Appellate Advance Ruling Authority holds GST applicable on transfer of business as a going concern between ‘distinct persons’ (i.e. two establishments of same entity)

By March 23, 2022 No Comments

 In a ruling[i] having significant GST implications for business reorganization, the AAAR has held that transfer of business as a going concern between distinct persons from one State to another would be considered as ‘supply of goods’ attracting GST.
Facts of Case:
M/s. Shilpa Medicare Limited (“Company”) undertakes Research & Development work in Active Pharmaceutical Ingredient (API) along with manufacturing formulation products in small quantity for R & D purpose. R & D centre is involved in formulation & Analytical development and method validations for analytical tools. The whole business unit of the Company in Vizianagaram, Andhra Pradesh was being shifted to its Bengaluru, Karnataka unit as a going concern. The Company filed an advance ruling application before the Authority for Advance Ruling (“AAR”) asking whether the said transfer would amount to supply of goods or services. Also, whether the Company can file GST ITC-02 return and transfer unutilised ITC from Vizianagaram, Andhra Pradesh unit to Bengaluru, Karnataka unit. The AAR clarified that the transaction would amount to supply of services and the Company can file GST ITC-02.

Aggrieved by the said ruling, the Deputy Commissioner of Central Tax, GST Division filed an appeal before the AAAR seeking clarification in the case.

Whether the transaction would amount to ‘supply of service in relation to transfer of business as a going concern’ and eligible for GST exemption?

  • The AAAR observed that the main issue for decision was whether the transfer of business in the case was a supply of goods or services or both.
  • The AAAR held that the transaction in question did not qualify as a ‘transfer of going concern to another person’ since both the units of the Company held the same PAN and were hence ‘distinct persons’. Hence, the provisions of para 4(c) of Schedule II of Central Goods and Services Tax Act, 2017 (“CGST Act”) did not apply and, consequently, the transaction was liable to be treated as ‘supply of goods’ (i.e. transfer of assets of the Vizianagaram unit to the unit in Karnataka State). Since the exemption benefit in question was in respect of ‘supply of service in relation to transfer of going concern’, the subject transaction was not eligible for such a benefit.
  • Since the transaction was classified as a ‘supply of goods’, the question of transfer of unutilised ITC to the recipient location did not arise and hence the question whether ITC-02 can be filed for transfer of ITC from the Vizianagaram Unit to Bangalore Unit also did not arise.
  • The earlier AAR ruling was hence set aside and the transaction under question was held as ‘supply of goods’ liable to levy of GST as per the prevailing provisions of the CGST/APGST Act, 2017. Further, the Company was also not entitled to file Form ITC-02 for transfer of ITC to their Bangalore unit situated in the State of Karnataka.

Our Comments:
In the absence of a clear finding to the effect that the transaction in question was not in the nature of ‘transfer of business as a going concern’ but a mere ‘transfer of assets’, it appears that the above ruling is based on an erroneous interpretation of law. Further, the reason (that the transfer of undertaking was between two ‘distinct person’ and not between two ‘persons’) given in the ruling for holding the transaction as ‘supply of goods’ and not ‘supply of service’ does not appear to hold water in law.

[i] Deputy Commissioner of Central Tax, Division-Vizianagaram, Andhra Pradesh in case of M/s. Shilpa Medicare Limited [AAAR/AP/07(GST)/2020 dated 10.11.2020]

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