Sale of Buildings on Leased Land Deemed a Taxable Service, Not a Sale, in Major AAR [Read Order]

In a significant ruling that clarifies the tax treatment of property transactions involving leased land, the Maharashtra Authority for Advance Ruling (AAR) has held that the transfer of buildings constructed on leased land constitutes a taxable service under the Goods and Services Tax (GST) regime, and not a sale of immovable property. This decision means such transactions will attract GST at 18%, diverging from the common industry practice of treating them as non-taxable sales.

The ruling was delivered in the case of General Motors India Private Limited (GM India), which had sought clarity on the GST implications of its asset sale to Hyundai Motor India Limited (HMI). As part of a comprehensive Asset Purchase Agreement valued at over INR 787 crores, GM India had transferred its Talegaon manufacturing facility, including leasehold rights to land, numerous buildings, and thousands of items of plant and machinery. The company had treated the sale of buildings separately, contending it was neither a supply of goods nor services and thus outside GST's scope.

However, the AAR bench, delved deep into the original lease deed between GM India and the Maharashtra Industrial Development Corporation (MIDC). They observed that the lease agreement explicitly demised the plot of land "together with the buildings and erections now or at any time hereafter standing and being thereon." The authority concluded that the buildings were an inseparable part of the leased property from the very beginning.

Crucially, the AAR emphasized that under the Transfer of Property Act, 1882, a lessee does not acquire ownership of structures built on leased land. Instead, any such structures are considered an accession to the leased property, and the lessee merely holds leasehold rights over them. Therefore, GM India could not legally claim ownership of the buildings or effect a "sale" of them. The Deed of Conveyance executed by the company was found not to conclusively prove ownership, as the fundamental title remained with the MIDC.

The authority ruled that what was being transferred to HMI was not ownership of buildings but the assignment of the composite leasehold rights, which included the right to use the land and the structures on it. Consequently, the entire consideration received for the transfer of these rights—even if contractually broken down into separate values for land and buildings—is payment for a single taxable service. This service is classified as an "activity of agreeing to transfer one's leasehold rights."

The AAR classified this service under SAC 999792 (Other miscellaneous services) and held it taxable at 18% under the GST law. It distinguished this from the sale of a building by an owner, which can be non-taxable, clarifying that the critical factor is the nature of the rights being transferred, not the physical asset itself. The ruling reinforced its view by referencing the Bombay High Court's decision in the Builders Association of India case (2018), where the court upheld that long-term lease premiums are consideration for a taxable service of leasing.

On the other aspects of the transaction, the AAR confirmed that the assignment of the land lease rights itself is a separate taxable service. Furthermore, the sale of the thousands of individual items of plant and machinery was rightly treated by GM India as a supply of goods, liable to GST at the applicable rates for each item, based on their individual transaction values.

The ruling was delivered by members D.P. Gojangunde and Priya Jadhav, providing much-needed judicial interpretation on a complex and common business scenario, particularly for industries operating on large leased plots. The decision binds the applicant in the specific case but offers critical guidance on how similar transactions will be viewed by tax authorities going forward.

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