GST Update No 149 on whether business can be transferred between distinct units

The concept of distinct units is newly introduced in GST regime wherein the transactions between distinct units are to be considered as supply leviable to GST. However, an interesting issue that recently came before Andhra Pradesh AAAR in the case of M/S. SHILPA MEDICARE LIMITED [AAAR/AP/07 (GST)/2020 dated 10.11.2020] was examining the fact as to whether it is possible to transfer business as a going concern by a unit registered in different State to another unit with same PAN in different State and the taxability of such transaction in GST era. It was also enquired as to whether it is possible for the transferor distinct person to transfer input tax credit to the transferee unit by filing ITC-02. The detailed analysis of this decision is subject matter of discussion of our present update. The applicant intended to shift its business registered in the State of Andhra Pradesh to its distinct unit registered in Karnataka. Consequently, the applicant sought advance ruling as to whether the said transaction is supply of goods or services, whether it is covered under SI. No. 2 of Notification no. 12/2017 providing exemption to the service of transfer of business as a going concern and whether the applicant can file FORM GST ITC-02 and transfer the unutilized ITC from Andhra Pradesh to Karnataka. The Andhra Pradesh AAR giving reference of Schedule II of CGST Act, 2017, ruled that the transaction is a supply of service and therefore, covered under the exemption as stated in the Notification no. 12/2017. Furthermore, the AAR also ruled that GST ITC-02 can also be filed for transferring the input tax credit available with the transferor unit to the transferee unit. Aggrieved by the ruling of AAR, department preferred appeal before AAAR. The counsel for the department contended that as per Para 4 (c) of Schedule II of CGST Act, business when transferred to another person as going concern would disqualify to be as supply of goods. However, in the present case the transfer of the business as a going concern is carried out to a distinct but same person having same PAN. Therefore, provisions of Schedule II cannot be invoked. Further, the appellant also contended that the applicant had not submitted any documentary evidence to establish the fact that transaction is a going concern except for making declaration in the application. Further it was contended that since the above activity is not supply of service, applicability of Notification No. 12/2017 does not arise. Moreover, as regards transfer of unutilized input tax credit, it was argued that as per Section 18(3) and Rule 41 of CGST Act and Rules, transfer of ITC from one unit to another shall be applicable only in case of change in the constitution of business. It was also stated that as per Rule 41A, ITC can be transferred from one registered person in a state to another registered person in the same state with the same PAN. There is no provision to transfer ITC from one state to another state as SGST credit cannot be transferred to another State. The counsel of the assessee argued that contentions raised by department as regards “distinct but same person” is totally baseless since for the purpose of payment of tax and taking credits they are termed as different entities but for transferring credits, they are treated as same entity. Further, it seems that the officer of the department is totally confused as to whether to treat the activity as supply of goods or supply of services. It was held that since business is not a movable property it cannot be termed as “goods”. Also, “anything other than goods” is services. Further, it was argued that the said activity also falls within the ambit of “business” since business includes “supply or acquisition of goods or services related to commencement or closure of business”. As per this analogy, it was contended that the transaction is that of supply of service and eligible for benefit of exemption under notification no. 12/2017. Reliance was placed on Paradise Food Court v. State of Telangana by Andhra Pradesh High Court in support of the contention that business is not movable property so it is not goods. Furthermore, it was held that as per AS-1, the term “going concern” means transfer of business or assets and liabilities so that business can be carried on for the foreseeable future and it is possible to even transfer a division of the business as independent concern. Since the said conditions are fulfilled, they are eligible for exemption under the said notification. The AAAR held that the as per Section 25 of CGST Act, 2017, concept of “distinct person” was introduced in GST. Since, both the units of applicant are termed as distinct person, the said activity does not come in the ambit of para 4 (c) of Schedule II and therefore, it is supply of goods between distinct persons. Hence, no exemption under Notification No. 12/2017 shall be available to them. Further, as far as invoking the provisions of Section 18(3) is concerned, it shall not be applicable in the given case since there is no change in constitution of the registered person. Consequently, transfer of ITC from one state to another state is not allowed. Hence, the AAAR reversed the decision given by AAR. It is often observed that pro-revenue approach is followed by AAR while deciding the issues raised before them. However, in the present case, the favourable view taken by AAR has been reversed by AAAR on filing of appeal by the department. In our opinion, the view taken by the AAAR to deny the benefit of exemption available on transfer of business as a going concern to distinct person is totally illogical as distinct person under GST Laws is treated as separate person. When tax is paid on transactions between two distinct persons, they cannot be considered as same person while examining eligibility of exemption. Such an interpretation will defeat the ultimate intention of law of not levying GST on transfer of business as going concern as there is not good reason for denying benefit of exemption in case of distinct persons. As regards the contention of not permitting the transfer of unutilized input tax credit of particular State to another State, it is submitted that in case of distribution of credit by ISD, the credit of SGST is being distributed as IGST by the ISD. As such, the reasoning adopted for not allowing transfer of unutilized input tax credit does not appear to be proper and sound. However, as there is no mechanism in GST Laws to challenge the decision rendered by AAAR on merits before the High Court, the poor assessee will have to bear the adverse illogical opinion taken by AAAR.

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GST Update No 149 on whether business can be transferred between distinct units

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