[Maithry Kini]
Maithry is a 4th year student at School of Law, Christ (deemed to be university), Bengaluru
Introduction
With the enactment of a new regime for indirect tax certain aspects have become ambiguous. The recent ruling of Karnataka bench of Authority for Advance Ruling (“Authority”)has offered certain clarity with respect to Goods and Service Tax (“GST”) implications on hiving off or demerger transactions. In the application filed by M/s Rajashri Foods Private Ltd[1] (“Applicant”) the question to be determined was whether the transaction of demerger or sale of a unit as a going concern would amount to supply of goods or supply of services or supply of both goods and services.
Background of the case
The Applicant sought to sell a fully functional unit of the entire business to another distinct person, who would not only benefit from a right over the assets but would take over the liabilities. The facts further convey that the business shall continue as a going concern. On the basis of this fact the Applicant claimed that such a transaction does not amount to supply and that they were exempted from the levy of the tax as under sl. no 2 Notification No.12/2017-Central Tax (Rate) dated 28.06.2017[2] (“Notification”).
In order determine the scope and levy of tax it is necessary to examine the meaning of the term going concern and the supply under the Central Goods and Services Act, 2017 (“Act”).
Analysis of the term sale as a going concern
A going concern is a concept of accounting which implies business as a whole or in entirety. Transfer of a going concern means that the business activities shall continue to be carried out by the transferee as an independent business. This was reiterated in the landmark case of In re IndorRama Textile Limited where the court held that assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.[3]The Supreme Court in Allahabad Bank v. ARC Holding (“Allahabad Bank Case”) held that if the company is sold off as a going concern, then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are transferred.[4]
Demerger is sale of a business unit as a separate functional unit formulating into a resultant company. The demerger of an undertaking into another separate undertaking is facilitated by transferring the undertaking to a new company on a going concern basis. According to the Income Tax Act, 1971 demerger[5] is defined to be transfer of an undertaking as a going concern. Further the explanation states that there much be transfer of the business as a whole and does not include individual assets of the business.
Considering the above explanations with the facts of this case it is clear that the sale of undertaking in this present case amounts to demerger wherein the unit is sold as a going concern and would result into a separate company with distinct identity. In the present case the Authority while analysing the relevance and scope of the term going concern stated that:
“Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. It implies that the business will continue in the new hands with regularity and a nature of permanency.”[6]
Analysis of the term Supply
Section 7(1) of the Act[7] defines supply to include transfer for consideration in furtherance of business.This implies that the activity undertaken is in regular course of the business such as sale or transfer of the asset, should be the effect of transactions in due course of carrying out the business. Therefore the activity to be called as supply should be such that undertaking activity shall amount to “conduct of business or enhancing the business.”
Further under Part 4 of Schedule II of the Act[8] referred in the Section states that supply also includesgoods forming part of the assets of a business, transferred or disposed off under the directions of the person carrying on the business. Such assets which are disposed off under such direction or transaction do not part a form of assets of the business. This transaction shall fall under the ambit of supply. It is pertinent to note that there is an exception under the paragraph which specifically excludes business transferred as a going concern to be treated under supply. Therefore, the transfer of a going concern as a whole does not comprise an activity undertaken in furtherance of the business activity.
However, the scope of Section 7(1) extends beyond the meaning of the expression in course of furtherance of the business as it further states that it includes imports for consideration with or without any transaction in furtherance of the business. Thus, upon plain reading, Section 7(1) has a wider scope to include even sale as a going concern under the ambit of supply.
Further, taking into consideration the Notification that has been relied upon, the table provides for description, rate and condition for levy of central tax. The sl. no. 2 which directly pertains to the subject matter at hand states services by the way of transfer of business. Further the title clearly classifies it as description of services. Irrespective of the provisions under the Act the intention to bring sale of going concern under supply is clear by classifying it under services. Thus the Authority ruled that the sale of business as a going concern amounts to supply and that the Notification shall cover the transaction on the condition that it is sold as a going concern.
Conclusion
The ruling brings in various excluded transactions under the umbrella of GST regime irrespective of the levy of tax. The Authority in the present case has stepped beyond the provisions of the Act and has heavily relied on the Notification to determine the meaning of supply. Strict interpretation and observance of the provision of the enabling Act must be mandated. Although tax statutes vastly enforce compliance, interpreting excluded or exempted transaction under supply would only burden the corporate sector with additional procedures and compliances which in the practical perspective decreases efficiency and ease of doing business. Hence it is essential for the legislature to look into and clearly classify the transactions with minimum contradictions.
[1] In re, M/s Rajashri Foods Private Ltd, The Additional Advanced Ruling in Karnataka, Order dated: 23rd April, 2018: http://gstcouncil.gov.in/sites/default/files/ruling-new/06-Rajashree%20Foods-AAR-order.pdf
[2]Notification No.12/2017-Central Tax (Rate) dated 28th June 2017 http://www.cbic.gov.in/resources/htdocs-cbec/gst/Notification12-CGST.pdf
[3]In re IndorRama Textile Limited (2013)4CompLJ141(Del).
[4]Allahabad Bank v. ARC Holding AIR 2000 SC 3098.
[5]Section 2(19AA), the Income Tax Act, 1961
[6]In re, M/s Rajashri Foods Private Ltd, The Additional Advanced Ruling in Karnataka, Order dated: 23rd April, 2018
[7]Section 7(1), the Central Goods and Service Tax Act, 2017
[8]Part 4, Schedule II, Central Goods and Service Tax, 2017