Is GST applicable for assignment of leasehold right in immovable property?

Similar to the terms used in a property buying process, the world of renting is also filled with complex terms of its own. There are two main parties in a lease agreement. A lease is a contractual arrangement where one party, called the lessor, provides an asset for use by the other party, referred to as the lessee, based on periodic payments for an agreed period.

By signing a lease agreement, the owner transfers some right over the immovable property to the tenant (lessee). The tenant is entitled to remain in possession of the premises till the lease agreement is terminated.

A tenant who has taken a building or a floor on rent may be wanting to sub-let part or whole of the rented premises because of various reasons.

This is also known as sub-leasing. Basically, a sublease is created when the renter decides to rent out the apartment he or she is already renting. For example, if you rent your apartment to another person, you’d be creating a sublease.

Let use refer to the AAR ruling of M/s Enfield Apparels Ltd where the issue under consideration before the West Bengal Authority of Advance Ruling (AAR) was whether assignment of sub lease to another party amounts to transfer of the property or not?

Facts of the Case

The National Company Law Tribunal (NCLT), passed an order, initiating the corporate insolvency resolution process (CIRP), admitting the applicant as the corporate debtor.
The NCLT appointed an Interim Resolution Professional (IRP) who was subsequently confirmed as the Resolution Professional (RP) by the Committee of Creditors (CoC).
During the CIRP, the RP and the CoC did not receive any resolution plan. The NCLT, therefore, passed another order to start the process of liquidating the corporate debtor and appointed the IRP as the Liquidator.
One of the assets under liquidation was the leasehold factory unit along with car parking space (Demised Premises).
The West Bengal Industrial Development Corporation Ltd (Sub-lessor) granted the applicant possession of the Demised Premises for 99 years under a registered deed of sub-lease on payment of an up-front premium and monthly lease rental.

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According to the Deed, the applicant, after the expiry of at least 5 years from the date of the Deed coming into force, was entitled to assign to another person the unexpired residual period of the sub-lease after taking written approval of the Sub-lessor and on payment of transfer fee, being 10% of the prevailing market value of the property as assessed by the Registering Authority of the State Government.
The Liquidator wanted to know whether GST was payable on the consideration receivable on such assignment. If so, what should be the SAC and the rate applicable? He also sought clarity on whether he can claim input tax credit (ITC) for the GST paid on the transfer fee.

Submissions of the Applicant

The applicant submitted that the leasehold right to immovable property was an immovable property.
He referred to section 3(26) of the General Clauses Act, 1897, which defined immovable property to include land, benefits to arise out of the land and things attached to the earth, or permanently fastened to anything attached to the earth.
The phrase ‘benefits to arise out of land’ is relevant. According to the applicant, it means the interest in land. Even the transfer of development rights in the land through joint development is treated as the sale of land.
The applicant, therefore, concluded that the lease alone should attract levy of GST.
Assignment of leasehold rights on land, on the other hand, was nothing but the transfer of immovable property similar to the sale of land and buildings
No GST was leviable on such assignments as it was nothing but a sale of the building.
Pertaining to the question of admissibility of the ITC, being the GST to be paid on the transfer fee, according to the applicant, such transfer fee was the consideration payable to the Sub-lessor for rendering service in the course or furtherance of business, more specifically because business included in terms of section 2(17)(d) of the GST Act supply or acquisition of goods or services in connection with the closure of a business.
The applicant, therefore, argued that GST to be paid on such transfer fee was admissible as ITC if it was ruled that the assignment of leasehold right was a supply of taxable service

Submissions of the concerned officer from the revenue

Revenue submitted that the assigning of the sub-lease is a service classifiable under the heading ‘Other Miscellaneous Services’ (SAC 99979) and is to be taxed accordingly.

Observations of the Authority on whether there was any transfer of immovable property

Section 3(26) of the General Clauses Act, 1897 defines “immovable property” to include land, benefits to arise out of the land, and things attached to the earth, or permanently fastened to anything attached to the earth.
However, applicability of the General Clauses Act, 1897 in the context of a Special Act like the CGST Act, 2017 was limited to areas where no express provisions were made under the said Special Act.
Scope of supply under section 7(1) of the GST Act includes all forms of supply of goods and services, including a sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made.
Section 7(1A) read with Schedule II under the GST Act provides which of such supplies shall be treated as supply of goods or services.
Paragraph 2 of Schedule II provides that with respect to transactions relating to land and buildings, any lease, tenancy, easement, license to occupy the land, letting out of a building including a commercial, industrial or residential complex for business or commerce is the supply of services.

In other words, benefits arising from land in the forms specified in paragraph 2 of Schedule II are not to be treated as transactions in immovable property but as the supply of service for the purpose of the GST Act.
The Deed, therefore, confers upon the applicant no better title to the Demised Premises other than a service contract of lease.
He can, therefore, transfer to the assignee only his right to receive the service of the lease for the unexpired period after obtaining prior approval of the Sub-lessor on payment of the transfer fee.
The Deed provides the rights of the Sub-lessee. They include the right to have peaceful possession of the Demised Premises on regular payment of the lease rental and compliance to the conditions and restrictions.
A reading of the Deed made it clear that the Sub-lessor allowed the applicant, possession of the Demised Premises for the manufacture of garments and textiles.

The sub-lease may be terminated if the Sub-lessee fails to pay the lease rental or maintenance charges, fails or delays in commencing commercial operation, discontinues the business, fails to maintain good labour practice or breaches any terms of the Deed.
It was evident that the applicant, apart from the conditional possession of the Demised Premises, enjoyed no ownership, which was central to sale of any immovable property within the meaning of section 54 of the Transfer of Property Act, 1882.
The applicant’s interest in the benefits arising out of the Demised Premises was limited to sub-leasing in terms of the Deed.
He was capable of transferring the benefits only to that extent.
The assignment, therefore, did not amount to transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and there was no transfer of any immovable property in the context of the GST Act.

Observations of the Authority on the classification of the service

The activity of assignment was in the nature of agreeing to transfer one’s leasehold rights.
It did not amount to further sub-leasing, as the applicant’s rights as per the Deed extinguished.
Neither did it create fresh benefit from land other than the leasehold right.
It was like a compensation for agreeing to transfer the applicant’s rights in favour of the assignee.
Thus it was a service classifiable under ‘Other miscellaneous service’ (SAC 999792) and taxable @ 18% under Sl No. 35 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017, as amended from time to time.

Observations of the AAR on whether ITC is available or not

The transfer fee charged by the Sub-lessor was in the nature of a consideration for tolerating an act that the applicant was otherwise refrained from doing in terms of the Deed.
It was also a service classifiable under ‘Other miscellaneous service’ (SAC 999794) and taxable @ 18% under Sl No. 35 of the Notification No. 11/2017 – CT (Rate) dated 28/06/2017.
It was the consideration payable to the Sub-lessor for providing a service in the course or furtherance of business, more specifically because business includes supply or acquisition of goods or services in connection with the closure of a business in terms of section 2(17)(d) of the GST Act.
The GST to be paid on such transfer fee was, therefore, admissible as ITC.

In conclusion,the activity of assignment of leasehold property is in the nature of agreeing to transfer one’s leasehold rights. It does not amount to further sub-leasing, as the applicant’s rights stands extinguished after assignment. Neither does it create fresh benefit from the land. It is in the nature of compensation for agreeing to do the transfer of the applicant’s rights in favour of the assignee.

It is a service classifiable under ‘Other miscellaneous service’ (SAC 999792) and taxable @ 18%. The transfer fee charged by the Sub-lessor is the consideration payable to the Sublessor for providing a service in the course or furtherance of business, and the GST to be paid on such transfer fee is, therefore, admissible as ITC.

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