2019 (2) TMI 1080 - AAR - GST

Levy of CGST/SGST Act - merger of entities - merger of his proprietorship firm as a going concern with a private limited company on the fixed assets and currents assets including stocks of raw material, semi-finished and finished goods - transfer of input tax credit available in the credit ledger account or cash ledger account of proprietorship firm to the respective credit ledger and cash ledger account of the private limited company, consequent upon merger - Section 18 (3) of the CGST/HGST Act, 2017. Held that - It is evidently clear that there are provisions in the law, where in case of merger, a registered person, by filing Form GST ITC-02, electronically on common portal, can transfer un-utilized input tax credit lying in his electronic credit ledger to the transferee. Here it is to be noted that these provisions pertain to transfer of unutilized input tax credit. These provisions are not applicable to un-utilized balance lying in electronic cash ledger - It is further observed that Section 7 of the CGST/HGST Act, 2017, defines the scope of supply, which includes sale, transfer, barter, exchange made for a consideration in the course of or for furtherance of business and also provides vide clause (d) to sub-section (1) that the activities to be treated as supply of goods or services as referred to in Schedule ll. As per Para 4(c) of Schedule II to the CGST/HGST Act, 2017, transfer of business as a going concern is not treated as supply and thus, the same stands excluded from the scope of supply of goods - it emerges that the applicant can transfer un-utilized input tax credit, under the provisions of Section 18(3) of the CGST/HGST Act, 2017 and Rule 41 of the CGST/HGST Rules, 2017, in case of merger.

Summary

Issues:
1. Liability to pay tax on merger of a proprietorship firm with a private limited company.
2. Transfer of input tax credit from the proprietorship firm to the private limited company upon merger.

Analysis:
1. The applicant sought a ruling on the liability to pay tax under the CGST/SGST Act on the merger of their proprietorship firm with a private limited company. The applicant contended that the merger would not attract tax as per Rule 41 of CGST/HGST Rules and Section 29 of the CGST/HGST Act. The Officer's comments did not provide any specific observations on the case's facts. The applicant argued that the transfer of business as a going concern to a private limited company did not fall within the ordinary course of business or furtherance of business, hence exempt from tax under Section 7 of the CGST Act 2017. Reference was made to Schedule II of the Act, which excludes the transfer of business as a going concern from the definition of supply of goods or services.

2. The applicant also sought a ruling on the transfer of input tax credit from the proprietorship firm to the private limited company post-merger. The applicant relied on Section 18(3) of the CGST Act 2017 and Rule 41 of CGST Rules, which allow for the transfer of unutilized input tax credit to the transferee in case of a change in the constitution of a registered person due to merger. The Authority noted that these provisions applied specifically to the transfer of unutilized input tax credit and not to the balance in the electronic cash ledger. The applicant's reliance on a ruling from the Authority for Advance Rulings, Karnataka, further supported their claim for the transfer of input tax credit upon merger.

3. The Authority, after detailed discussions, found that the provisions of Section 18(3) of the CGST Act 2017 and Rule 41 of CGST Rules 2017 allowed for the transfer of unutilized input tax credit in case of a merger. The Authority also referenced Notification no. 12/2017-Central Tax, which exempted the intra-state supply of services of transfer of a going concern from central tax, supporting the applicant's position. Therefore, the ruling pronounced that the applicant was not liable to pay tax on fixed assets and current assets upon merger and that the input tax credit could be transferred to the private limited company as per the relevant provisions.

This judgment clarifies the tax implications and input tax credit transfer process in the context of a merger between a proprietorship firm and a private limited company under the CGST/SGST Act, providing guidance on compliance with the legal provisions governing such transactions.