Whether the sale of a functional business unit would amount to supply of goods or supply of services or supply of goods & services

PJ/Case Law/2016-2017/3454

Case:RAJASHRI FOODS PVT. LTD.
Citation:2018 (13) G.S.T.L. 221 (A.A.R. - GST)
Issue: Whether the sale of a functional business unit would amount to supply of goods or supply of services or supply of goods & services
Brief facts:The issues involved in the appeal are filed by M/s. Rajashri Foods Private Ltd. (hereinafter referred to as ‘Applicant’). The assessee, Shri S. Amarnath (Director), is involved in the B0usiness of manufacturing animal feed known as - M/s. Rajashri Foods Private Ltd. (hereinafter referred to as ‘Applicant’) holding GSTIN Number 29AAACR6946B1ZC, having registered address at #17, Platform Road, Seshadripuram, Bengaluru - 560 020. M/s. Rajashri Foods Private Ltd. have filed an application in form GST ARA-01 on 19-12-2017 seeking Advance Ruling under Section 97 of CGST Act, 2017, KGST Act, 2017 & IGST Act, 2017 read with Rule 104 of CGST Rules, 2017 & KGST Rules, 2017. They enclosed copy of challan for Rs. 10,000/- bearing CIN Number SB1N17122900184487 dated 19-12-2017 towards the applicable fee. The applicant, having three manufacturing units situated at Ramanagara, Hiriyur and Bengaluru (Seshadripuram), intends to sell the unit situated at Hiriyur along with all its fixed assets namely land, building, plant and machinery etc., current assets namely stock and trade receivables, etc., and liabilities namely Bank term loans, bank working capital loans, creditors for supplies, etc., for a lump sum consideration. The applicant has sought Advance Ruling as to whether the transaction would amount to supply of goods or supply of services or supply of goods & services and also whether the transaction would cover under Sl. No. 2 of the Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017 that is if the said transaction is covered under the definition of Services.

Appellant’s contention: Sri S. Vishnu Murthy, Chartered Accountant and the authorized representative of the Applicant appeared and presented the case. The assessee mentioned that the unit in question, which is intended to be sold, is an independent one and is involved in the manufacture of animal feeds.This unit has fixed assets in the form of land, building, plant and machinery and current assets in the form of inventory and receivables. It has also availed term loans from the bank for the purpose of setting up of the unit and working capital loans availed from the banks for meeting the working capital requirements. The unit has also liabilities in the form of sundry creditors and certain outstanding liabilities. The proposed transaction of sale of unit as a whole involves transferring of all the assets to the purchaser and also taking over of all the liabilities by the purchaser. Therefore, the applicant wants to know if the said transaction would amount to sale and attract the GST Act or not.

Respondent’s Contention: The authority for Advance Ruling stated that it has considered the submissions made by the Applicant in their application for advance ruling as well as the submissions made by Sri S. Vishnu Murthy, Chartered Accountant, the authorized representative of the applicant, during the personal hearing. It has also considered the questions/issues on which advance rulings have been sought for by the applicant, relevant facts having bearing on the questions/issues raised, and the applicant’s understanding/interpretation of law in respect of the issue. It has been summarised that the transaction envisages the transfer of all assets to the buyer and the buyer shall also take over all the liabilities. It also conveyed that the unit sought to be sold is a fully functional unit and the transaction relates to the transfer of the entire business to a new person, who would not only enjoy a right over the assets but shall also take over the liabilities. It thus also implies that there will be continuity of business. As the unit is said to be functional and is desired to be transferred as a whole to a new owner it amounts to transfer of a going concern as a whole.

Reasoning of Judgement: Section 7(1) (d) stipulates that activities referred to in Schedule II shall be treated as supply of goods or supply of services. In Schedule II the entry at serial Number 4 refers to ‘transfer of business assets’. Transfer of business assets is considered as supply of goods. The transfer of business assets implies that a part of the assets are transferred and not the whole business. Further in Part 4(c) of Schedule II it is provided that when the business is transferred as a going concern then it does not amount to supply of goods. It, therefore, becomes clear that such transfer of business does not constitute a supply of goods. Activities which constitute supply of services are also described in Schedule II. However the transaction involving the transfer of a going concern is not covered under this Schedule. This analysis further brings us to the Notification No. 12/2017-Central Tax (Rate), dated 28th June, 2017. Column Number 3 of the Table in the said Notification gives the description of the services. Serial Number 2 of the Notification provides for ‘Services by way of transfer of a going concern, as a whole or an independent part thereof’. This indicates that the activity of transfer of a going concern constitutes a supply of service. The Notification further provides ‘Nil’ rate of tax on such a supply.

Decision: The transaction of transfer of business as a whole of one of the units of the Applicant in the nature of a going concern amounts to supply of service.

Comment: The gist of this case is that the transfer of one of the independent business units of an assessee would amount to supply of service as per Notification No.12/2017-Central Tax (Rate), dated 28-6-2017. Although, it attracts NIL rate of tax.

Prepared by: Adit Gupta

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PJ/Case Law/2016-2017/3454

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