Delhi HC: No GST on DDA’s Leasehold-to-Freehold Conversion Charges; Recovery Stayed
Issue
Whether the conversion charges paid to the Delhi Development Authority (DDA) for converting a property from leasehold to freehold constitute consideration for a taxable service (specifically, “agreeing to forego future rent”) or are part of the non-taxable sale consideration for immovable property.
Facts
The Dispute: The petitioners, owners of commercial units in DLF South Court Mall, applied to convert their leasehold properties to freehold in November 2023. They paid the prescribed conversion charges amounting to approx. ₹1.54 crore.
The Demand: Initially, no GST was levied. However, in April 2025, the DDA raised a retrospective GST demand of ₹30.26 lakh on the conversion charges already paid.
DDA’s Justification: The DDA relied on a new Standard Operating Procedure (SOP) dated 28 March 2025. The SOP treated conversion charges as consideration for the service of “foregoing the right to collect future rent,” classifying it as a taxable supply under Schedule II, Para 5(e) of the CGST Act (“agreeing to the obligation to refrain from an act”).
Petitioner’s Argument: The petitioners argued that the conversion fee is essentially a payment to acquire absolute ownership (freehold title). Therefore, it falls under the exclusion for “sale of land” (Schedule III, Para 5), which is neither a supply of goods nor services and is outside the GST net. They pointed out that DDA’s own 2016 scheme and 2023 rate notifications did not mention GST.
Decision
The Delhi High Court granted interim relief to the petitioners and stayed the recovery of the GST demand.
Prima Facie View: The Court observed that the conversion of a property from leasehold to freehold is fundamentally a transaction transferring ownership title. Therefore, the conversion charges are “part and parcel of the sale consideration” for the immovable property.
Excluded from GST: Since the sale of land is statutorily excluded from the definition of supply under Schedule III of the CGST Act, the Court held that prima facie, GST is not leviable on these charges.
SOP Questioned: The Court questioned the legality of the DDA’s attempt to retrospectively tax this transaction based on an internal SOP that contradicts the statutory exclusion for land sales.
Key Takeaways
Conversion is Sale, Not Service: The judgment reinforces the principle that payments made to perfect the title of immovable property (converting leasehold to freehold) are part of the “sale of land” and not a separate service.
Limits of “Tolerating an Act”: The DDA’s attempt to categorize the transaction as “agreeing to forego rent” was viewed skeptically. Courts are increasingly restricting the revenue’s tendency to apply the “tolerating an act” clause to standard property transactions.
No Retrospective Tax by SOP: An internal administrative SOP cannot override the statutory provisions of the GST Act or impose a tax liability retrospectively where none existed under the governing schemes.
Relief for Property Owners: This order provides significant protection to property owners in Delhi against retrospective GST demands on freehold conversions.