Panacea Biotec not to pay 18% GST on leasehold land, says Bombay HC

After Gujarat High Court, in a yet again landmark judgment, the Bombay High Court on January 21 quashed the GST demand on the assigning of leasehold land under the Maharashtra Industrial Development Corporation (MIDC).

The Court was hearing a matter as to whether 18% GST should be applicable to such leasehold land deals or not. Even the industry had continuously contended that it would lead to double taxation of stamp duty and GST payable on the assignment and transfer of leasehold land, which meant that GST should not be levied.

WHAT WAS THE CASE?

The dispute arose from a transaction in which MIDC initially assigned leasehold land to Panacea Biotec Ltd. Subsequently, in 2022, Panacea Biotech assigned this leasehold land to Mankind Pharma. The key legal question before the Court was whether GST at 18% could be levied on the transfer of leasehold land by Panacea Biotech to Mankind Pharma. The GST authorities had issued a show cause notice and confirmed the demand through the impugned order dated August 19, 2024.

TAX TANGLE

The Bombay High Court addressed the core legal issue of whether GST is applicable on a Deed of Assignment under which land and any building constructed thereon are transferred by a lessee to a third party. The petitioner, Panacea Biotech Ltd, argued that the transaction falls under Item 5 of Schedule III of the Central Goods and Services Tax Act, 2017, which excludes certain transactions from the purview of GST.

The petitioner further asserted that the transaction does not fall under Item 2 of Schedule II of the same Act, as alleged by the GST authorities. Importantly, the petitioner had raised these arguments in their reply to the show cause notice, which was inexplicably disregarded in the impugned order.

Abhishek A Rastogi, founder of Rastogi Chambers, Counsel for the petitioner, argued that GST legislation has been carefully crafted to exclude the sale of land and buildings from its scope, with specific provisions ensuring such transactions remain outside the ambit of GST. Additionally, a notification exempts the assignment of rights for leasehold land, recognizing that these transactions, should also fall outside GST’s purview.

Rastogi argued that once the leasehold rights are assigned to a third party, the assignor relinquishes all control over the land. Consequently, the interest arising from the land effectively constitutes a transaction akin to the sale of land in substance and should be treated accordingly.

He demonstrated various clauses of the assignment deed by which MIDC had transferred the leasehold land to the petitioner and demonstrated to the court that the subsequent transfer from the petitioner ensures that all the rights of the petitioners are alienated. It was also highlighted before the court that these transactions are already subject to stamp duty and the additional 18% burden will make the transactions unworkable and not feasible.

WHAT THE COURT SAID

The Court, under Justice BP Colabawalla and Justice Firdosh P Pooniwalla observed that the impugned order erroneously stated that no submissions were made by the petitioner in response to the show cause notice. This finding was factually incorrect, as the petitioner had indeed submitted a reply dated July 22, 2024, which was duly received by the Assistant Commissioner of State Tax on the same day. Despite this, the impugned order failed to consider or address the petitioner’s submissions, rendering the decision procedurally flawed and violative of principles of natural justice.

The Bombay High Court further took note of a subsequent decision by the Gujarat High Court, which held that similar transactions are not taxable under GST law. The Court directed the GST authorities to consider and address this Gujarat High Court ruling while re-adjudicating the matter.

Thus, in light of these findings, the Bombay High Court quashed and set aside the impugned order dated August 19, 2024, and directed the respondent to re-adjudicate the show-cause notice. The Court emphasized the necessity for a fresh and comprehensive consideration of the issues, ensuring that the petitioner’s submissions and the Gujarat High Court’s judgment are fully addressed.

WHY DOES THIS CASE MATTER?

Experts say that this judgment reinforces the principle that tax authorities must exercise their powers judiciously and in compliance with procedural fairness. By setting aside the GST demand, the Bombay High Court has provided much-needed clarity on the taxability of transactions involving the assignment of leasehold land, which has significant implications for the industry. This decision underscores the necessity for tax authorities to diligently consider taxpayers’ submissions and adhere to established legal precedents while adjudicating disputes.

Further, this decision by the Bombay High Court is a watershed moment for businesses engaged in the assignment of leasehold land, offering significant relief to the industry. It clarifies a long-standing ambiguity regarding the applicability of GST on transactions involving the transfer of leasehold rights, aligning such transactions with the legislative intent of excluding the sale of land from GST’s ambit.

Thus, by quashing the GST demand, the Court has established a strong legal precedent emphasizing that the substance of transactions should prevail over their form. This reinforces the distinction between taxable supplies under GST and transactions akin to the sale of land, which fall outside the scope of the tax.

Meanwhile, the economic impact will be that the Court’s recognition that such transactions are already subject to stamp duty prevents the imposition of an additional 18% GST burden. This ensures that businesses can avoid a double tax impact, making land transactions economically viable and fostering a favourable investment environment.

Not just this, the judgment highlights the importance of procedural fairness and adherence to natural justice in adjudication. Tax authorities are now under an obligation to carefully consider taxpayers’ submissions and follow legal precedents, reducing arbitrary tax demands and boosting confidence in the tax system.

This ruling protects entities from unsustainable financial burdens and sets a benchmark for interpreting similar transactions across sectors. It is expected to provide a clear roadmap for future transactions involving leasehold assignments, benefiting industries reliant on long-term leases.

Also, the Court’s reference to Schedule III of the Central GST Act underscores the importance of legislative clarity in excluding land-related transactions from GST’s ambit. The judgment reinforces that taxing such transactions would contradict the legislative framework and create unnecessary financial strain on businesses.

It is understood that this judgment could influence similar disputes across other jurisdictions, creating a ripple effect for tax assessments under GST law. It also emphasizes the need for more streamlined and transparent guidelines for determining the taxability of transactions that straddle the fine line between goods and services.

With this Bombay High Court’s decision provides a robust foundation for resolving similar disputes in favor of businesses, ensuring fairness, consistency, and adherence to the legislative intent of the GST framework. Experts say that this landmark judgment is poised to become a cornerstone of tax jurisprudence in India.