Transfer of proprietorship business to partnership firm constitutes supply of services under GST section 2(52)

AAR West Bengal ruled that transfer of proprietorship business to partnership firm constitutes supply of services, not goods, under GST. The Authority determined business cannot be classified as movable property to qualify as goods under GST Act section 2(52). Since anything other than goods, money and securities falls under services definition, the transaction qualifies as service supply. The transfer would be covered under Notification No. 12/2017-Central Tax (Rate) Serial No. 2, subject to meeting going concern conditions. However, AAR could not conclusively determine going concern status due to insufficient auditor comments regarding entity's ability to continue operations for foreseeable future.

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Issues Involved:
1. Whether the transaction of transfer of business by way of merger of two registration/distinct persons would constitute supply under GST Law.
2. Whether the transaction would amount to a supply of goods or supply of services.
3. Whether the transaction would be covered under Entry No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
4. If the answer is negative, whether GST is leviable on the transfer of existing stock (closing stock), assets, etc., from the proprietorship concern to the partnership concern.

Issue-wise Detailed Analysis:

1. Whether the transaction of transfer of business by way of merger of two registration/distinct persons would constitute supply under GST Law:

The applicant proposes to merge his proprietorship business with a partnership firm, transferring all assets and liabilities without any consideration. The applicant contends that the transfer of business qualifies as 'supply' under GST, citing Section 7(1) of the GST Act, and relies on various advance rulings. The Authority for Advance Ruling (AAR) agrees with the applicant, concluding that the transaction satisfies the conditions of 'supply' under GST.

2. Whether the transaction would amount to a supply of goods or supply of services:

The applicant argues that the transfer of business cannot be considered a transfer of goods, as business is not movable. The applicant references Section 2(52) of the GST Act and the judgment of the Hon'ble Madras High Court in Deputy Commissioner, (CT) v. K. Behanan Thomas. The AAR concurs, stating that business cannot be classified as 'goods' and thus, the transaction should be treated as a supply of services, as defined in Section 2(102) of the GST Act.

3. Whether the transaction would be covered under Entry No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017:

The applicant submits that the transaction should be exempt from GST under Entry No. 2 of Notification No. 12/2017, which exempts "services by way of transfer of a going concern, as a whole or an independent part thereof." The AAR reviews the applicant's submission and various advance rulings, including those in the cases of Rajashri Foods Pvt. Ltd., Airport Authority of India, and Cosmic Ferro Alloys Limited. The AAR concludes that the transaction qualifies as a 'transfer of a going concern' and falls under the exemption provided in the said notification, subject to the condition that the business is transferred as a going concern.

4. If the answer is negative, whether GST is leviable on the transfer of existing stock (closing stock), assets, etc., from the proprietorship concern to the partnership concern:

Since the AAR has determined that the transaction constitutes a supply of services and is covered under the exemption provided in Notification No. 12/2017, this issue becomes moot. The AAR does not need to address the GST liability on the transfer of existing stock and assets separately, as the entire transaction is exempt from GST.

Observations & Findings:

The AAR notes that the applicant has provided a Memorandum of Understanding (MOU) detailing the transfer of all rights, title, ownership, interest, assets, and liabilities to the partnership firm. The AAR emphasizes that the transfer of business as a going concern involves the transfer of all assets and liabilities, along with employees and their benefits, and cannot be treated as a supply of goods. The AAR refers to the definition of 'going concern' in Accounting Standards and various judicial precedents to support its conclusion.

Ruling:

The AAR rules that the transaction of transfer of business by way of merger constitutes a supply of services. The transaction is covered under Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, subject to the fulfillment of conditions to qualify as a going concern.

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