If a business is not transferred as a going concern, GST will be Payable.
Facts and Issue of the case
The applicant is stated to be engaged in manufacturing of Ferro alloys and Cold Rolled Formed Sections having its factories at Barjora (hereinafter referred to as the ―FERRO Unit‖) and Singur (hereinafter referred to as the ―CRF Unit/ CRF business‖) respectively. It is submitted that 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 intends to sell its CRF unit as a whole which involves transferring of all the assets to the purchaser which includes taking over all the liabilities due and payable as on the date of transfer for a lump sum consideration.
The applicant has made this application under sub section (1) of section 97 of GST Act and the rules made there under raising following questions vide serial number 14 of the application in FORM GST ARA-01:
- 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 aforesaid question on which the advance ruling is sought for is found to be covered under clause (a) and (e) of sub-section (2) of section 97 of the GST Act. The applicant states that the question raised in the application has neither been decided by nor is pending before any authority under any provision of the GST Act.
Observation of the Court
Court has gone through the records of the issue as well as submissions made by the authorised advocates of the applicant during the course of personal hearing. We have also considered the submission made by the officer concerned from the Revenue. The fact of the case as court finds is that the applicant has entered into a ‘Business Transfer Agreement‘ (BTA) intending to sell of his CRF unit as a whole with assets and liabilities to Cosmic CRF Limited. The applicant has submitted that the impugned sale of CRF Unit in pursuance of the BTA can be considered as a supply of services and qualifies for exemption under Sl. No.2 of the Notification No.12/2017-Central Tax (Rate) dated 28.06.2017.
Court first takes the issue to decide whether the transfer of the business of the CRF unit involved in the instant case shall qualify as a supply of services or not. In the instant case, admittedly 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. However, here the applicant intends to sell his entire CRF unit where the purchaser agrees to take over the assets as well as the liabilities of the said CRF unit along with the employees and their benefits. In our view, 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 GST 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 GST Act.
In the matter of Innovative Textiles Ltd, the Uttarakhand Authority for Advance Ruling (Ruling No. 20/2018-19 dated 26.03.2019) has observed that „a transfer of a business as a going concern is the sale of a business including assets. In terms of financial transaction ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation.‟
The term ‘going concern’ is not defined under the GST Act or rules framed there under. The applicant has submitted that 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‖.
Court finds that the applicant has entered into BTA agreeing to sell the CRF Business located at Vill-Ajabnagar, P.O.-Molla Simla, Dist-Singur, PIN-712409. The purchaser has also agreed to purchase the CRF business having assets and all liabilities attached to the said CRF Unit as a going concern. The BTA further refers that the purchaser shall continue to employ the current employees of CRF Unit even after the takeover of the CRF business. Furthermore, the seller i.e., the applicant has agreed that he shall not be entitled to engage in any business competing with the activities of the purchaser in respect of existing CRF business. Both the clauses indicate that the business will continue by the purchaser with regularity.
The applicant has also submitted that the concept of transferring a company as a ‘going concern’ was examined by the Delhi High court ln re Indo Rama Textile Limited (2013) 4 Comp LJ 141 (Del). Para 27 of the said judgement reads as follows: “Statement on Standard Auditing Practices (SAP) 16, “Going Concern”, issued by the Council of the Institute of Chartered Accountants of India, provides that — ”When a question arises regarding the appropriateness of the Going Concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve, to the auditor’s satisfaction, the question regarding the entity’s ability to continue in operation for the foreseeable future.
It therefore appears 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, we like to mention 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 we are 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 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.In-re-Cosmic-Ferro-Alloys-Limited-GST-AAR-West-Bengal