AAR clarifies going concern transfer and pure services exemptions under Sl. Nos. 2 and 3, Notification 12/2017-CT

The AAR held that transfer of assets and liabilities constituting the business from the transferor to the transferee amounts to "service by way of transfer of a going concern as a whole or an independent part thereof" and is an exempt supply under Sl. No. 2 of Notification No. 12/2017-CT (Rate). The work orders relating to digital asset management, GIS/WebGIS data analysis and orientation programmes for a governmental water supply directorate were classified as pure services, not works contracts or composite supplies, and thus exempt under Sl. No. 3 of the same Notification. Post-transfer supplies and invoices issued in continuation of the original work orders retain the same tax treatment as if executed by the transferor.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether transfer of business assets and liabilities from the proprietorship concern to the applicant constitutes a "service by way of transfer of a going concern, as a whole or an independent part thereof" and is exempt under Serial No. 2 of Notification No. 12/2017-Central Tax (Rate).

1.2 Consequences for classification and rate of tax if the transfer is not treated as an exempt "transfer of a going concern".

1.3 Whether, post-transfer of business, supplies/invoices issued in furtherance of, or as an extension of, work orders originally issued in the name of the transferor would (a) retain identical taxability for the transferee, including in light of an earlier advance ruling in favour of the transferor, and (b) whether specified services under sample work orders qualify as exempt "pure services" under Serial No. 3 of Notification No. 12/2017-Central Tax (Rate).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Characterisation of business transfer as "transfer of a going concern" and exemption under Serial No. 2 of Notification No. 12/2017-Central Tax (Rate)

Legal framework

2.1 The Court examined Section 7(1) and 7(1A) of the Central Goods and Services Tax Act, 2017 defining "supply" in an inclusive manner, covering all forms of supply such as sale, transfer, etc., for consideration in the course or furtherance of business, and providing that activities constituting a supply are to be treated as supply of goods or supply of services as per Schedule II.

2.2 The Court referred to Schedule II, Entry 4(c), which deems goods forming part of business assets to be supplied immediately before a person ceases to be a taxable person, unless "the business is transferred as a going concern to another person" - in which case such transfer is not treated as a supply of goods but as a supply of services.

2.3 The Court relied on Serial No. 2 of Notification No. 12/2017-Central Tax (Rate), exempting "services by way of transfer of a going concern, as a whole or an independent part thereof".

Interpretation and reasoning

2.4 The Court held that, given the inclusive nature of Section 7(1), transfer of a business, even if not strictly "in the course or furtherance of" the transferor's ongoing business, constitutes a "supply" under the GST Act.

2.5 The Court noted that, under Schedule II, a transfer of business "as a going concern" is not treated as a supply of goods but as a supply of services, falling within the scope of services contemplated by the Act.

2.6 As the GST Act does not define "going concern", the Court adopted the expression in its ordinary and financial sense, identifying key features such as:

- continuity of operations without imminent liquidation;

- financial stability and ability to meet obligations;

- consistent revenue streams and profitability;

- absence of intention to materially curtail operations; and

- preparation of financial statements on the basis of continued use of assets.

2.7 On facts, the Court found that:

- all business assets and liabilities (other than personal buildings and investments) of the proprietorship concern were to be transferred to the applicant;

- immovable property, goods, employees, goodwill and unexecuted orders, including ongoing works for the Public Health Engineering Directorate, would move to the applicant; and

- the applicant would continue to run the same business, executing pending and ongoing work orders.

2.8 The Court relied on financial statements of the transferor for FY 2023-24 and 2024-25 showing:

- turnover increase from Rs. 6.66 crore to Rs. 9.23 crore;

- gross profit increase from Rs. 2.60 crore to Rs. 3.72 crore; and

- significant fixed assets (furniture, plant and machinery) and rising sundry debtors.

2.9 These indicators were treated as evidence of a financially healthy enterprise with no indication of imminent liquidation and capability of continued operations, satisfying the attributes of a "going concern".

2.10 Accordingly, the Court concluded that the transaction constituted a transfer of business as a going concern, and, by virtue of Schedule II and Serial No. 2 of Notification No. 12/2017-Central Tax (Rate), such transfer is to be treated as a supply of services exempt from GST.

Conclusions

2.11 The transfer of business assets and liabilities from the proprietorship concern to the applicant constitutes a "service by way of transfer of a going concern" within the meaning of Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) and is exempt from GST.

2.12 Since the transfer is so exempt, the question of alternative classification and applicable rate of tax does not arise.

Issue 2 - Effect of prior advance ruling and taxability of post-transfer supplies under existing and sample work orders

Legal framework

2.13 The Court referred to Section 103(1) of the GST Act, which provides that an advance ruling is binding only on (a) the applicant who sought it, and (b) the concerned or jurisdictional officer in respect of that applicant.

2.14 Section 103(2) was noted, which makes an advance ruling binding unless the law, facts, or circumstances supporting the original ruling have changed.

2.15 The Court considered Serial No. 3 of Notification No. 12/2017-Central Tax (Rate), exempting:

"Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution."

2.16 In that context, the Court outlined:

- the concept of "pure services" as services not involving works contract or any composite supply with goods;

- the definition of "composite supply" in Section 2(30) of the GST Act; and

- relevant constitutional provisions: Article 243G read with Eleventh Schedule (including Entry 11: "Drinking water") and Article 243W read with Twelfth Schedule (including Entry 5: "Water supply for domestic, industrial and commercial purposes").

2.17 The Court also considered the statutory and policy background of Jal Jeevan Mission and the role of the Public Health Engineering Department/Directorate in providing safe and reliable drinking water, directly linked to the constitutional functions relating to drinking water and water supply.

Interpretation and reasoning - Effect of earlier ruling for the transferor

2.18 The Court recorded that an earlier advance ruling dated 11.12.2024 had been issued in favour of the transferor (proprietorship concern) holding that specified services under particular work orders were exempt as "pure services" under Serial No. 3 of Notification No. 12/2017-Central Tax (Rate).

2.19 The applicant contended that, after business transfer, supplies/invoices for such work orders executed by the applicant should retain identical taxability as earlier determined for the transferor.

2.20 The Court held that, under Section 103(1), the previous advance ruling is binding only on the original applicant (transferor) and its jurisdictional officer, not on the applicant (transferee), who is a distinct taxable person with a separate GSTIN.

2.21 The Court further held that, by virtue of Section 103(2), the underlying facts and circumstances have changed due to transfer of business from the transferor to the applicant, and therefore the earlier ruling cannot automatically extend to the applicant.

2.22 Consequently, the Court concluded that the advance ruling dated 11.12.2024 is not applicable or binding in respect of the applicant or its jurisdictional officer, and identical tax treatment cannot be claimed purely on the basis of that earlier ruling.

Interpretation and reasoning - Taxability of services under sample work orders post-transfer

2.23 The Court distinguished two categories of work:

(a) work items described in para 4.9, in respect of which the earlier ruling had already been rendered in favour of the transferor; and

(b) additional work items described in para 4.10, on which no previous ruling had been sought or given.

2.24 For the category (a) items (para 4.9), the Court reiterated that the previous ruling remains confined to the transferor and does not bind or govern the applicant. No transposition of that ruling's binding effect to the applicant was recognised.

2.25 For the category (b) items (para 4.10), the Court undertook an independent analysis of the sample work orders, which broadly related to:

- digital transformation and monitoring of mega schemes;

- enhancement of Jalmitra application and related Android/Web modules;

- digitisation and asset mapping of Piped Water Supply Schemes;

- geo-referenced digitisation of drawings and data validation;

- field-level validation of Functional Household Tap Connection (FHTC) data;

- orientation programmes for implementation and monitoring stakeholders; and

- development/maintenance of applications and platforms for unique tap water identity generation and data access.

2.26 The Court found, after detailed examination, that these activities:

- do not involve any works contract; and

- do not involve composite supplies with any element of supply of goods.

2.27 Accordingly, the services under the sample work orders in para 4.10 were characterised as "pure services".

2.28 The Court further observed that these services are provided to the Government of West Bengal, represented by the Public Health Engineering Directorate, which is a governmental department engaged in water supply schemes under Jal Jeevan Mission and related programmes.

2.29 The Court held that these services are directly in relation to the function of providing drinking water and water supply to households, which are functions entrusted to Panchayats under Article 243G (Eleventh Schedule, Entry 11) and to Municipalities under Article 243W (Twelfth Schedule, Entry 5).

2.30 All three cumulative conditions under Serial No. 3 of Notification No. 12/2017-Central Tax (Rate) were thus found to be satisfied for the work items listed in para 4.10:

- the services are "pure services" (no works contract or supply of goods);

- the recipient is the State Government (through the PHE Directorate); and

- the activities are in relation to functions constitutionally entrusted to Panchayats/Municipalities regarding drinking water and water supply.

2.31 However, the Court limited its ruling to the specific sample work orders placed on record, clarifying that the exemption would apply only if actual work orders issued to the applicant remain the same as those samples in all material respects.

Conclusions

2.32 The earlier advance ruling dated 11.12.2024 in favour of the transferor is not binding on the applicant (transferee) or its jurisdictional officer. It cannot be automatically invoked to govern the taxability of supplies made by the applicant post-transfer.

2.33 As regards the work items in para 4.9, the previous ruling remains confined to the transferor, and the applicant cannot claim its binding effect; separate determination is necessary, and the earlier ruling does not apply to the applicant by operation of law.

2.34 As regards the work items in para 4.10, if, after the business transfer, the applicant executes those works under work orders identical in content and scope to the sample work orders examined, the services provided qualify as exempt "pure services" under Serial No. 3 of Notification No. 12/2017-Central Tax (Rate), subject to the conditions identified by the Court.

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