GST shall be levied on payment of lump sum upfront premium as transfer charges of leasehold rights

The Uttar Pradesh, AAR in the matter of Remarkable Industries (P.) Ltd.[Advance Ruling No. UP/ADRG/41/2023 Dated December 07, 2023] held that the activity of the Applicant is in the nature of agreeing to transfer one's leasehold rights. It does not amount to further sub-leasing, as the Applicant's right as per the Deed of sublease stands extinguished after the assignment. Neither does it create fresh benefits 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" i.e., SAC 999792 and taxable at the GST rate of 18% under SI No. 35 of Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017. Further, the Applicant is not a State Government Industrial Development Corporation or Undertaking. Hence the benefit of Entry No. 41 of Notification No. 12/2017-Central Tax dated June 28, 2017 is not admissible to the Applicant as the condition of the said entry is not satisfied.

Facts

Remarkable Industries (P.) Ltd. ("the Applicant"), is engaged in the business of manufacturing and selling various products. The Applicant had acquired an industrial plot from the Noida Authority under a lease deed for a period of 99 years. As per the terms of the lease, the Applicant had paid a lump sum upfront premium amount and is also required to pay annual lease charges to the Noida Authority.

After operating its manufacturing facility on the leased industrial plot for several years, the Applicant now wishes to sell/transfer its leasehold rights over the said plot to M/s S K Industries ("the Assignee") for a certain consideration.

The process for transferring the leasehold rights involves the following steps:

1) The Applicant (existing lessee) needs to seek permission from the Noida Authority for transferring its leasehold rights to the buyer.

2) Upon granting permission, the Noida Authority requires the buyer to pay certain transfer charges.

3) Once the transfer charges are paid by the buyer, the Noida Authority executes a fresh lease deed with the Assignee for the remaining period of the original 99-year lease term.

4) Consequently, the Applicant's rights and obligations under the original lease deed stand extinguished, and the buyer becomes the new lessee with respect to the industrial plot.

It is pertinent to note that the Applicant is not sub-leasing the property or creating any fresh benefit from the land. Instead, the Applicant is merely transferring its existing leasehold rights to the buyer in exchange for a consideration.

In light of the above facts, the Applicant sought an advance ruling from the AAR, Uttar Pradesh, on the classification and applicable GST rate for the activity of transferring its leasehold rights.

The Applicant sought an advance ruling on the classification and applicable GST rate for the activity of transferring its leasehold rights.

Issue

Whether the activity of transferring leasehold rights by the Applicant amounts to further sub-leasing, and if not, the appropriate classification and applicable GST rate for the said activity?

Held

The Uttar Pradesh, AAR in Advance Ruling No. UP/ADRG/41/2023 held as under:

• Observed that, as per Section 7(1) of the CGST 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) of the CGST Act read with Schedule II of the CGST 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.
• Opined that, 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 (the premises whose leasehold right is to be transferred including land and building) to other than a service contract of lease. The Applicant can, therefore, transfer to the Assignee only its right to receive the service of the lease for the remaining period after obtaining prior approval of the lessor (Noida Authority). The assignment, therefore, does not amount to the transfer of any benefit other than leasehold rights in terms of the Deed for the unexpired period of the lease and is no transfer of any immovable property in the context of the GST Act.
• Opined that, Entry No. 41 of Notification No. 12/2017-Central Tax dated  June 28, 2017 holds that one time upfront amount (called as premium, salami, cost, price, development charges or by any other name) leviable in respect of the service, by way of granting long term (thirty years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial units is exempted from service lax. The emphasis is on one time upfront amount on industrial plots provided by State Government Industrial Development Corporations or Undertakings. Thus when land was given by Noida to M/s PEC Equipment, for the first time for 99 years, for industrial use, the same may not be subject to GST. But the same is not applicable to the subsequent transfer of lease hold rights. Here the seller i.e. the Applicant is not a State Government Industrial Development Corporation or Undertakings and hence benefit of Entry No. 41 of the Exemption Notification is not admissible to the Applicant as the condition of the said entry is not satisfied. Hence, Entry No. 41 of the Exemption Notification is not applicable on the Applicant.
• Held that, the activity of the applicant is in the nature of agreeing to transfer one's leasehold rights. It does not amount to further sub-leasing, as the Applicant's right as per the Deed of sub-lease stands extinguished after assignment. Neither does it create fresh benefits from the land. It is in 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 i.e., SAC 999792 and taxable @ 18% under SI No. 35 of Notification No. 11/2017 Central Tax (Rate) dated June 28, 2017. Further, Entry No. 41 of the Exemption Notification is not admissible to the Applicant as the condition of the said entry is not satisfied. Hence, Entry No. 41 of the Exemption Notification is not applicable on the Applicant.