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Authority for Advance Ruling (AAR) decision on lump sum amount received on transfer of going business along with assets-liabilities is a supply of Services

 

Facts:

Rajashri Foods Pvt. Ltd. (Applicant), The Applicant having three manufacturing units situated at Ramanagara, Hiriyur and Seshadripuram. The Applicant willing to sell one unit situated at Hiriyur along with all its fixed assets namely land, building, plant & machinery, closing stock & trade receivables etc., and liabilities namely Bank term loans, bank working capital loans, creditors for supplies etc., for a lump sum consideration.

Rajashri Foods Pvt. Ltd. applied for clarification of the said transaction to Authority for Advance Ruling that:-

  1. Whether the transaction would amount to supply of goods or supply of services or both.
  2. Whether the transaction would treated as services by way of transfer of a going concern, as a whole or an independent part thereof, where GST rate is ‘ Nil ‘  (Refer : Notification No.12/2017 dated 28.06.2017).

Authority of Advance Ruling team discussed on above application and concludes as below:

Section 7(1) provides that “Supply” includes activities such as sale, transfer, barter, exchange etc made for a consideration in the course or furtherance of business. The transfer of a going concern, either as a whole or an independent part thereof, for a lump sum consideration does not constitute an activity taking place in the course of business or for furtherance of business. However since the word “includes” has been used in Section 7(1) the scope of supply goes beyond the meaning of the expression “in the course or furtherance of business“. Therefore in the case of the transfer of a going concern even if the act of transfer does not constitute an activity carried out in the course of regular business or for furtherance of business, the activity may still qualify to be termed as a supply.

Section 7(1) (d) stipulates that activities referred to in Schedule II shall be treated as supply of goods or supply of services. In Schedule II the entry at serial number 4 refers to “Transfer of business assets“. Transfer of business assets is considered as supply of goods.

Further in part 4(c) of Schedule II it is provided that when the business is transferred as a going concern then it does not amount to supply of goods. It, therefore, becomes clear that such transfer of business does not constitute a supply of goods.

This analysis further brings us to the Notification, No. 12/2017-dated 28th June 2017. Column number 3 of the Table in the said Notification gives the description of the services. Serial number 2 of the Notification provides for ” Services by way of transfer of a going concern, as a whole or an independent part thereof “.

Conclusion:

Thus, the activity of transfer of a going concern constitutes a supply of service. The Notification further provides “Nil‟ rate of tax on such a supply subject to the condition that the unit is a going concern.

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