GST LIABILITY IN CASE OF TRANSFER OF BUSINESS (PART-1)

[Dr. Sanjiv Agarwal]

Statutory Provision

Liability in case of transfer of business (Section 85)

85. (1) Where a taxable person, liable to pay tax under this Act, transfers his business in whole or in part, by sale, gift, lease, leave and license, hire or in any other manner whatsoever, the taxable person and the person to whom the business is so transferred shall, jointly and severally, be liable wholly or to the extent of such transfer, to pay the tax, interest or any penalty due from the taxable person upto the time of such transfer, whether such tax, interest or penalty has been determined before such transfer, but has remained unpaid or is determined thereafter.

(2) Where the transferee of a business referred to in sub-section (1) carries on such business either in his own name or in some other name, he shall be liable to pay tax on the supply of goods or services or both effected by him with effect from the date of such transfer and shall, if he is a registered person under this Act, apply within the prescribed time for amendment of his certificate of registration.

Tax liability in case where business is transferred to another person without discharging tax liability

Where any person liable to pay tax, transfers his business in whole or part, by sale, gift, lease, leave and license, hire, or in any other manner, then such person and the person to whom the business is transferred shall be jointly and severally liable to pay the tax, interest or penalty due from the taxable person up to the time of such transfer, whether such dues have been determined before such transfer, but have remained unpaid or is determined after such transfer.

The liability of transferee shall be automatic irrespective of:

(i)      Consideration;

(ii)     Mode and manner of transfer;

(iii)    Transfer in whole or part;

(iv)    Determination or not of liability.

The only pre-requisite is that such tax liability should relate to period before such transfer and should be unpaid. It will not matter if it is determined before transfer or after such transfer.      

The transferee or lessee shall be jointly and severally liable to pay:

• Tax,
• Interest, or
• Penalty

due from or payable by such taxable person (transferor).

It shall be immaterial as to whether such tax, interest or penalty has been determined before transfer but remained unpaid or is determined after such transfer.

Obligation of transferee or lessee on such transfer

The transferee may carry on business in his own name or some other name. He / it shall–

(i)      apply and get the certificate of registration amended appropriately within prescribed time;

(ii)     pay GST w.e.f. date of transfer on taxable supply of goods and/or services or both effected by him

Types of business transfers covered

Business transfers covered under section 85 would inter alia include-

(a)   Sale,

(b)   Gift,

(c)   Lease,

(d)   Leave and license,

(e)   Hire, or

(f)    In any other manner (eg exchange, rental, disposal etc.)

Such transfer of business can be in whole or in part.

According to the aforesaid provision, the expression ‘in any other manner’ is very wide and expansive to include wide range of types of supplies and is not restricted only to the specific cases referred in the provision. Thus, it may also include transactions such as of barter, exchange and disposal in any form so as to construe it as a transfer.

The statutory provision talks of transfer of business which may include all forms of transfer. What is transfer has not been defined in the Act but it states that the aforementioned types of transactions will be covered under the scope of transfer. Such transfer would include both goods and services. According to section 4 of Sale of Goods Act, 1930, Section 4 defines sale and agreement to sale. Accordingly, a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be contract of sale between one part – owner and another. A contract of sale may be absolute or conditional. Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

According to section 5 of the Transfer of Property Act, 1882, ‘transfer of property’ means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons and to ‘transfer property’ is to perform such act.

Transfer of property

Transferor	Modes of Transfer	Transferee
	Sale Transfer Barter Exchange Lease License Hire Disposal Rental Other manner

The different type of transfers are explained hereunder:

Sale

The term ‘Sale’ has not been defined in the GST Act. Sale is one of the components of Supply as defined in sec 7 of the GST Act. “Sale” has In order to constitute a sale under the Sales of Goods Act, 1930, there must exist the following ingredients:

(a)   Agreement of sale

(b)   Payment or promise of payment of price

(c)   Delivery of goods

(d)   Transfer of property from the seller to buyer

According to meaning of ‘sale’ in State VAT laws and Central Sales tax Act, ‘Sale’ means any transfer of property in goods by one person to another for cash or deferred payment or other valuable consideration.

The scope of sale can be understood by way of following chart:

Ingredients of Sale

Agreement of sale

Payment or promise of payment of price

Delivery of goods

Transfer of property from the seller to buyer

Sale v. supply

In the transaction of sale, transfer of property in goods is an important feature. Whereas the word supply is much wider in scope and sale is one factor in the word supply. Example: Removal of goods constitute supply in the GST whereas in sale issuance of invoice determines the sale.

Barter

‘Barter’ means exchanging one thing for another. Barter is a contract wherein the parties exchange goods for goods, whereas in the contract of sale there is an exchange of goods for money. In the contract of barter, there is no element of price whereas in the contract of sale the element of price is a basis requisite. The contract of barter could be of following kinds:

(a)   Goods exchanged for goods

(b)   Goods exchanged for services

(c)   Services exchanged for services

(d)   Goods and/or services exchanged partly with goods and partly with services.

Examples:

1.     A contract wherein one party agrees to transfer ownership of television to his landlord against the rent to be paid by him.

2.     An Architect agrees to give his services for building the house of his tax consultant against the services of tax consultant provided to him during the year.

Exchange

The word ‘exchange’ means to give up something for something else. In case some goods are given up for money, it becomes a transaction of sale and in case goods are given up for some other goods or services, the transactions become a transaction of barter. In reference to commercial transactions, the word ‘exchange’ and ‘barter’ are used interchangeably to mean the transaction of transfer of goods and/or services for some other goods and/ or services.

License

‘License’ is a permission by one person to another to do some act which would be unlawful without such permission. In the commercial word, licensing is at the heart of exploitation of Intellectual property rights. A software developer would normally issue license of copyright to the end user of software.

In the case of BHARAT PETROLEUM CORPORATION LTD. VERSUS CHEMBUR SERVICE STATION - 2011 (3) TMI 1832 - SUPREME COURT, the Hon’ble Supreme Court made an observation on lease and license and observed that if the document creates the interest in the property, it is a lease but in case it only permits the other to use the property of which the legal possession continues with the owner, it is a license.

Rental

‘Rent’ is a consideration for hiring some goods or property for a specified period of time. In reference to the immovable property, rent could be described as an amount agreed in the lease or tenancy agreement to be paid by the tenant to the landlord. The same term could be used for charge against a movable property. The term rental would mean an activity, consideration of which is rent.

For example, the rent is paid for hiring a cab. Rent is paid for hiring a pandal or shamiana.

Lease

‘Lease’ is a contract by which one party agrees to convey an estate in property to another person for a consideration. A ‘lease’ contract can involve any property that is not illegal to own. The lease could be of immovable property or of movable property like machines, car etc. In the contract of lease there is no transfer of ownership. The ownership remains with the lessor but possession and right to use is transferred to the other party called lessee.

Disposal

‘Disposal’ means to alienate the ownership in goods. Dictionary meaning of the word disposal is an act or process of getting rid of something. The supply includes the action of disposal also.

Since under the GST law, tax is leviable on a transaction which cover the conditions of section 7 and 8, such transfer shall in order to attract liability ensure that:

• There should be a transfer
• There should be two parties, transfer and transferee
• Transfer should be of business
• Such transfer should be furtherance or in course of business
• Such transfer should be for a consideration except in case of permanent transfer or disposal of business assets as per clause I of Schedule I of CGST Act, 2017.

Where the transfer is not for whole of business but part of it, in such cases, transferee would be liable to pay tax only to the extent of liability attributable to the business transferred.

 

(To be continued…..)

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