Aerocom Cushions Private Limited Vs Assistant Commissioner

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

Heard.

2. Issue Rule, returnable forthwith. Mr. K.K. Nalamwar, learned Counsel waives service of Rule on behalf of the respondent. With consent of learned Counsels for the parties, the petition is taken up for final hearing.

3. The challenge is to the show cause notice dated 20-12-2024 issued by respondent No.1 calling upon the petitioner to show cause as to why goods and services tax amounting to Rs.27,00,000/- should not be demanded and recovered from the petitioner under sub-section (1) of Section 74 of the Central Goods and Services Tax Act, 2017 (for short, “Act of 2017”) towards non payment of GST on transfer of leasehold rights.

4. The notice has been issued under Section 74(1) of Act of 2017 on the ground that the petitioner has concealed a transaction where he has assigned his leasehold rights in the plot belonging to MIDC to Sumit Madanlal Pagariya, Proprietor of M/s. Rishita Industries for Rs.1,50,00,000/-. As such, it is undisputed that the leasehold rights have been assigned with consent of MIDC Hingna, Nagpur and that the petitioner has paid an amount of Rs.3,95,640/- by way of additional premium.

5. According to the respondents, this transfer of assignment of rights would amount to supply of services in terms of Section 7(1) of the Act of 2017 read with sub-clause (b) of Clause 2 of Schedule II. For the purpose of ready reference, we reproduce relevant parts of Section 7 and Clause 2(b) of Schedule II.

“7. Scope of supply-

(1) For the purposes of this Act, the expression – “supply” includes-

(a) 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;

[(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II]

SCHEDULE II
 [See section 7]

ACTIVITIES 1 [OR TRANSACTIONS] TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES.

2. Land and Building.

(a) any lease, tenancy, easement, licence to occupy land is a supply of services:

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”

6. As could be seen, sub-clause(b) of clause 2 of Schedule II indicates any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

7. In the case before us, the transaction under question is assignment of leasehold rights by the petitioner in favour of assignee-M/s. Rishita Industries, which admittedly is not a lease nor does it amount to sub-lease. In fact, in the show cause notice issued by respondent No.1, he has categorically mentioned that the transaction under question does not amount to sub-lease as the petitioner’s right stands extinguished by the said transaction. Respondent No.1 has recognized this transaction as seeking compensation to transfer rights in favour of the assignee. According to respondent No.1, this activity amounts to service classifiable under other miscellaneous services and is taxable at 18% under Sr. No. 35 of the Notification No.11/2017 CT (Rate) dated 28-06-2017.

8. Our attention is invited to the entry at Sr.No.1 which includes other services (washing, cleaning and dyeing services; beauty and physical well­being services, and other miscellaneous services including services nowhere else classified). As could be seen, the services include miscellaneous services like washing, cleaning, dyeing, beauty, physical well-being, etc. Such petty services, in our view, cannot be extended to assignment of leasehold rights in an immovable property, to term it to be other miscellaneous services as classified under clause at Sr. No.35 of the Notification.

9. In that view of the matter, the notice could be said to be bad in law on this count alone. We, however, find it necessary to consider whether the assignment of leasehold rights would amount to supply of service. Admittedly, the petitioner holds a lease for 95 years. Thus it is a long term lease and in that sense is a leasehold ownership property. The rights under the lease are transferable in terms of clause 2(u) of the lease executed between MIDC and the petitioner. Thus the rights are transferable. Accordingly, the petitioner has transferred the rights to M/s. Rishita Industries with prior consent of MIDC.

10. This transaction on the face of record constitute transfer of immovable property by the petitioner to M/s. Rishita Industries. The transaction pertains exclusively to transfer of benefits arising out of an immovable property and has no nexus whatsoever with the business of the petitioner company. Consequently, the essential element of supply of service in the course of business or in furtherance of business is completely absent. On this point, a profitable reference could be had to the judgment of Gujarat High Court in a case of Gujarat Chamber of Commerce and Industry v. Union of India, (2025) 170 taxmann.com 251 (Gujarat), wherein identical issue was considered which finds place in para 27, which reads as under :

“27. Therefore, moot question which arises for consideration is whether assignment of the leasehold rights of the land along with the building thereon would be covered by the scope of supply so as to levy GST as per the provisions of section 9 of the GST Act or not?”

Thus, the question before the Gujarat High Court was, whether assignment of the leasehold rights of the land along with the building thereon would be covered by the scope of supply so as to levy GST as per the provisions of section 9 of the GST Act.

11. In the case before the Gujarat High Court, the lease was executed by GIDC whereas in the case before us it is executed by MIDC. In the present case also the petitioner has constructed factory building on the land allotted to it and has assigned the rights of the land along with building standing thereon. The Gujarat High Court considered provisions of the GST Act with Schedule II and held thus;

“31. The functions and powers of the GIDC are prescribed under Chapter III of the GIDC Act for growth and development of industries in the State of Gujarat by establishing and managing the industrial estate and develop such industrial area.

32. Sub-clause (a) of section 14 of the GIDC Act empowers the GIDC to acquire and hold such property, both movable and immovable as may be necessary for the performance of any of its activities and to lease, sell, exchange or otherwise transfer any property held by it on such conditions as may be deemed proper by the Corporation. In exercise of such powers, GIDC enters into lease agreement of 99 years for allotment of land for industrial purpose in the industrial estate developed by it.

33. The ownership of the plot of land allotted by GIDC remains with it and only the right of possession and occupation are transferred by way of leasehold rights in favour of allottee lessee.

34. Schedule-II of the GST Act provides for activities or transactions to be treated either as supply of goods or supply of services. As per clause 5(a) of Schedule II renting of immovable property is to be treated as supply of services. Therefore, allotment of land which is undisputedly an immovable property on lease would be covered by clause 5(a) of the Schedule II of the GST Act and therefore, the same would be covered by the scope of supply of services liable to levy of tax under the provisions of section 9 of the GST Act.