Binding High Court Precedents Seal the Fate of the Department’s Appeals

AUTHOR: CA Atul Gupta

CASE: Assistant Commissioner of CGST & Central Excise vs. Pragna Chemical Industries & Ors. (GSTAT, Surat Bench)  |  CITATION: 2026 Taxo.online 3355

1. BACKGROUND

The Goods and Services Tax (GST) regime, introduced in 2017, sought to subsume multiple indirect taxes under a single umbrella while clarifying the taxability of transactions. However, ambiguities persist, particularly in classifying transactions involving immovable property. One such contentious issue has been whether the assignment of leasehold rights in industrial plots — such as those allotted by the Gujarat Industrial Development Corporation (GIDC) — constitutes a “supply of service” under GST or a transfer of immovable property, which falls outside the GST levy.

The dispute gained prominence after the Gujarat High Court’s landmark judgment in Gujarat Chamber of Commerce and Industry v. Union of India (2025 Taxo.online 1), which held that such assignments are not taxable under GST. Despite the Supreme Court’s dismissal of the department’s Special Leave Petitions (SLPs) against this ruling, the GST authorities continued to issue show-cause notices and demand tax under Section 74 of the CGST Act, 2017, invoking fraud, wilful misstatement, or suppression of facts.

The GSTAT Surat’s decision in Assistant Commissioner of CGST v. Pragna Chemical Industries (2026 Taxo.online 3355) now settles this controversy, reinforcing the binding nature of High Court precedents and curtailing the department’s attempts to re-litigate settled legal positions.

2. FACTS OF THE CASE

The dispute revolves around the assignment of leasehold rights in GIDC plots to third parties. The key facts are as follows:

1. Original Allotment & Attachment: In 1990, GIDC allotted Plot No. 7311 in Ankleshwar to Mr. Vinay R.S. Jain under a license agreement. The Central Excise and Customs Department later attached the plot for recovery of dues from Tulsi Alloys Pvt. Ltd., a defaulter.
2. E-Auction & Assignment: An e-auction was conducted by MSTC Ltd. on behalf of the department on 26.04.2018, where M/s Raj Enterprise emerged as the successful bidder. Raj Enterprise transferred its rights to Pragna Chemical Industries (the respondent) via a nomination agreement dated 05.03.2019. GIDC subsequently transferred the leasehold rights to Pragna Chemical Industries via Office Order No. GIDC/RM/ANK/TRF/FFO/ANKI/583 dated 24.01.2019.
3. GST Demand & Adjudication: The Assistant Commissioner of CGST, Division-IX, Ankleshwar, issued a Show Cause Notice (SCN) demanding GST on the transaction under the reverse charge mechanism (RCM), alleging suppression of facts and invoking Sections 74 and 122(2)(b) — despite the transaction occurring through a department-conducted auction, the Dy. Commissioner (Division IX) issuing a Form Appendix IX certificate authorizing the transfer, and the department itself approving the assignment. The adjudicating authority confirmed the demand, imposing tax under Section 74(1), penalty equal to tax under Section 74(1), and additional penalty under Section 122(2)(b).
4. Appellate Relief: The First Appellate Authority set aside the demand, relying on the Gujarat High Court’s judgment in Gujarat Chamber of Commerce and Industry (2025 Taxo.online 1), which held that assignment of leasehold rights is not a taxable supply under GST.
5. Department’s Appeal to GSTAT: The department filed three appeals before the GSTAT Surat, arguing that the SLPs against the Gujarat High Court’s judgment were pending before the Supreme Court (later dismissed), and that the department intended to file a review petition against the Supreme Court’s dismissal. The GSTAT Surat dismissed all appeals, upholding the Appellate Authority’s order.
6. ISSUES

1. Whether the assignment of leasehold rights in GIDC plots constitutes a “supply of service” under GST — specifically, whether such transactions fall under Schedule II, Clause 5(b) (agreeing to transfer a right in immovable property) or Schedule III, Clause 5 (sale of land, which is not a supply).
2. Whether the department’s invocation of Sections 74 and 122(2)(b) was justified — whether the transaction involved fraud, wilful misstatement, or suppression of facts to evade tax.
3. Whether the reverse charge mechanism (RCM) applies to such transactions — if the transaction is not a supply, RCM cannot be invoked.
4. Whether the Gujarat High Court’s judgment (affirmed by the Supreme Court) binds the Tribunal, despite the department’s intention to seek a review.
5. CONTENTIONS OF THE PARTIES

PETITIONER (DEPARTMENT) Taxability Under GST •  The assignment of leasehold rights is a “supply of service” under Section 7(1)(a) of the CGST Act, read with Schedule II, Clause 5(b). •  The transaction does not qualify as a “sale of land” under Schedule III, Clause 5, as it involves leasehold rights, not freehold ownership. Invoking Section 74 •  The respondents deliberately withheld information about the transaction, justifying invocation of Section 74. •  RCM applies, as the transaction is a supply of service under Notification No. 13/2017-Central Tax (Rate). Supreme Court’s Dismissal of SLP is Not Binding •  Dismissal of the SLP does not conclusively affirm the Gujarat High Court’s judgment; the department intends to file a review petition, so the Tribunal should not be bound. Procedural Irregularities •  The Appellate Authority erred in relying solely on the Gujarat High Court’s judgment without considering the merits of the department’s case.

RESPONDENT (PRAGNA CHEMICAL INDUSTRIES & ORS.) Transaction is Transfer of Immovable Property •  The assignment of leasehold rights is not a “supply of service” but a transfer of immovable property, outside GST per Schedule III, Clause 5. •  The Gujarat High Court’s judgment in Gujarat Chamber of Commerce and Industry squarely covers the issue. No Fraud or Suppression •  The transaction occurred through a department-conducted auction, and the Dy. Commissioner (Division IX) issued a certificate (Form Appendix IX) authorizing the transfer. •  The department itself approved the assignment, making the allegations of suppression baseless. Binding Precedent •  The Gujarat High Court’s judgment binds the Tribunal, and the Supreme Court’s dismissal of the SLP further affirms its validity; an intention to file a review does not dilute its binding effect. No RCM Applicability •  Since the transaction is not a supply, the reverse charge mechanism does not apply.

Respondent’s Reliance on the Gujarat High Court Ruling

GUJARAT CHAMBER OF COMMERCE AND INDUSTRY V. UNION OF INDIA (2025 TAXO.ONLINE 1) “Assignment by sale and transfer of leasehold rights of the plot of land allotted by GIDC to the lessee in favour of a third party assignee for a consideration shall be assignment/sale/transfer of benefits arising out of ‘immovable property’ by the lessee-assignor in favour of the third party-assignee, who would become the lessee of GIDC in place of the original allottee-lessee. In such circumstances, the provisions of Section 7(1)(a) of the GST Act, read with Clause 5(b) of Schedule II and Clause 5 of Schedule III, would not be applicable to such transaction, and the same would not be subject to levy of GST.”

5. RELEVANT STATUTORY PROVISIONS

Section 7(1)(a) of the CGST Act

STATUTORY TEXT “Supply includes all forms of supply of goods or services or both… made or agreed to be made for a consideration by a person in the course or furtherance of business.”

Schedule II, Clause 5(b)

STATUTORY TEXT “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be treated as supply of service.”

Schedule III, Clause 5

STATUTORY TEXT “Sale of land… shall be treated neither as a supply of goods nor a supply of services.”

Section 74(1) of the CGST Act

STATUTORY TEXT “Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.”

6. HELD: GSTAT SURAT’S RULING

The GSTAT Surat delivered a comprehensive judgment, dismissing the department’s appeals and upholding the Appellate Authority’s order. The key holdings are as follows:

1. Assignment of Leasehold Rights is Not a Taxable Supply

The Tribunal fully endorsed the Gujarat High Court’s judgment in Gujarat Chamber of Commerce and Industry (2025 Taxo.online 1), holding that the assignment of leasehold rights in GIDC plots is a transfer of immovable property, not a supply of service.

• Schedule III, Clause 5 of the CGST Act explicitly excludes “sale of land” from GST levy, and the assignment of leasehold rights falls within this exemption.
• Schedule II, Clause 5(b) does not apply, as the transaction is not a service but a transfer of property rights.

GUJARAT HIGH COURT’S RULING (2025 TAXO.ONLINE 1) “The transaction of assignment of leasehold rights is a transfer of immovable property and not a supply of service. Hence, GST is not leviable.”

2. Binding Nature of High Court Precedents

The Tribunal emphatically rejected the department’s argument that the Supreme Court’s dismissal of the SLP was not binding:

• The Gujarat High Court’s judgment is the jurisdictional High Court’s ruling and binds all lower authorities, including the Tribunal.
• The Supreme Court dismissed the SLP against the Bombay High Court’s judgment in Aerocom Cushions Private Limited v. Assistant Commissioner (2026 Taxo.online 1411), which endorsed the Gujarat High Court’s view.
• The department’s intention to file a review does not affect the binding nature of the judgment, as no stay or recall order was passed.

SUPREME COURT’S ORDER (22.05.2026) “We are not inclined to interfere with the impugned judgment and order of the High Court, hence, the special leave petition is dismissed.”

3. Invocation of Sections 74 and 122(2)(b) is Unjustified

Since the transaction is not taxable, the invocation of Section 74 and 122(2)(b) was misconceived:

• Section 74 applies only where tax has not been paid, short-paid, or erroneously refunded due to fraud, wilful misstatement, or suppression.
• The department’s own conduct (auctioning the plot and approving the assignment) negates any allegation of fraud or suppression.
• Penalty under Section 122(2)(b) (for failure to pay tax) cannot be imposed if no tax is payable.

4. Reverse Charge Mechanism (RCM) Does Not Apply

Since the transaction is not a supply, the reverse charge mechanism under Notification No. 13/2017-Central Tax (Rate) is inapplicable.

7. PRECEDENT CASE LAW (TAXO.ONLINE CITATIONS)

Gujarat Chamber of Commerce and Industry v. Union of India (2025 Taxo.online 1)

Held: Assignment of leasehold rights in GIDC plots is not taxable under GST as it is a transfer of immovable property.

Aerocom Cushions Private Limited v. Assistant Commissioner (Anti-Evasion), Nagpur (2026 Taxo.online 50)

Held: The Bombay High Court endorsed the Gujarat High Court’s view, holding that assignment of leasehold rights is not a supply of service.

8. KEY TAKEAWAYS

Practical Implications: •  Assignment of Leasehold Rights = Transfer of Immovable Property: Not taxable under GST (falls under Schedule III, Clause 5). Schedule II, Clause 5(b) does not apply, as the transaction is not a service. •  Binding Nature of High Court Judgments: Tribunals and lower authorities are bound by High Court rulings, even if the department intends to file a review in the Supreme Court. The Supreme Court’s dismissal of the SLP further strengthens the binding effect. •  No Fraud or Suppression Where Department Itself Conducts Transaction: Allegations of fraud/suppression are baseless if the department itself conducted the auction and approved the assignment. •  Sections 74 and 122(2)(b) Cannot Be Invoked for Non-Taxable Transactions: Penalty and demand under Section 74 are invalid if no tax is payable. RCM does not apply if the transaction is not a supply. •  Department’s Litigation Strategy Backfires: Continuing appeals despite binding precedents leads to wastage of judicial resources and adverse costs. Assessees can rely on High Court judgments to challenge similar demands.

9. CONCLUSION

The GSTAT Surat’s judgment in Assistant Commissioner of CGST v. Pragna Chemical Industries (2026 Taxo.online 3355) is a landmark ruling that settles the controversy surrounding the GST taxability of leasehold rights assignments. By upholding the Gujarat High Court’s precedent and rejecting the department’s attempts to re-litigate, the Tribunal has strengthened the principle of judicial discipline and provided clarity to businesses dealing with industrial plot assignments. Assessees can now confidently challenge GST demands on similar transactions, while tax authorities must align their assessments with binding judicial precedents. This judgment also serves as a cautionary tale for the department, highlighting the futility of pursuing appeals in the face of settled legal positions.