The assignment of leasehold rights has emerged as a contentious issue under the Goods and Services Tax (GST) regime. While the GST Act, 2017, defines "supply" broadly under Section 7, the classification of transactions involving immovable property continues to generate litigation.
The central question is whether the transfer of leasehold rights amounts to a taxable supply of service or whether it constitutes a mere transfer of benefits arising out of immovable property, outside the scope of GST. In a recent case of M/s Vidarbha Beverages v. Union of India [2026-VIL-208-BOM], the petitioner held a long-term lease for an industrial plot and constructed a factory building. Subsequently, the petitioner assigned the leasehold rights to a third party.
The Department issued a show cause notice demanding GST, contending that such assignment amounted to a supply of service under Section 7(1) read with Clause 2(b) of Schedule II, which treats leasing or letting out of buildings for business or commerce as a supply of services. The Department classified the transaction as a taxable service under Sr. No. 35 of Notification No. 11/2017-CT (Rate) dated 28 June 2017, which covers "other miscellaneous services" taxable at 18%. According to the authorities, the assignment of leasehold rights was akin to compensation for the transfer of rights and therefore fell within the ambit of taxable services.
The Bombay High Court rejected the Department's contention. It held that the transaction was neither a lease nor a sublease, but an assignment of leasehold rights. Importantly, the Court observed that miscellaneous services such as washing, cleaning, or beauty services could not be extended to cover the assignment of immovable property rights. Thus, the classification under Entry 35(ii) was inappropriate. The Bombay High Court also invoked the principle laid down in CIT v. Godavari Devi Saraf (1978) 113 ITR 589, which held that until a contrary decision is given by another competent High Court, rulings of one High Court are binding on tribunals in other states.
Thus, the Gujarat High Court's decision was binding on authorities in Maharashtra, unless overturned by another High Court or the Supreme Court. Gujarat High Court Precedent: The Gujarat High Court in Gujarat Chamber of Commerce and Industry v. Union of India had earlier ruled that assignment of leasehold rights is essentially a transfer of benefits arising out of immovable property, not a supply of service under GST.
This precedent was relied upon to quash the show-cause notice and adjudication order in Vidarbha Beverages. The Court emphasized that the transaction lacked the essential element of being "in the course or furtherance of business," which is a prerequisite for GST applicability. However, in the case of M/s KOBELCO CONSTRUCTION EQUIPMENT INDIA PVT LTD [2025- VIL-171-AAR - AP], it was further held that while the Hon'ble Gujarat High Court has held that the assignment of leasehold rights in land constitutes a transfer of immovable property and is outside the purview of GST. This view may not align with the intent of the GST regime. The aforesaid judgment has been assailed before the Hon'ble Supreme Court of India and is presently pending adjudication.
Stamp Duty Consideration: Another critical factor is that stamp duty is payable on the assignment of leasehold rights, reinforcing the characterization of such transactions as transfers of immovable property rather than services. This strengthens the argument that GST should not apply, as the transaction is already subject to state taxation under stamp duty laws
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