Leasehold Assignment Cannot Be Taxed by Service Labels

A Brief Supreme Court Order, but a Detailed GST Principle

The Supreme Court order in Union of India and Another v. Gujarat Chamber of Commerce and Industry and Others, 2026-VIL-68-SC, dated 21.07.2026, is short in length but significant in consequence. The Revenue's Special Leave Petitions against the Gujarat High Court judgment in Gujarat Chamber of Commerce and Industry and Others v. Union of India and Others, 2025-VIL-21-GUJ, dated 03.01.2025, have been dismissed. The detailed reasoning lies in the Gujarat High Court's 147-page judgment, which examined whether assignment of long-term leasehold rights in industrial plots allotted by the Gujarat Industrial Development Corporation can be taxed as a GST service.

The controversy arose from a common industrial estate transaction. GIDC had allotted industrial plots to industrial units on long-term leases, generally for 99 years. The original lessees later assigned their leasehold rights to third-party assignees for lump-sum consideration, after obtaining GIDC's permission. The Department treated the assignment as supply of service taxable at 18%. The taxpayers, on the other hand, argued that the assignor had transferred an interest in immovable property, namely leasehold rights and benefits arising out of land.

The Gujarat High Court accepted the taxpayers' position, and the Supreme Court has refused to interfere. The issue is therefore important not merely for GIDC-related transfers, but also for GST classification of long-term leasehold rights, industrial plot assignments, and transactions where the Department seeks to tax a property transfer by using a service label.

The Real Question Was Not Lease, but Assignment

A clear distinction must be maintained. The original long-term lease granted by GIDC to an industrial unit may be treated as a service of renting or leasing immovable property. Entry No. 41 of Services Exemption Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017, specifically addresses one-time upfront amounts such as premium, salami, cost, price, or development charges payable for long-term leases of industrial plots by State Government Industrial Development Corporations or Undertakings to industrial units. Such grants enjoy exemption where the conditions of the entry are satisfied.

However, the dispute before the High Court was different. It did not concern only the original lease grant by GIDC. It concerned a subsequent assignment by the original lessee to a third-party assignee. The assignor transferred the leasehold rights it already held. The assignee stepped into the shoes of the original lessee, subject to GIDC's permission and the terms of the lease.

This distinction shaped the entire case. The Department treated the assignment as a continuation of the lease service. The High Court treated it as a transfer of leasehold interest in immovable property. Once the transaction was understood as an assignment of the entire leasehold right, the Department's service-taxability approach lost its foundation.

Leasehold Rights Are Benefits Arising Out of Land

The High Court placed considerable emphasis on the legal nature of leasehold rights. Under Section 105 of the Transfer of Property Act, 1882, a lease is a transfer of the right to enjoy immovable property. Section 108(j) recognises that a lessee may transfer absolutely, by mortgage, sub-lease or otherwise, the whole or any part of his interest in the property, subject to contract or local usage.

The General Clauses Act, 1897 and the Registration Act, 1908 also treat benefits arising out of land as immovable property. This is important because leasehold rights are not floating commercial rights detached from land. They are rights to enjoy land. They arise from land. Their value comes from land. Their transfer affects the enjoyment of land.

The Supreme Court decision in Sri Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co., (1979) 3 SCC 106, supported this approach. The principle emerging from that decision is that an interest in immovable property and benefits arising out of land are themselves treated as immovable property. The High Court also relied upon Gopal Saran v. Satyanarayana, (1989) 3 SCC 56, where assignment was understood as the transfer of the whole right or interest. Therefore, when the lessee transferred the whole leasehold interest, the transaction was much more than providing a service.

Assignment Is Not the Same as Sub-Lease or Permission to Use

The Department's case weakened because it failed to sufficiently distinguish between assignment, sub-lease, and permission to use. In a sub-lease, the original lessee may retain a reversionary interest and create a subordinate right in favour of another. In an assignment, the assignor transfers the whole interest held by him, and the assignee steps into his position.

This distinction was recognised in State of West Bengal v. Gautam Sur, AIR 2008 Cal 1, where the difference between assignment of lease and underlease was explained. The Gujarat High Court applied the same broad principle. The original lessee was not merely allowing another person to use the premises for a period while retaining the same commercial role. It was transferring its leasehold interest itself.

Once this is appreciated, the GST character changes. A person who transfers his entire leasehold interest is not rendering a renting service to the buyer. The transaction is closer to a transfer of immovable property rights. GST cannot ignore this legal character merely because the subject matter originated in a lease.

Schedule II Classifies; It Does Not Create Taxability

A central statutory principle in the judgment is the limited function of Schedule II to the CGST Act. Section 7 defines the scope of supply. Section 7(1)(a) includes various forms of supply, such as sale, transfer, barter, exchange, licence, rental, lease or disposal, made for consideration in the course or furtherance of business. Section 7(1A) then provides that where certain activities constitute supply under Section 7(1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

This structure is important. Schedule II does not create supply independently. It only classifies an activity as goods or services after the activity first qualifies as supply under Section 7. Therefore, the Department could not start with Schedule II and use it to convert the transfer of immovable property rights into a taxable service.

Clause 5(a) of Schedule II treats the renting of immovable property as a supply of service. But assigning the entire leasehold interest is not the same as renting. Clause 5(b) deals with the construction of a complex, building, civil structure or part thereof intended for sale, subject to the completion certificate or first occupation rule. That provision also did not assist the Department. The real transaction remained the transfer of leasehold interest and the building as immovable property rights.

Schedule III Keeps Land and Building Outside GST

Schedule III to the CGST Act, 2017 is equally important. Section 7(2) provides that activities or transactions specified in Schedule III shall be treated neither as supply of goods nor as supply of services. Clause 5 of Schedule III covers the sale of land and, subject to clause 5(b) of Schedule II, the sale of a building.

The Department argued that the assignment of leasehold rights is not a sale of land itself. The High Court examined the matter in greater depth. Leasehold rights are benefits arising out of land and constitute immovable property. When such rights are assigned along with the building, the transaction cannot be artificially split and taxed as a service merely because the assignor did not own the freehold title.

This reasoning is significant. In commercial reality, industrial plots allotted on long-term lease are often transferred by assigning leasehold rights. The transferee does not purchase freehold ownership but acquires a valuable right to enjoy the land for the remaining lease period. If such a right is treated as immovable property under general law, GST classification must respect that character unless the statute clearly provides otherwise.

The Exemption Entry Did Not Decide the Assignment Issue

Entry No. 41 of Services Exemption Notification No. 12/2017-Central Tax (Rate) has a specific role. It exempts one-time upfront amounts payable for long-term leases of industrial plots by State Government Industrial Development Corporations or Undertakings to industrial units. This entry recognises that the original grant of a long-term lease by bodies such as GIDC may otherwise fall within GST as a supply of service, but is exempt where the entry's conditions are satisfied.

However, the High Court did not treat this exemption entry as the source of non-taxability of the subsequent assignment. The subsequent assignment was held outside GST because of the nature of the transaction itself. It was a transfer of immovable property rights and not a supply of service.

This distinction avoids confusion. The original grant by GIDC and the subsequent assignment by the lessee are separate transactions. Transfer charges collected by GIDC for granting permission to assign may have their own GST consequences, as GIDC renders a permission-related service. However, the lump-sum consideration paid by the assignee to the assignor for the transfer of leasehold rights does not become taxable merely because GIDC may charge GST on transfer fees.

A Classification Entry Cannot Supply the Charging Event

The High Court's reasoning is also supported by a basic principle of tax law. A rate entry, classification entry, or notification cannot create taxability if the charging provision itself is not attracted. The assessee relied on Commissioner of Central Excise-I, New Delhi v. S.R. Tissues Pvt. Ltd., (2005) 6 SCC 310 = 2005-VIL-24-SC-CE, where the Supreme Court explained that classification cannot substitute for the charging requirement.

This principle is vital in GST. Before examining rate, exemption, classification, or valuation, the first question must be whether there is a taxable supply. If the transaction is outside supply, the Department cannot bring it within tax merely by referring to a service accounting code or a broad residual entry.

The Revenue's reliance on Services Rate Notification No. 11/2017-Central Tax (Rate) and service entries relating to immovable property or miscellaneous services therefore did not carry the matter further. The transaction did not become a service merely because some entry could be broadly worded. Taxability must arise from the transaction's real legal nature.

The Department's Service Theory Was Too Wide

The Department's approach, if accepted, could have produced an overbroad result. Every transfer of leasehold interest in industrial plots could be treated as a service merely because the right arose from a lease. That would blur the legal distinction between renting, sub-leasing, licensing, and the assignment or transfer of an immovable property interest.

Tax law cannot work by such broad approximations. A leasehold right is a valuable property right. Its assignment has consequences under property law, stamp law, registration law, and contract law. When the assignor parts with the whole leasehold interest and the assignee steps into the assignor's position, the transaction cannot be reduced to a service merely by using the word “lease”.

The High Court's approach preserves legal discipline. It asks exactly what is being transferred. It then tests that transfer under property law and GST law. This method is safer than treating every land-related commercial arrangement as a taxable service.

The Supreme Court Has Left the High Court View Undisturbed

The Supreme Court order is brief. The delay was condoned. The Court noted that a similar Special Leave Petition had already been dismissed on 22.05.2026 in SLP(C) No.18772 of 2026, reported as 2026-VIL-46-SC. Finding no grounds to interfere, the Special Leave Petitions filed by the Revenue were dismissed.

Although the Supreme Court has not written a detailed independent judgment, the consequence is clear. The detailed Gujarat High Court judgment remains undisturbed. For practical purposes, the High Court's reasoning will now carry substantial persuasive and operational value in disputes involving the assignment of long-term leasehold rights in industrial plots.

This is particularly important because the High Court judgment was rendered in a large batch of matters and examined the issue at length. The Supreme Court's refusal to interfere gives stability to the conclusion that assignment of such leasehold rights is not taxable as a supply of service under GST.

The Transaction Must Be Tested by Its Real Character

The practical rule emerging from the litigation is that the original long-term lease grant by an industrial development corporation and the subsequent assignment of leasehold rights by the lessee must be examined separately. The original grant may be a lease service, subject to exemption under Entry No. 41 of Notification No. 12/2017, provided the conditions are satisfied. Transfer charges collected by GIDC for permission may also be separately taxable, depending on the facts.

However, the consideration received by the original lessee from the assignee for the assignment of leasehold rights in the industrial plot stands on a different footing. Where the assignment transfers the whole leasehold interest and the assignee steps into the shoes of the lessee, the transaction is a transfer of immovable property rights. It is not renting. It is not a residual service. It is not an agreement to tolerate or do an act. It is not taxable merely because the property was originally held on lease.

For senior officers and professionals, the judgment provides a disciplined sequence of analysis. First, identify the transaction. Secondly, determine whether the right transferred is a benefit arising out of land. Thirdly, examine whether the assignor has transferred the whole leasehold interest or merely permitted use. Fourthly, apply Section 7 and Schedule III before moving to Schedule II or rate notifications. This sequence prevents misclassification.

The Property-Law Foundation Strengthens the GST Conclusion

The Gujarat High Court's conclusion was strengthened by settled property-law principles. In Sri Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co., (1979) 3 SCC 106, the Supreme Court recognised that a benefit arising out of land is treated as immovable property. This principle directly supported the taxpayer's case because leasehold rights in an industrial plot are not ordinary contractual permissions. They are rights to enjoy land for the balance lease period, and their value is inseparably connected with the land.

The High Court also relied on Gopal Saran v. Satyanarayana, (1989) 3 SCC 56, where assignment was understood as transfer of the whole right or interest held by the assignor. This helped distinguish assignment from mere permission, licence, renting or sub-lease. Where the original lessee assigns the whole leasehold interest, the assignor does not continue as a service provider. The assignee steps into the assignor's position in relation to the leasehold rights.

This case-law foundation supports the GST conclusion. If the right transferred is a benefit arising out of land, and the transfer is an assignment of the whole leasehold interest, GST cannot treat it as an ordinary taxable service merely by relying on the broad wording of supply. The property-law character of the transaction must guide the GST classification.

In the final analysis, the judgment teaches that a lease service, transfer permission fee and assignment of leasehold rights may arise in the same commercial chain, but they are not the same transaction. Each must be tested separately. That is the practical and lasting value of 2026-VIL-68-SC read with 2025-VIL-21-GUJ.