INTRODUCTION
In a significant development for taxpayers and the industrial sector, the Hon’ble Supreme Court has put an end to the long-standing controversy egarding the levy of Goods and Services Tax (GST) on the assignment of long-term leasehold rights in industrial plots allotted by the Gujarat Industrial Development Corporation (GIDC). By its Order dated 21 July 2026 in Union of India v. Gujarat Chamber of Commerce and Industry & Ors., Special Leave Petition (Civil) Diary No. 33270 of 2025 [TS-522-SC-2026-GST], the Apex Court declined to interfere with the judgment of the Gujarat High Court [TS-03-HC(GUJ)-2025-GST] by dismissing the batch of Special Leave Petitions.
The significance of the Supreme Court’s order extends beyond the parties to the present litigation. The controversy regarding levy of GST on assignment of long-term leasehold rights is not confined to allotments made by the Gujarat Industrial Development Corporation (GIDC) but similarly arises in respect of industrial development authorities across various states, where industrial plots are allotted on long-term leases with
permission to assign such rights. Although the dismissal of the Special Leave Petition does not amount to a declaration of law under Article 141 of the Constitution, the order is nevertheless likely to have considerable practical significance in the adjudication of similar disputes pending before various High Courts and revenue departments across the country.
BACKGROUND
The controversy arose after GST authorities-initiated proceedings against various industrial units that had assigned their leasehold rights in GIDC industrial plots to third parties. The Department sought to levy GST at 18% on the consideration received by the assignor by treating the assignment of leasehold rights as a “supply of services” under Section 7 of the Central Goods and Services Tax Act, 2017.
The Gujarat Chamber of Commerce and Industry, along with several industrial undertakings, challenged these proceedings before the Gujarat High Court. The principal issue before the Court was whether the assignment of leasehold rights in industrial land, together with the buildings constructed thereon, constitutes a taxable supply of services under the GST regime or merely amounts to a transfer of an interest in immovable property lying outside the scope of GST.
Gujarat High Court’s Reasoning
In Gujarat Chamber of Commerce and Industry & Ors. v. Union of India & Ors., R/Special Civil Application No. 11345 of 2023 and allied matters, the Hon’ble Gujarat High Court undertook an elaborate examination of the nature of leasehold rights under the Transfer of Property Act, 1882 and the scheme of the Central Goods and Services Tax Act, 2017. The Court held that a long-term lease creates an interest in immovable property in favour of the lessee and that such interest constitutes a valuable proprietary right capable of being transferred.
The Court further held that when the lessee assigns its leasehold rights to a third party, the transaction amounts to a transfer of the entire interest in the immovable property. Upon such assignment, the assignor completely divests itself of its rights and obligations under the lease, while the assignee steps into the shoes of the original lessee and thereafter holds the leasehold interest directly under the lessor. Consequently, the assignor does not undertake any continuing obligation, activity or performance for the benefit of the assignee after the assignment.
On this reasoning, the Hon’ble High Court concluded that the assignment of leasehold rights cannot be regarded as a “supply of services” under Section 7 of the CGST Act read with Schedule II. Instead, the transaction is, in substance, a transfer of an interest in immovable property and therefore falls outside the scope of GST. The Court accordingly declared that GST is not leviable on the consideration received by the assignor for
assignment of long-term leasehold rights, while clarifying that transfer fees or other charges separately recovered by the industrial development corporation may stand on a different footing depending upon the nature of the levy.
The importance of the above reasoning lies in the fact that it is founded upon the legal nature of an assignment of leasehold rights rather than upon any peculiar feature of the GIDC allotment scheme. Consequently, wherever industrial development authorities create long term leasehold interests capable of assignment, the reasoning adopted by the Gujarat High Court may equally become relevant while examining the GST implications of such
transactions.
Aggrieved by the judgment passed by the Hon’ble Gujarat High Court in Gujarat Chamber
of Commerce and Industry & Ors. v. Union of India & Ors., R/Special Civil Application No.
11345 of 2023 and allied matters, the Revenue preferred a Special Leave Petition before
the Hon’ble Supreme Court, which was registered as Union of India v. Gujarat Chamber of Commerce and Industry & Ors., Diary No. 33270 of 2025. The Revenue sought to challenge
the High Court’s conclusion that the assignment of long-term leasehold rights constitutes a
transfer of an interest in immovable property and does not amount to a taxable supply
under the CGST Act.
Before the Courts, the Revenue contended that the assignment of leasehold rights
constituted a taxable “supply of services” under Section 7 of the CGST Act read with
Schedule II. According to the Revenue, leasehold rights are intangible rights capable of
being supplied for consideration, and their transfer amounts to a taxable transaction in the
course or furtherance of business. The Revenue further sought to equate the assignment of
leasehold rights with the original grant of lease by the industrial development corporation.
Rejecting these submissions, the Gujarat High Court drew a clear distinction between the
original grant of a lease and the subsequent assignment of leasehold rights. The Court held
that while the original lease creates a proprietary interest in favour of the lessee, an
assignment merely transfers that existing proprietary interest to another person. Upon such
transfer, the assignor completely divests itself of all rights and obligations under the lease,
and the assignee steps into the shoes of the original lessee. Since the assignor renders no
continuing service or performs any obligation after the assignment, the transaction cannot
be characterised as a “supply of services” under the CGST Act but is, in substance, a
transfer of an interest in immovable property.
As is common with any new scheme of taxation, the initial phase is to test the same on the constitutional anvil. Service Tax was no different. lt had its share of challenges, being mounted on the vulnerability to sustain the legality tide. Some can be noted below:
- Goods Transport Operator:
- The levy of Service Tax on Goods Transport Operators was a combative issue since its inception. An attempt to levy service tax on Goods Transport Operators failed, following a nationwide strike. However, the Government, not one to cow down, chose to tax the recipient of the service.
- Vide the Finance Act, 1997; certain amendments were made to Section 65. Rules 2(1)(d), (xii), and (xvii) of the Service Tax Rules, 1994 were amended by imposing the tax in effect on the customers of clearing and forwarding agents and goods transport operators. This imposition of service tax on customers was challenged before the Apex Court in the Laghu Udyog Bharati’. Accepting the challenge, the Court held that the charging section (Section 66) provided for the tax to be paid by the provider. Section 68-1 A, which was merely the section that laid the machinery for collecting the tax, would not change the nature of the tax.
- To overcomethe same, anamendment was made on 12.05.2000. Section 117 of the Finance Act, 2000, sought to retrospectively validate the taxes earlier collected under the Service Tax Rules. While the writ petitions challenging the validity of the
amendments made by the Finance Act, 2000, were pending, the Finance Act, 2003, was assented to by the President on 14.05.2003. There cannot be any doubt that the object of these sections was to nullify the effect of the decision in the Laghu Udhyog Bharati by retrospectively amending and validating provisions held to be illegal. The same again came to be challenged in Gujarat mbuja Cements? case. The Apex Court, this time, upheld the said amendment as valid and legal.
- Professional services:
- The constitutional validity of service tax on services provided by practising tax consultants, chartered accountants, and architects under section 116 of the Finance (No. 2) Act of 1998 was challenged before the Hon’ble Bombay High Court in the Al/ India Federations’ case. The challenge was mounted on grounds of lack of legislative competence and violation of rights under
Articles 14 and 19(1)(g) of the Constitution. It was claimed that such taxation fell under the States’ jurisdiction as per the State List. The Bombay High Court upheld the validity. It ruled that the Union had the authority, and it rightly exercised its residuary powers. The Court clarified that while professions themselves may fall within State jurisdiction, the taxation of services rendered by those professions is a distinct subject on which Parliament is competent to legislate. A challenge to the said judgment was also repelled by the Supreme Court. It held that service tax is a tax on the activity of providing services, not a tax on the profession itself.
- Restaurants and Accommodation Services:
The constitutional validity of service tax on these services was challenged on multiple occasions. The issue was raised whether the Union Government has _ legislative competence to levy service tax on restaurant and short-term accommodation § services,when States are empowered to tax the same.
The Kerala High Court in Kerala Bar and Hotel Association® case struck down the levy. The court held that the supply of food and accommodation was a “deemed sale” under Article 366(29A)(f), taxable only by States under Entry 54, List Il. Accommodation services fall within the luxury tax, exclusively under Entry 62, List Il. The Parliament invoked the residuary power (Entry 97, List ). However, residuary power can be used only if the State clearly lacks legislative competence. Since Entries 54 and 62 expressly empower States, the Union cannot invoke the residuary entry.
In Kerala Classified Hotels® case, an identical view was taken, holding that classification as “service” does not override constitutional allocation of taxing powers.
Per contra, the Delhi High Court in Federation of Hotels’ case upheld service tax, holding that service tax on restaurants is a distinct levy on the service component of the restaurant transaction. The sale of food (State subject) and service provided in a restaurant (Union subject via residuary power) are conceptually separable. The pith and substance theory was applied. A challenge to the said ruling was negated by the Supreme Court’.
- Hire Purchase and equipment leasing:
In the Association of Leasing® case, the challenge was on the levy of “banking and other financial services”. The challenge was mounted on the ground that hire purchase and equipment leasing, though financial transactions, by virtue of the Constitution (Forty-sixth Amendment) Act (Article 366(29A)), hire-purchase/leasing is deemed to be a sale. Any attempt to levy service tax on the same transaction will amount to a colourable exercise of power. Negating the above, the Supreme Court held that service tax in the present case is neither on the material nor on the sale. It is on the activity of financing/funding of equipment/assets within the meaning of the words “financial leasing services” in Section 65(12)(a)(i). The doctrine of pith and substance was invoked.
- Construction/Works Contracts:
‘Works contract’ or ‘Contract of work’ has been the question all along. The said contract has been the subject matter of challenge since time immemorial. In Larsen and Toubro Limited’ case, the issue before the Apex Court was whether there was a works contract, attracting sales tax, on the sale of a flat in a building. A tri-partite agreement was entered into between the developer, the flat purchaser, and the owner of the land. Answering the above question in the affirmative, the Supreme Court held that states had the power to levy sales tax in terms of Article 366(29A). The above view was aftirmed by the Constitution Bench judgment in the case of Kone Elevators”.
This gave rise to the levy of service tax on the service element in the works contract.In Larsen and Toubro’* case, the Supreme Court held that prior to July 2007, no service tax could be levied on the service portion in a works contract in the absence of a charging provision. A notification granting an abatement/exemption cannot govern the levy when none exists.
The Delhi High Court in Suresh Kumar Bansal’® case held that service tax could not be levied on composite contracts if there was no statutory mechanism to segregate the value of the service portion from the value of the land/goods.
- Royalty:
In the Mineral Development Area Authority’* case, the Supreme Court was dealing with a case of the real nature of royalty paid by the lessee to the State Government. The Apex Court held it was not a tax but a contractual consideration. The levy of service on such royalty is still pending consideration. However, the Chhattisgarh High Court in the Mahesh Sharma’? case has rejected the petition challenging the Show Cause Notice demanding service tax on royalty, relying on the said decision.
INDIRECT TAX
Service Tax is an indirect tax, albeit from an economic point of view. From a legal standpoint, it is a tax levied on the provision of taxable services in India. It is a transaction-based tax. It is a transaction-based levy.
To begin with, only three services, viz., telecommunication, stockbroker, and general insurance services, bore the brunt. With each budget, the list kept expanding (just like our population) and gradually rose to 119 services. With effect from ist July, 2012, the Negative list regime entered. The Parliament was bored of defining taxable service after taxable service; hence, it chose to define “service” for the first time, and levied tax on all services (with certain exceptions).
Section 65B(51) of the Finance Act defined taxable services as any service subject to service tax under Section 66B. Section 66B was the charging section. Section 66D listed out the negative list of services (those which had been granted immunity from taxation).
Section 65B(44) defines “Service” with effect from 01.07.2012. It provides that service means any activity undertaken by one person for another for a consideration (with certain exclusions, which were carved out to avoid constitutional trangress). With this arose arenas of interpretation. A few may be referred here to gauge the evolutionary path. The same is relevant even under the GST regime.
The term “activity” is not defined. It states from one “person” to “another”. Thus, the existence of two independent and distinct parties (service provider and service recipient) is mandatory. In the Calcutta Club”* case, the Larger Bench of the Supreme Court held that a member in a members’ club is not subject to service tax. One cannot make a profit out of oneself. This doctrine of mutuality was applied and upheld. It affirmed the principle in Venkatesh Premises Co-op Housing Society,” holding that receipts by a co-operative housing society do not amount to “income”.
The term “consideration” has not been defined in the Act. The Indian Contract Act, 1872, defines consideration. It can be inferred that ‘consideration’ means everything received in return for a provision of service, which includes monetary payment and any consideration of a non-monetary nature, as well as deferred consideration.
The concept of consideration, as derived from the Latin Maxim quid pro quo (something for something), must flow from the contract of service. Any and every transaction involving the exchange of funds will not amount to consideration. In R. J. Tolsma’®, the European Court of Justice held that there has to be a legal relationship between the service provider and recipient pursuant to which there is reciprocal performance.
The Supreme Court in Edelweiss’? case was dealing with an issue relating to the levy of service tax on corporate guarantee offered to group companies without consideration. It held that it would not fall under the definition of “service” as defined under 65B(44) of the Finance Act 1994, as there was no “consideration”.
In Golcha Properties”, the Tribunal held that no “renting of immovable property” service was provided to the Distributor by the exhibitionist as there was no consideration received from them.
Section 67 provided for valuation. It provided that the value shall be the gross amount charged for the service. Rules were framed when a value could not be arrived at under special circumstances. In the Taj Mahal’ case, the Supreme Court held that the Rules were meant only for the purpose of carrying out the provisions of the Act, and they could not take away what was conferred by the Act or whittle down its effect.
The valuation provisions also covered inclusions and exclusions. Rule 5 provided for “inclusion in or exclusion from value of certain expenditure or costs”. The Delhi High Court in the /ntercontinental Consultants* case held that reimbursements could not be subjected to service tax as the rule was ultra vires section 67. The value of service to be taxed can, therefore, never exceed the gross amount charged by the service provider for such service provided. Thus, there can be no Service Tax on reimbursements, such as reimbursements, say, travelling, accommodation, etc. This decision was subsequently upheld by the Supreme Court,
In Bhayana Builders™ case, the Supreme Court held that what is to be taxed is the gross amount charged by the service provider ‘for such service’. It is only the value of ‘such service’ which can be taxed and nothing else. However, Finance Act 2015 amendment (w.e.f. 14.05.2015) explicitly included reimbursable expenditures or costs incurred by the service provider and charged in the course of providing/agreed to vprovide taxable service, in the definition of “consideration”. The same, yet, does not seem to overcome the above decisions.
EXEMPTIONS
Section 66D of the Act, notified from 1st July 2012; vide Notification No. 19/2012-ST date 05.06.2012, lists out a “Negative List of Services”. A list of “services” which will not be subject to service tax. It would be out of the purview of taxation under section 66B.
Similarly, vide Notification No. 12/ 2012-ST dated 17.03.2012 (commonly referred to as the “Mega Exemption Notification”), about 34 services had been notified to be exempt from payment of service tax; in addition to 17 mentioned under section 66D. This list includes services like funeral, burial, crematorium, or mortuary services for the deceased, agricultural services, services provided by the government, healthcare, educational institutions, and services by charitable organisations, subject to specific conditions.
The issue of whether “bowling alleys” are amusement facilities and hence, subject to service tax or not was considered by the Tribunal. lt held that bowling alleys are not subject to service tax as they were covered under the Negative List. This decision was affirmed by the Supreme Court*®.
Reverse CHARGE MECHANISM
Section 68 of the Act mandated the tax to be paid by the provider of the Service. It is a tax on the rendition of the service, irrespective of whether the customer reimburses the tax to the service provider or not. The service provider was required to deposit service tax with the government. However, section 68(2) of the Act provided for an exception. The Reverse Charge Mechanism (RCM) represents an exception, whereby the service recipient is made liable to pay service tax and comply with all statutory provisions, as if it were the service provider. They can run but cannot hide. However, critically, “service recipient” was not defined.
Notification No. 36/2004-ST, effective from 01.01.2005, to begin with introduced reverse charge on certain services. This continued in Notification No.28/2012-ST post Negative List regime. A parallel provision applied to services received from abroad, where the Indian recipient became liable to pay service tax under Section 66A of the Finance Act.
The Madras High Court in Chennai and Ennore Steamer Agents®° case held that service tax cannot be levied on steamer agents in India for transportation service provided by foreign shipping lines to Indian exporters/importers. It noted that the steamer agents are not “service recipients”. A similar view has been taken by the Karnataka High Court in Managalore Steamer Agents.” case.
TRANSITION OF SERVICE TAx To GST
The introduction of GST was not a tax reform. It was a constitutional reset. With the 10/st Constitutional Amendment, India introduced
Article 246A, which permitted concurrent jurisdiction for the levy of tax on the intrastate supply of goods & services. Article 269A provided for the power to tax interstate trade. Article 279A provided for the creation of the GST Council, sadly as a recommendatory body. Article 366(12)(a) defines “Goods & Services Tax” as any tax on the supply of goods or services or both, except taxes on the supply of alcoholic liquor for human consumption. Article 366(26) (a) defines “Services” means anything other than goods. Similarly, certain consequential amendments were made in the Seventh Schedule, consisting of the Union List and the State List.
Thus, the statute Central Goods & Services Tax Act, 2017, State Goods & Services Tax and Union Territory Goods & Services Tax Act, 2017, and rules framed thereunder) came to be enacted, deriving power from Article 246A. Hence, the same would always be subject to constitutional boundaries and must pass scrutiny of Article 14, Article 19(1)(g), Article 21, Article 265, read with Article 300A of the Constitution.
The transition framework focused on three areas: carry forward of ITC, continuation of certain procedures, and handling of claims under the old laws.
TRANSITIONAL PROVISIONS
Sections 140 to 143 of the CGST Act 2017 provided the taxpayers to carry forward the Input Tax Credit (ITC) earned under the existing laws to the GST regime and deal with past issues. Rules keeps haunting. This provision was subject to endless disputes relating to technical glitches, systemic issues, and interpretational hazards, leading to amendments at early stages of theintroduction of the law itself.
In Filco Trade®®, the Supreme Court had to step in, directing the re-opening of the online common portal for all assessees to refile or fresh-file the forms to avail of this transitional benefit.
The evolution of service taxation in India shows a clear shift from a narrow system to a broad, unified tax framework. This is being enlarged under the GST regime. However, the so-called “progressive” system is also carrying the ailments of the past with it. Identical issues of charge, taxability, exemptions, valuation, reverse charge, and compliance are seen under the new regime. It appears that ‘demons’ have also crossed the bridge with the ‘angels’. Only time would be the penultimate judge.
