2026 (2) TMI 169 - HC - GST

Transfer of business as a going concern and transfer of input tax credit: exemption preserved; AAR ruling set aside.

Notification No. 12/2017 treats transfer of a going concern (whole or independent part) as an exempt supply, though the court left open whether the GST ... Transfer of business as a going concern - scope of 'supply' u/s 7 - sale of goods in the course or furtherance of business - exemption for transfer of going concern under Notification No. 12/2017 - transfer of unutilised input tax credit - change in the constitution of the registered person - distinct persons by virtue of separate registrations u/s 25 - HELD THAT:- Notification No. 12/2017 treats the transfer of a going concern as a whole or an independent part, thereof as supply of services and exempts the same from payment of tax. There is a doubt as to whether such services could have been brought within the purview of the GST regime, once the GST Act itself does not provide for taxation of supply of services or to even treat transfer of business as a going concern, as a supply of service. However, this Court is leaving this issue open inasmuch as the petitioner would still be entitled to the benefit of exemption by virtue of the notification. In the case of a sale, the transaction would be between a seller and buyer, who are two separate persons or entities. There would not be any change on account of a sale. However, the language of Section 18(3) provides for transfer of input tax credit in cases of sale also. Similarly, in the case of a merger or amalgamation or lease, the registered person who is transferring the business goes out of the picture and it is only the transferee of the business that would be given the benefit of transfer of input tax credit. In such cases also, there would be no change in the constitution of the registered person. In the circumstances, full meaning and benefit cannot be given to the phrase “change in the constitution of the registered person” if it is understood to mean that there has to be an internal change, in the registered person, on account of certain forms of transfer/supply or that the business itself moves from one registered person to another person. Any such interpretation would cut out same of the forms of transfer such as sale, merger, lease of business etc. To that extent, it would have to be held that change in constitution cannot be taken to be change in the constitution of the transfer or and that the benefit of transfer of input tax credit would not be available to a transferee which is a separate entity. This phrase would have to be understood to mean that there can be transfer of input tax credit from the ledger of the transferor to the transferee. Thus, the input tax credit available, in the ledger of the transferor, arises out of the tax component paid on the goods, by the transferor, etc. The input tax so credited has to be used, to discharge further liability, to the tax authorities. This is one of the assets available with the transferor. In the case of a sale of the entire business, it would only be reasonable that this asset, in the form of input tax credit, is also transferred. Section 18(3) is giving a statutory basis for such transfer. We do not foresee any such problems in relation to the input tax credit available under the Central GST Act or the IGST Act, as the authority administering these Acts is the Central Government. In the case of transfer, of input Tax Credit, from the APGST Act to the KGST Act, any decision would affect the State of Andhra Pradesh and the State of Karnataka. However, the State of Karnataka, is not before us. As such, it would be appropriate that this issue should be placed before the authorities, under the KGST Act as well as the APGST Act, for a decision, as to the admissibility of such a transfer between the APGST Act and the KGST Act. The petitioner, may approach the authorities, in this regard and agitate it’s rights. Accordingly, this writ petition is disposed of, by setting aside the ruling of the Appellate Authority for Advance ruling, dated 10.11.2020. Further consideration of the issue, by the authorities, shall be on the basis of the observations, in this order. Issues: (i) Whether the transfer of the petitioner's entire R&D unit as a going concern amounts to a taxable supply of goods or services under the GST law or is not chargeable as a sale of goods; (ii) Whether the unutilised input tax credit (ITC) in the transferor unit in Andhra Pradesh can be transferred to the transferee unit in Karnataka under Section 18(3) of the CGST Act and related provisions.Issue (i): Whether the transfer of the entire R&D unit as a going concern is a taxable supply of goods or services under the CGST/APGST Acts.Analysis: The Court compared the GST definitions of 'supply' in Section 7 and Schedule I with precedents under the Sales Tax and VAT regimes (including Coromandel Fertilizers and Paradise Food Court), which held that sale of an entire business as a going concern is not a sale 'in the course of business' and thus not taxable as sale of individual goods. The Court observed that Notification No.12/2017 treats transfer of a going concern as supply of services and exempts it, and left open the larger question whether such transfers could be characterised as services under the GST charging provisions while applying the notification for relief.Conclusion: The transfer of the entire R&D unit as a going concern is not to be treated as a taxable supply of individual goods under the GST charging provisions; the petitioner is entitled to the benefit of exemption by Notification No.12/2017.Issue (ii): Whether unutilised input tax credit in the transferor's Andhra Pradesh ledger can be transferred to the transferee in Karnataka under Section 18(3) of the CGST Act.Analysis: The Court construed Section 18(3) to allow transfer of unutilised ITC on transfer/ sale/ merger/ amalgamation etc., and rejected a narrow interpretation that 'change in constitution' requires only internal restructuring of the same registered person. The Court held that where registrations in different States render units 'distinct persons' under Section 25, the authorities cannot treat intra-entity transfers as non-transfers; however, interstate transfer of ITC between State GST ledgers (APGST to KGST) raises allocation issues affecting States and requires determination by the relevant State/Central authorities under their statutes and rules.Conclusion: Section 18(3) permits transfer of unutilised ITC on transfer of a business; the appellate authority's conclusion denying such transfer is set aside. Questions about admissibility of credit transfer between APGST and KGST ledgers are to be decided by the competent authorities under those Acts and not finally determined by this Court.Final Conclusion: The order of the Appellate Authority for Advance Ruling dated 10.11.2020 is set aside; the petitioner is entitled to the benefit of Notification No.12/2017 in respect of the going-concern transfer and Section 18(3) must be read to permit transfer of unutilised ITC on transfer of business, while interstate ledger adjustments are to be considered by the appropriate tax authorities.Ratio Decidendi: A transfer of an entire business as a going concern is not chargeable as a sale of goods under the GST charging provisions and, where a business is transferred, Section 18(3) of the CGST Act provides for transfer of unutilised input tax credit to the transferee; interstate ledger allocation issues require administrative determination by the competent authorities.