Recently, it was in news that DGGI has started investigation into chargeability of GST on sale of business by the Raymond's consumer goods business to a Godrej unit for Rs. 2825 Crores.
In this regard, Company is of the view that they have transferred the business as Slump Sale on Going Concern basis, therefore, transaction is not chargeable to GST.
So, in this article, we have tried to cover the Slump Sale and its GST implication from each and every angle. (Note: We don't know whether transaction of Raymond satisfies the conditions of Slump Sale or not).
Areas Covered in this Article:
Whether Transfer of Business Assets is Supply of Goods or Service
If we analyse the clause 4 of Schedule-II along with Section 2(102), transfer of Business Assets can be summarised as follows:
a. If Business Assets are sold independently: It will be treated as Supply of Goods just like normal case.
b. If Business Assets are transferred as part of Business itself on Going Concern Basis: It will be considered as Supply of Service as per Clause 4 of Schedule-II.
c. If Business Assets are transferred as part of Business itself not on Going Concern Basis: It will be like Composite supply of both Goods & Service i.e.
i. Transfer of Business Assets will be treated as Supply of Goods and
ii. Transfer of Business (Not Assets) will be treated as Supply of Service
However, in our opinion, here Principal Supply generally is not transfer of Business Assets but Business, therefore, it will be considered as Supply of Service.
Exemption Available for Slump Sales
As per S.No.-2 of Notification No. 12/2017 as amended on Exemption of Services, following service is exempt from GST:
" Services by way of transfer of a going concern, as a whole or an independent part thereof".
Here, key words is transfer of Business Completely (like complete business of an Organisation) or Independent Part there of (like some business segment/factory etc.) on going concern basis.
So it has two components:
A. Transfer of Business or Independent Part thereof
B. On Going Concern Basis
What is Meaning of Slump Sale & Going Concern Basis
Component-A (Transfer of Business or Independent Part thereof)
Transfer of Complete Business or independent part thereof without assigning any value to individual assets is called Slump Sale. In GST, Slump Sale has not been defined. However, Section 2(42C) of Income Tax Act has defined the Slump Sales as:
slump sale" means the transfer of one or more undertaking, by any means for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.
Undertaking (Explanation 1 to Section 2(19AA)
"undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
Accordingly, for satisfying the Component-A of the Condition, it needs to be be transfer of a unit or division or business activity as a whole not transfer of assets & liabilities which does not constitute business activity.
Component-B (On Going Concern Basis)
Meaning of Going Concern has not defined in the GST Act. However, CBIC Guide (Para 7.11.15) issued during Service Tax Regime , explained the meaning of Going Concern Basis as:
What does the term ‘transfer of a going concern’ mean?
Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business, but shall not cover mere or predominant transfer of an activity comprising a service. Such sale of business as a whole will comprise comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. Since the transfer in title is not merely a transfer in title of either the immovable property or goods or even both it may amount to service and has thus been exempted.
Accordingly, for satisfying the condition of going concern it should be
a. Transfer of running business which can be run independently.
b. It should be comprehensive sale of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc.
In one of the advance ruling, it was held that where employees or liabilities of that unit has not been transferred, it will not be considered as transfer on Going Concern Basis.
Further, Hon'ble Delhi HC in the case of Indo Rama Textile Limited has defined Going Concern basis as
when the assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.
Treatment of ITC related to Goods which are transferred
Lets's assume there is Slump Sale on Going Concern basis which is exempt in terms of N.No. 12/2017 as amended.
Now question arise what about ITC which has been availed by the Taxpayer against the Goods (inputs, capital goods) which are transferred as part of Business Sale.
In this regards, Section 18(3) read with Rule 41 prescribed special procedure for transfer of ITC from Transferor to Transferee in case of Slump Sale.
Section 18(3):
Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.
As there was no mention of Slump Sale in Section 18(3), there were doubts whether Slump Sale is covered in Section 18(3) or not. In this regards, Circular No.133 03/2020-GST dated 23rd March, 2020 has clarified that Slump Sale is covered in Section 18(3) (Para 3(b) of the Circular).
Accordingly, Transferor is Required to file ITC-02 electronically on Common Portal to transfer the ITC to the Transferee by following the provisions of Rule-41 i.e.
a. the input tax credit shall be apportioned in the ratio of the value of assets of the new units
as specified in the Slump Sale i.e. (Value of Assets Transferred/Total Value of Assets of the Taxpayer).
The "value of assets" means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.
Further, Value of Assets is to be taken Registration wise as clarified by the Circular.
b. The transfer or shall also submit a copy of a certificate issued by a practicing chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.
c. The transferee shall, on the common portal, accept the details so furnished by the transfer or and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.
d. The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.
Important Question, when Transferor do not opt for Section 18(3), as Section 18(3) is not mandatory Section but optional one as " shall be allowed" is written.
In our opinion, in this case, as Taxpayer has not opted for special procedure provided for the Slump Sale, he will be governed by general rules of law i.e. ITC needs to be reversed for goods/services used in Exempt Supply in terms of Section 17.
Accordingly, he needs to reverse ITC against inputs and capital goods that form part of Slump Sale which is an Exempt Supply in terms of Section 17.
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.