TRANSFER OF BUSINESS AS A GOING CONCERN – SUPPLY OF SERVICES?

[Mr. M. GOVINDARAJAN]

IN RE: M/S. COSMIC FERRO ALLOYS LIMITED [2022 (5) TMI 181 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL], the applicant is engaged in manufacturing of Ferro alloys (‘FERRO’ for short) and Cold Rolled Formed  (‘CRF’ for short) Sections having its factories at Barjora and Singur respectively. The entire operations of the applicant are segmented in the said two units i.e. FERRO Unit and CRF Unit and both the units are functional and running independently.  The applicant intended to sell the CRF unit to the purchaser en masse.  The purchase includes taking over all the liabilities due and payable as on the date of transfer for a lump sum consideration.

The applicant sought for advance rulings on the following questions from the Authority for Advance Ruling, West Bengal-

• Whether the transaction would amount as supply of goods or supply of services or supply of goods and services?
• Whether the transaction would be covered under Entry No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017?

The applicant submitted the following before the Authority for Advance Ruling-

• The applicant intended to sell his CRF unit as a whole with all assets and liabilities to Cosmic CRF Limited for which he has entered into a Business Transfer Agreement with the purchaser.
• The Business Transfer Agreement contains the following aspects-

• Transfer of employees of the said CRF unit to the employment of the purchaser 
• Takeover of Current Net Assets 
• Conduct of business to ensure continuity
• Non-Compete Clause by seller
• Transfer of permission and licenses.

• The CRF unit has fixed assets in the form of land, building, plant and machinery, inventories and other current assets and has also availed credit facilities from financial institutions and also has other outstanding short-term liabilities.
• The proposed transaction is for the sale of CRF unit owned by the applicant as a going concern, as a whole envisages transfer of the entire business of the CRF unit to the purchaser.
• The purchaser is taking over the assets as well as the liabilities of the said CRF unit which includes the employees and their benefits. 
• The business of the CRF unit will continue as it is after the transfer.
• The Business Transfer Agreement dated 19.01.2022 establishes the intent of the purchaser and seller to conclude the transaction for sale/purchase of one independent self sustained unit of the seller along with its liabilities and employees.
• The purchaser intends to continue with the same business as the unit is presently involved in i.e. manufacturing of Cold Rolled Forms.

The view of the applicant is that the transaction contemplated being sale of an independent unit is a supply of service as a going concern. In view of the Entry No 2 of the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, the said transaction is to be charged at ‘NIL’ rate of tax.  The applicant relied on the following judgments in this regard-

• Delhi High court in -  INDO RAMA TEXTILE LTD., IN RE [2012 (8) TMI 79 - DELHI HIGH COURT] the Delhi High Court held that a company is said to be transferred as a 'going concern' when the assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.
• ALLAHABAD BANK VERSUS ARC HOLDING LTD. [2000 (9) TMI 931 - SUPREME COURT] – the Supreme Court held that if the company is sold off as a 'Going concern', then along with the assets of the company, if there are any liabilities relevant to the business or under taking, the liabilities too are transferred.

The applicant contended that in view of the above judgments the proposed transaction would be considered as sale by way of transfer of an independent business unit as a going concern.

The applicant further contended that as per Section 7 of the Central Goods and Services Tax Act, 2017  read with Clause 4(c) of Schedule II  the term ‘supply’ includes ‘transfer of business assets’.  The applicant, therefore contended that  it can be said that an exception has been carved out in the statute with regards sale of business as a going concern, specifically stating that the same is not a supply of goods and thus as an alternative the sale of going concern can be considered as a supply of service.   Entry No 2 of the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017 speaks that the services of transfer of a going concern, as a whole or independent part thereof, is covered under ‘NIL’ rate of GST.  Therefore the transfer of business as a going concern attracts NIL rate of duty.

The Revenue submitted the following before the Authority for Advance Ruling-

• On perusal of the Business Transfer Agreement it becomes imperative that the applicant intends to transfer a going concern and same will be continued by the purchaser.
• The transfer of business, as per the Business Transfer Agreement, is supply within the meaning and scope of Sec. 7 of the GST Act.
•  The same apparently appears to attract 'NIL' rate of Tax in terms Entry vide serial- 2 of Notification No. 12/2017 Central Tax (Rate), dated 28.06.2017 [Corresponding SGST Notification- 1136-F .T. Dated: 28.06.2017].

The Authority for Advance Ruling heard the submissions made by the applicant as well as the Revenue.  The Authority for Advance Ruling analyzed the facts of the case and the provisions contained in the Business Transfer Agreement.  The Authority for Advance Ruling analyzed section 7(1) of the Act.  The Authority for Advance Ruling found that the applicant has entered into an agreement which inter alia involves transfer of goods forming part of the assets of the business. In a standalone manner, such transfer shall be treated as supply of goods in terms of clause (a) of Entry No. 4 of Schedule II.   Such transfer of a unit of a business cannot be treated as supply of goods since business cannot be said to be a movable property so as to qualify as ‘goods’ as defined in clause (52) of section 2 of the Act. Further, anything other than goods, money and securities falls within the meaning of ‘services’ as defined in clause (102) of section 2 of the Act.

The term 'going concern' is not defined under the GST Act or rules framed there under.  The concept of going concern has been defined in Accounting Standards – 1 issued by ICAI which states that a fundamental accounting assumption is that of ‘Going Concern’ according to which “the enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations”.

The Authority for Advance Ruling relied on the definition for the expression ‘going concern’ in ‘Taxation of Service: An Education Guide’ published by the Central Board of Excise & Customs.   Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business, but shall not cover mere or predominant transfer of an activity comprising a service. Such sale of business as a whole will comprise comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. Since the transfer in title is not merely a transfer in title of either the immovable property or goods or even both it may amount to service and has thus been exempted.

The Authority for Advance Ruling observed that to qualify as a ‘going concern’, the business must not have ‘intention or necessity of liquidation or of curtailing materially the scale of the operations’. In this context, the Authority for Advance Ruling indicated that the applicant has not furnished any documentary evidences from the auditor with regard to the ‘entity's ability to continue in operation for the foreseeable future’ in absence of which the Authority for Advance Ruling was  unable to conclude that the applicant has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.

The Authority for Advance Ruling ruled as below-

• The transaction of transfer of business unit of the applicant involved in the instant shall be treated as a supply of services

The transaction would be covered under Entry No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 subject to fulfillment of the conditions to qualify as a going concern.