2025 (7) TMI 192 - AAR - GST

Supply or not - cancellation of a lease agreement originally executed under the pre-GST regime - Taxability of proportionate amount (refund) corresponding to the unexpired lease periods - HELD THAT - It is evident that while leasing of property constitutes a supply of service under the GST Act the cancellation of a lease in itself does not constitute a taxable activity under the Act. In the present case as outlined in the application the applicant is receiving a proportionate amount corresponding to the unutilised period of the lease. The taxability of similar transactions has been addressed by the Central Board of Indirect Taxes and Customs (CBIC) in Circular No. 178/10/2022-GST dated 03-08-2022. In this circular while clarifying the GST liability on compensation paid for cancellation of coal blocks the CBIC held that The compensation was given to them for such cancellation not under a contract between the allottees and the Government but under the provisions of the statute and in pursuance of the Supreme Court Order. Therefore it would be incorrect to say that the prior allottees of the coal blocks supplied a service to the Government by way of agreeing to tolerate the cancellation of the allocations made to them by the Government or that the compensation paid by the Government for such cancellation in pursuance to the order of the Supreme Court was a consideration for such service. Therefore the compensation paid for cancellation of coal blocks pursuant to the order of the Supreme Court in the above case was not taxable. The gist of the is that the cancellation of coal blocks was not based on any agreement where prior allottees consented to or agreed to tolerate the cancellation in exchange for compensation. Instead the cancellation was imposed by the Government under statutory provisions and pursuant to a Supreme Court order. The compensation paid was not contractual but statutory and therefore did not involve any supply of service (such as agreeing to tolerate an act) under GST law. Hence the compensation paid was not taxable under GST. Proceeding on similar lines the refund received by the applicant for the unexpired portion of the lease period is not liable to GST as it does not involve any supply of service. The transaction does not entail any agreement to perform refrain from or tolerate an act and is merely a return of consideration for the unutilized lease period. The cancellation of the lease agreement as described above shall not be treated as a supply under the provisions of Section 7 of the CGST Act 2017.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

• Whether the cancellation of a long-term lease agreement, originally executed during the pre-GST regime, constitutes a "supply" under Section 7 of the Central Goods and Services Tax (CGST) Act, 2017, thereby attracting GST liability.
• Whether the refund of proportionate amounts by the lessor to the lessee for the unexpired lease period upon cancellation of the lease agreement is taxable under GST.
• Whether any other amounts payable or receivable in connection with the lease cancellation, such as enhanced compensation payable to original landowners and adjustments thereof, fall within the scope of supply under GST law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether cancellation of lease agreement executed pre-GST is a "supply" under Section 7 of the CGST Act

Relevant legal framework and precedents: Section 7(1) of the CGST Act defines "supply" to include all forms of supply of goods or services made for consideration in the course or furtherance of business. Schedule II clarifies that lease or tenancy of land is a supply of services. However, the Act does not explicitly address cancellation of leases as a supply. The CBIC Circular No. 178/10/2022-GST dated 03-08-2022 was considered, which clarified that compensation paid for cancellation of coal blocks pursuant to statutory orders is not a supply as there was no contractual agreement to tolerate cancellation, and compensation was statutory and not consideration for a service.

Court's interpretation and reasoning: The AAR analyzed the nature of the lease agreements entered into pre-GST and noted that the original leases were executed before GST implementation, thus no GST was levied on the original transactions. The cancellation involves surrendering the leased land and receiving a refund of the unutilized lease period. The AAR reasoned that cancellation itself does not constitute a supply of service under the CGST Act, as it does not involve any active performance, refraining from, or tolerating an act as per the definition of supply. The refund is merely a return of consideration for the unexpired lease period and not consideration for any supply.

Key evidence and findings: The lease agreements, payment and amortization of leasehold assets, the court order enhancing compensation payable to original landowners, and the refund amounts proposed by Technopark were examined. The applicant's clarification that the outstanding compensation payable to Technopark would be set off against the refund was also noted. The absence of any contractual agreement for tolerating cancellation or performing any act in exchange for compensation was a critical fact.

Application of law to facts: The AAR applied the statutory definitions and the CBIC Circular to conclude that the cancellation of the lease agreements does not amount to a supply under GST law. The refund received is a return of consideration for the unexpired lease period, not consideration for a supply of service.

Treatment of competing arguments: The applicant argued that since the leases were pre-GST, no GST applies and cancellation does not constitute supply. No contrary submissions were received from the jurisdictional officer. The AAR did not find any basis to treat the cancellation as supply and distinguished it from situations where compensation is received for agreeing to tolerate or refrain from acts, which would be taxable.

Conclusions: Cancellation of the lease agreements executed pre-GST is not a supply under Section 7 of the CGST Act. Consequently, no GST liability arises on the refund of proportionate amounts for unexpired lease periods.

Issue 2: Taxability of refund of proportionate lease amounts on cancellation

Relevant legal framework: The refund corresponds to the unutilized lease period and is adjusted against the unamortized leasehold assets in the applicant's books. GST law treats lease of land as supply of service, but the refund on cancellation is a return of consideration, not a supply.

Court's reasoning: The refund is not consideration for any new supply but a reversal of prior consideration for the lease period not availed. The AAR relied on the CBIC Circular to reinforce that such refunds do not attract GST.

Application of law to facts: The refund amounts were carefully examined, including the set-off of outstanding compensation payable by the applicant. The accounting treatment as asset adjustment further supported the non-taxable nature of the refund.

Conclusions: The refund of proportionate lease amounts on cancellation is not taxable under GST.

Issue 3: Treatment of other amounts related to lease cancellation (e.g., enhanced compensation payable)

Relevant legal framework and analysis: The enhanced compensation payable to original landowners, ordered by the court and now demanded from the applicant, is treated as deemed consideration and recorded in books. However, since it relates to a statutory obligation and not a supply, it does not constitute taxable supply under GST.

Application of law to facts: The applicant's request to treat the outstanding compensation as deemed consideration for accounting purposes was accepted, but it was clarified that this does not affect the GST treatment of the lease cancellation or refund.

Conclusions: The enhanced compensation payable is not a supply under GST and does not attract GST liability in the context of lease cancellation.

3. SIGNIFICANT HOLDINGS

"The cancellation of the lease agreement, as described above, shall not be treated as a supply under the provisions of Section 7 of the CGST Act, 2017."

"The refund received by the applicant for the unexpired portion of the lease period is not liable to GST, as it does not involve any supply of service."

"If any additional amount is received by either party specifically under a pre-agreed arrangement for agreeing to refrain from an act, to tolerate an act or situation, or to do an act then the taxability of such payment must be examined separately. Such situations fall outside the scope of this Ruling and would require independent evaluation under the GST framework."

Core principles established include:

• Cancellation of a lease agreement entered into pre-GST does not constitute a supply under Section 7 of the CGST Act.
• Refund of proportionate lease consideration for unexpired periods upon cancellation is not taxable as it is a return of consideration, not consideration for supply.
• Compensation or amounts payable under statutory orders related to the lease do not constitute supply unless linked to an agreement to perform or tolerate acts.

Final determinations were that the cancellation and associated refunds do not attract GST, and questions beyond the primary issue were rendered moot.