.09.2025, asserting that the transaction constituted a supply of services under the Goods and Services Tax Act, 2017, and levied GST thereon.
Key Facts
- The petitioner held leasehold rights over industrial land under a lease agreement with MIDC, Nagpur
- The assignment deed dated 21.12.2021 transferred all rights, benefits, and obligations under the lease to Mr. Pande
- MIDC, Hingna, granted formal consent to the assignment on 18.12.2021
- The transaction did not involve any construction, development, or service provision by the petitioner
- The consideration paid was for the transfer of the leasehold estate itself, not for any ongoing service
- The respondent relied on the definition of "supply" under Section 7 of the CGST Act, 2017, to classify the transaction as a taxable service
Procedural History
- 21.12.2021: Deed of assignment executed between petitioner and Mr. Shripad Dattatray Pande
- 18.12.2021: MIDC, Hingna, granted consent to the assignment
- 22.09.2025: Respondent issued show cause notice demanding payment of GST on the transaction
- 13.03.2026: Writ petition filed before the Bombay High Court, Nagpur Bench, challenging the levy
Relief Sought
The petitioner sought quashing of the show cause notice dated 22.09.2025, declaration that the assignment of leasehold rights is not a taxable supply under GST, and cancellation of any demand raised thereon.
The Legal Issue
The central question was whether the transfer of leasehold rights in immovable property, with the consent of the lessor, constitutes a "supply of services" under Section 7 of the CGST Act, 2017, thereby attracting GST, or whether it amounts to a transfer of an interest in immovable property, which is exempt from GST under Schedule III.
Arguments Presented
For the Petitioner
The petitioner argued that the assignment of leasehold rights is not a supply of services but a transfer of an interest in immovable property, akin to a sale or conveyance. Reliance was placed on Schedule III, Entry 5 of the CGST Act, which excludes "transfer of title in goods or immovable property" from the definition of supply. The petitioner contended that the transaction involved no service element - no construction, no management, no maintenance - and was purely a conveyance of rights under a lease. The petitioner also cited the court’s own earlier judgment in Aerocom Cushion Private Ltd. v. Assistant Commissioner (Anti-Evasion), Writ Petition No. 2145 of 2025, as binding precedent.
For the Respondent
The respondent contended that the assignment of leasehold rights falls within the ambit of "supply of services" as defined under Section 7(1)(a) of the CGST Act, since it involves the transfer of rights in exchange for consideration. The respondent argued that leasehold rights are not equivalent to freehold ownership and therefore constitute a service rather than a property transfer. The respondent relied on circulars and rulings from the GST Council that treat leasehold transfers as taxable, and asserted that the petitioner’s reliance on Aerocom Cushion was misplaced as it was not yet reported.
The Court's Analysis
The Court reaffirmed its earlier reasoning in Aerocom Cushion Private Ltd. v. Assistant Commissioner (Anti-Evasion), observing that the nature of the transaction must be determined by its substance, not its form. The Court noted that the assignment deed transferred the entire bundle of rights held by the petitioner under the lease, including the right to use, occupy, and derive economic benefit from the land. Such a transfer, the Court held, is indistinguishable from the assignment of an easement or a long-term leasehold interest, which has historically been treated as a transfer of immovable property under the Transfer of Property Act, 1882.
"The transaction in question does not involve any service rendered by the transferor in the course of business. It is a one-time alienation of a proprietary interest in land, which is not a supply under the GST regime."
The Court further emphasized that Schedule III, Entry 5 explicitly excludes "transfer of title in immovable property" from the definition of supply. The Court rejected the respondent’s argument that leasehold rights are inherently different from freehold, noting that both are interests in land and both are governed by the same principles under property law. The Court held that the GST law does not create a new category of taxable transactions where none exists under substantive property law.
The Court also dismissed the respondent’s reliance on GST Council circulars, stating that circulars cannot override statutory provisions and that the law must be interpreted according to its plain language and legislative intent.
The Verdict
The writ petition was allowed. The show cause notice dated 22.09.2025 issued by the Assistant Commissioner of Sales Tax, Nagpur, was quashed and set aside. The Court held that the assignment of leasehold rights under a lease with MIDC consent does not constitute a taxable supply of services under GST. No costs were awarded.
What This Means For Similar Cases
Transfer of Leasehold Rights Is Exempt from GST
- Practitioners can now confidently advise clients that assignments of long-term leasehold rights, with lessor consent, are not taxable under GST
- Any demand notice issued on such transactions can be challenged on the grounds of misclassification
- Tax authorities must now distinguish between transfer of property interests and provision of services
Clarification on Schedule III’s Scope
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The judgment reinforces that Schedule III’s exclusion of property transfers applies broadly to all forms of interest in immovable property, including leasehold
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Circulars or departmental interpretations that conflict with statutory exemptions are invalid
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Tax planning for real estate transactions involving leasehold assignments must now treat them as non-taxable transfers
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Avoid classifying lease assignments as "service supply" unless there is active service provision (e.g., management, maintenance, development)
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Ensure consent from the lessor is documented - this strengthens the argument that the transaction is a transfer of rights, not a new service contract
