BUSINESS TRANSFER AGREEMENT

[Mr. M. GOVINDARAJAN]

Business

Section 2(17) of the Goods and Services Tax Act, 2017 (‘Act’ for short) defines the term business, as including-

1. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
2. any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
3. any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
4. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
5.  provision by a club, association, society, or any such body Corporate a subscription or any other consideration) of the facilities or benefits to its members;
6. admission, for a consideration, of persons to any premises;
7. services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
8. services provided by a race club by way of totalisator or a licence to book maker in such club ; and
1. any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

Business Transfer Agreement

A Business Transfer Agreement is structured to give effect to a comprehensive sale of assets and liabilities of one entity to another entity. It is in a form of a purchase and transfer of ownership agreement wherein details regarding the sale of the business and its assets are captured.  It outlines the type of transfer, type of sale, terms of sale and details of the transferrable. The business transfer agreement lists down the assets, liabilities, capital, contracts, customer lists, leases, employee insurance, new employment rights, inventory, tax issues, copyrights, and patents.

Transfer of a going concern' in a simple way can be described as transfer of a running business which is capable of being carried on by the purchaser as an independent business. The  internationally accepted guidelines) issued by His Majesty's Revenue & Customs (HRMC) to treat transfer of business as a going concern are as under-

• The assets must be sold as part of a ‘business’ as a ‘going concern’.
• The purchaser intends to use the assets to carry on the same kind of business as the seller.
• Where only part of a business is sold it must be capable of separate operation.
• There must not be a series of immediately consecutive transfers.

Applicability of GST on business transfer agreement

Vide Sl. No. 5 of Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017 the Central Government gives exemption to the Services by way of transfer of a going concern, as a whole or an independent part thereof.  The said is treated as ‘supply of service’ and covered under Chapter 99.

In re ‘Innovative Textile Ltd.,’ [2019 (4) TMI 1499 - AUTHORITY FOR ADVANCE RULINGS, UTTARAKHAND], the applicant is seller and is carrying on the business of manufacturing of textile yarns, fabrics and garments.  The applicant intends to sell their ongoing business of manufacturing, marketing and sale of textile yarn and fabrics from the textile manufacturing facility situated at Plot No. B-8, Ph-1 , SIDCUL Industrial Park, Sitarganj, Udham Singh Nagar, Uttrakhand to S D Polytech (P) Ltd in the form of business transfer as a going concern on slump sale basis as a whole with all assets and liabilities. The purchaser has agreed to purchase ‘Sitarganj Business’ as a going concern with all assets and liabilities on slump sale basis on the terms and conditions as set out in the Business Transfer Agreement.

The applicant has sought advance ruling on applicability of exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 on ‘Business Transfer Agreement’ as a going concern on slump sale basis.

On perusal of the business transfer agreement, the Authority of Advance Ruling found that-

• The applicant intends to sell the Sitarganj Business in the form of business transfer as a going concern on slump sale basis as a whole with all assets and liabilities to the purchaser;
• ‘Assets’ shall include all movable properties, plant & machinery and immovable properties physically available at site and debtors and deposits with Govt. or Utility agencies in audited Balance Sheet as on the cutoff date in relation to Sitarganj Business;
• ‘Sitarganj Business’ shall mean the ongoing business and as going concern of manufacturing, marketing and sale of textile yarn and fabrics manufactured in the Sitarganj facility including without limitation to any of the assets, liabilities, permits and employees etc;
• ‘Sitarganj facility’ shall mean the textile manufacturing facility situated at B-8, PH-1 SIDCUL Industrial Park, Sitarganj;
• ‘Transfer’ means the completion of each and all the steps required for transfer of Sitarganj Business from the seller to the purchaser in a running state and as a going concern on slump sale basis with all assets and liabilities;
• The seller shall hand over the physical possession on-- and the transfer will get completed on the registry of land;
• The parties shall take all steps and measures required to the end and intent that the purchaser shall become the full and undisputed owner of the business;
• In respect of Sitarganj facility and any immovable assets forming part of the Sitarganj business, seller shall execute a general power of attorney on - in favor of the purchaser’s nominated representative to collect original property documents and title deeds from hankers of seller.

The Advance Ruling Authority found that the applicant has intends to sale the ongoing Sitarganj business along with its all assets & liabilities and the said Sitarganj business is live/operating. The purchaser has purchased the Sitarganj business to carry on the same kind of business. Further as on date there is no series of immediately consecutive transfers of the said business.

The Authority for Advance Ruling held that the transfer of Sitarganj Business shall be treated as a going concern and is exempted from GST as on date in terms of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

In re ‘Rajeev Bansal and Sudershan Mittal’ – [2020 (4) TMI 67 - AUTHORITY FOR ADVANCE RULING, UTTARAKHAND], the applicant is a partnership firm engaged in the business of constructing residential/commercial complexes.  The firm was formed for constructing and selling a residential/ commercial building at village- Manoharpur, Jwalapur, Hardwar.  The applicant got the map approved from the competent authority.  The covered area was around 1.25 lakhs sq feet. A total carpet area of 85 thousand sq feet was constructed up to the date of transfer.  Ronav Infrastructure) engaged in the same business, approached the applicant to take over this incomplete project to further carry out the business of constructing and selling the said building.  The applicant entered into an agreement with Ronav Infrastructure for transfer of the business as a ‘going concern’. The main asset of the business being the land, the incomplete flats constructed on the land and the approved map. A separate sale deed was executed for transfer off flats as required under the state law for ₹ 21.80 crores on 24.10.2019.

The Authority for Advance Ruling sought for an advance ruling on applicability of exemption Notification No. 12/2017-Central Tax (Rate), dated 28.06.2017 on ‘Business Transfer Agreement’ as a going concern which consists of transferring under-construction project. 

The Authority for Advance Ruling analyzed the provisions of sale deed i.e., business transfer agreement and the related provisions in the Act.  The Authority for Advance Ruling found that the applicant is carrying on the business of constructing residential/commercial complexes and selling thereof and the applicant firm come into existence particularly for the said project. Further the applicant has sold the under-construction building, as a whole, with its all assets and transfers the rights of the same to the buyer including the approved map from the competent authority. The buyer has purchased the under-construction building/business to carry on the same kind of business as the purchaser themselves engaged in constructing residential/commercial complexes and selling thereof. Further as on date there is no series of immediately consecutive transfers of the said business.

The Authority for Advance Ruling held that transfer of Business in question shall be treated as a going concern and is exempted from GST as on date in terms of serial no. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 (as amended from time to time).