2023 (1) TMI 78 - AAR - GST

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

In Re: Jayesh Popat

AAR West Bengal ruled that transfer of proprietorship business to partnership firm constitutes supply of services, not goods, under GST. The Authority ... Classification of supply - supply of goods or supply of services - transfer of business by way of merger of two registration/distinct person - going concern or not - applicability of Entry No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 - levy of GST - transfer of existing stock (closing stock) assets, others etc. from proprietorship concern to the Partnership concern. HELD THAT:- Here the applicant intends to transfer his entire proprietorship business where the transferee agrees to take over the assets as well as the liabilities of the said transferor concern along with the employees and their benefits. In our view, such transfer of 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. The term 'going concern' is not defined under the GST Act or rules framed there under. 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”. 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 furnished before us copy of ‘Audit report under section 44AB of the Income-tax Act, 1961’ related to the period from 01.04.2020 to 31.03.2021. However, we do not find any comments from the auditor in respect of the ‘entity's ability to continue in operation for the foreseeable future’. We are, therefore, 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 of the applicant involved in the instant case shall be treated as a supply of services - The transaction would be covered under Serial No. 2 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 [corresponding West Bengal State Notification No. 1136 F.T. dated 28.06.2017] subject to fulfilment of the conditions to qualify as a going concern. 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.