1. Business restructuring and reorganisation have seen increasing frequency over the last several years. Businessmen, business-houses and investors have been cherry picking viable businesses as well as start-ups offering long-term potential. Surprisingly though, while the entire world economy is reeling under the COVID-19 pandemic, a lot of businesses have been storming the mergers and acquisitions space during these unprecedented times.
2. As organizations seek to sustain earnings or even continue to increase earnings through managing costs, as global competition continues to intensify, investors and businesses are demanding higher revenues from their top-line products as a way to further increase shareholder value. Therefore, reasons vary from business downturn, achieving economies of scale, establishing marketing leadership, ring fencing against predators, diversification and expansion, etc. or even exiting from non-core businesses or activities.
3. These objectives are sought to be achieved through business restructuring or reorganization. This may involve complex restructuring such as amalgamation, mergers or demergers as well as hive off or transfer of business or dilution of shareholding through sale of shares.
B. HISTORICAL BACKGROUND UNDER INDIRECT TAX LAWS
4. Transfer of business, amalgamation, mergers or demergers have also raised debates and disputes regarding taxation thereof. This was particularly so under the provisions of the earlier State sales tax and value added tax (VAT) laws across India.
5. The fundamental dispute which arose under the sales tax laws was, whether transfer of business as a going concern was liable to tax. It was argued that, in transactions of transfer of business, be it by a business transfer agreement or a scheme of amalgamation, merger or demerger, the assets of a business entity stand transferred to the transferee, that is, the purchaser of the business, the amalgamated, merged or the resultant entity. Therefore, sales tax was demanded on the assets which stood transferred under such arrangements. The matter was settled when Courts held that in such arrangements, there is no contract for sale of goods, and also that business is not ‘goods’.
6. Once it was held that business is not goods, questions arose whether a transaction under a Business Transfer Agreement or also under a Scheme of Amalgamation, Merger or Demerger actually resulted in transfer of a ‘Business’ as a ‘Going Concern’. This was dependent on the facts of each case and it was came to be concluded that, typically transfer of business as a going concern requires transfer of business in its entirety, as a whole including all assets, liabilities, rights, obligations, contracts, employees, etc. The transfer should be such that it enables the purchaser or the transferee to carry on or continue the business without interruption immediately upon the transfer. Exclusion of certain assets or few liabilities should not militate against there being a transfer of business. Moreover, it was concluded that transfer of business would also include transfer of an independent part of the business, such as a business division or a distinct line of business, one of the many factories, independent support units, etc.
7. Therefore, it was held that transfer of business would not attract liability for payment of sales tax or VAT. Courts further held that, in any event, such a transfer is normally not ‘in the course of business’ which was a pre-requisite for making a person liable to pay sales tax or VAT. Therefore, transfer of business could not be taxed under the State sales tax or VAT laws.
8. Several States provided that transfer of business would not be a transaction liable to sales tax or VAT. This settled the proposition regarding taxability of transfer of business under the State sales tax or VAT laws. On the other hand, an exemption was also granted under the provisions of the service tax law, under Chapter V of the Finance Act, 1994. Vide entry 37 in Mega Notification No. 25/2012-ST dated 20 June 2012, ‘Services by way of transfer of a going concern, as a whole or an independent part thereof’ was exempted from payment service tax.
9. One of the other areas of dispute was regarding the price or the consideration paid for the transfer of business. Generally, the consideration is paid in the form of cash or issuance of shares in the business of the transferee. In accordance with the practice and requirements under the Income Tax Act, 1961, specifically under section 50B thereof, in relation to slump sale, it was generally accepted that transfer of business should be for a lump sum consideration. It was then argued that in cases where values were assigned to the various assets and liabilities of the business in order to determine the consideration payable for the transfer of the business, the transfer no longer qualifies as a slump sale or transfer of business and should be treated as an itemized or piecemeal sale of assets of the business. Authorities governing the State sales tax or VAT laws also adopted this argument and the provisions of the agreement and intention of the parties were not considered to be a factor having a bearing on the issue.
10. While these were the aspects being debated under the sales tax and VAT laws, fresh controversy arose in cases of amalgamations, mergers and demergers from an anterior date. The question was regarding the treatment of inter-se transaction between the amalgamating companies or between various divisions of the demerging company between the appointed date and the effective date. In the case of amalgamations from an anterior date, claims for refund were filed for taxes paid on inter-se transactions between the entities between appointed date and the effective date. Courts were pleased to grant the refunds on the ground that, amalgamation from an anterior date converted transactions of sales into inter-unit transfers or stock transfers which did not invite levy of sales tax or VAT.
11. To overcome the requirement to grant refunds, some States amended their sales tax and VAT laws to provide that in the case of amalgamations, , the entities shall be deemed to be distinct entities upto the order of the High Court or the date on which the order was filed with the Registrar of Companies in accordance with the requirements of the Companies Act. This mitigated the requirement to refund taxes paid on inter-se transactions between the amalgamating companies.
12. However, while States sought to mitigate their liability for granting refunds, no provision was made in respect of demergers from an anterior date, where potentially, inter-unit transfer or stock transfer would stand converted into sales in view of the demerger or hive off. This resulted in a fresh controversy and demands for taxes in the case of demergers.
13. Refer Annexure for decisions of Courts enunciating the principles and conclusions on the matters discussed above.
14. With the above background, it will be desirable to examine whether the Goods and Service Tax Law (GST law) addresses the controversies which had arisen in the erstwhile indirect tax regime. The concepts and principles in relation to ‘business’ or ‘going concern’ have not been discussed herein, as the focus is on the liability, if any, under the GST law. For the sake of brevity, the different kinds of arrangements, namely, transfer of business under a business transfer agreement (BTA), amalgamations, mergers and demergers have been referred to as ‘transfer of business’ though each are distinct and have their own nuances.
C. GST IMPLICATIONS ON TRANSFER OF BUSINESS
15. GST is levied on supply of goods or services or both. The scope of ‘supply’ is provided in section 7 of the Central Goods and Service Tax Act, 2017 (CGST Act). Section 7(1)(a) states that supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Therefore, the pre-requisites of a transaction of ‘supply’ are;
(a) existence of ‘goods’ or ‘services’ or ‘both’, which is subject matter of the supply;
(b) supply in the nature of or similar to sale, transfer, barter, exchange, licence, lease, etc.
(c) between two persons;
(d) for a consideration;
(e) in the course or furtherance of business of the person making such transfer.
16. Therefore, it needs to be examined whether transfer of business satisfies all the criteria specified under section 7(1)(a) of the CGST Act.
17. As discussed above, in the case of transfer of business, there is an agreement to transfer a business as a whole, which is a conglomerate. There is no contract or bargain between the parties to transfer the individual assets, liabilities, entitlements, obligations, employees, etc. Business, as a conglomerate, by itself is not goods as already held by the Courts under the erstwhile sales tax laws. This conclusion will apply with equal force under the GST law also. However, the definition of ‘services’ under the GST laws will be relevant. Under section 2(102), ‘services’ are defined as ‘anything other than goods’.
18. Once it is concluded that business is not goods, by virtue of the definition under the GST law, transfer of business would be treated as supply of services. Having treated transfer of business as a service, it must still be recognized that there is no supply of the individual components of the business that is the assets, liabilities, etc. Therefore, there would be a transfer of the business as a whole, for which the consideration would be the price paid or issuance of shares.
19. However at this juncture, it is pertinent to refer to an important criteria in the scope of supply, i.e., such supply should be in the course or furtherance of business. The decision of the Courts should support the contention that transfer of a business is not in the course or furtherance of business and therefore it does not fall under the main clause of meaning of the term ‘supply’ under section 7(1)(a) of the CGST Act. It may be noted that ‘business’ is defined under section 2(17) of the CGST Act and includes supply of goods or services in connection with commencement or closure of business. However, it is contended that, in the case of transfer of business as a going concern, the business is not closed but is transferred. Moreover, the transfer of the business is not in connection with closure of business but the business itself is transferred (supplied). Therefore, arguably transfer of business should not be subject to the levy of GST. However, this will have to be tested before the Courts.
20. Considering the potential for debate, a specific exemption has been provided vide Entry No.2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017, which exempts ‘Services by way of transfer of a going concern, as a whole or an independent part thereof’. Therefore, transfer of business would, in any event not be liable to GST. As is evident, the exemption applies not only to transfer of business as a whole but also to an independent part thereof. The phrase ‘going concern’ signifies that a business for transfer should be in a conglomerate comprising of all elements of the business which are required to continue operation of the business independently by the transferee without any interruption. This would, therefore, include all assets, tangible or intangible, contracts, customers, resources and stocks (raw materials, semi-finished goods and finished goods), employees as well as liabilities and obligations including sales contracts, orders, etc.
D. ENTRIES OF SCHEDULES I AND II OF THE CGST ACT
21. The next question that arises is regarding the applicability of entries mentioned in Schedules I and II of the CGST Act which provide for tax on transfer of business assets.
22. Entry 1 of Schedule I specifies that ‘Permanent transfer or disposal of business assets where Input Tax Credit has been availed on such assets’ shall be treated as a supply even when made without consideration. Therefore, a doubt could arise whether there could be a liability for payment of GST on assets which are transferred as part of transfer of business.
23. The answer should be in the negative for obvious reasons. Schedule I of the CGST Act is specified under clause (c) of sub-section (1) of Section 7 of the CGST Act. In terms of the said clause (c) of section 7(1), activities specified in Schedule I would be liable to tax even in the absence of a consideration. However, as discussed above, transfer of business is a service which takes place for a consideration and therefore, already covered under sub-section (1)(a) of Section 7, although exempt from payment of tax.
24. The transfer of business once covered under section 7(1)(a) of the CGST Act cannot now be considered as supply under section 7(1)(c) read with Schedule I. Therefore, Entry 1 of Schedule I of the CGST Act will have no application in the case of transfer of business.
25. Further, Schedule II of the CGST Act provides the classification of supplies as that of ‘supply of goods’ or ‘supply of services’. The said Schedule II is specified under section 7(1A) of the CGST Act and assists in classification of transactions which otherwise qualify as supply under section 7(1) of the CGST Act. The following clauses in Para 4 of Schedule II refer to transfer of assets –
4. Transfer of business assets,-
(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless,-
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person.
26. Clause (a) of Para 4 refers to transfer or disposal of assets such that no longer forms part of the assets of the business. In such a case, the transfer or disposal of the assets shall be treated as supply of goods. From a careful reading, it will be evident that the entry envisages transfer or disposal of some of the business assets and continuity or use of the other remaining ones as part of or in the course of business. Therefore, this clause envisages and contemplates continuity of the business. Accordingly, transfer of business which results in transfer or disposal of all of the assets of business and discontinuation thereof by the transferor is not envisaged under this clause. Therefore, clause (a) of Para 4 of Schedule II has no application in such case. This will also be evident from the fact that clause (c) of Para 4 covers transfer or discontinuation of business.
27. Clause (c) of Para 4 considers transfer or transmission of business. However, the said entry does not apply when the business is transferred to another person as a going concern.
28. Therefore, entries of Schedules I and II of the CGST Act will have no application in the case of transfer of business.
E. GST IMPLICATION IN CASE OF ITEMIZED / PIECEMEAL SALE
29. What would be the implications if it is eventually held that, the arrangement between two parties does not constitute transfer of business or transfer of business as a going concern?
30. As discussed above, business is an amalgam or conglomerate of various assets and liabilities comprised therein. The claim for exemption may be sought to be denied on the ground that the business being transferred is not a ‘going concern’ and, therefore, does not qualify for exemption under Entry 2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017. Alternatively, it could be claimed that arrangement between the parties does not constitute a transfer of business as a whole.
31. If a transaction is sought to be brought to tax on the ground that the business is not a going concern, the fact remains that it is a business and what is transferred is an amalgam or conglomeration of the various elements thereof. As discussed above, the argument in such event could be that such a supply of a business is not ‘in the course or furtherance of business’ and therefore, cannot be brought to tax. However, if it is eventually held that taxes are payable thereon, the transaction being supply of services, will be taxed at the residual rate of 18 percent under Entry 35 of the Notification No.11/2017-Central Tax (Rate) dated 28 June, 2017.
32. The other situation could be that there is no sale of business, as a whole or an independent part. That is, the transaction is nothing but an itemised or piecemeal sale or transfer of the assets of the business. Therefore, GST shall be payable in case of such itemized or piecemeal sale at the rate applicable to the respective goods or services. It must be borne in mind that the assets of the business may be tangible as well as intangible assets, rights, may include actionable claims as well as cash and balances of receivables, which will be neither goods nor services.
33. Itemised or piecemeal sale will, therefore, be subject to GST as any other supply including requirements of Section 18(6) of the CGST Act read with Rule 44(6) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) as well as entries of Schedule II shall apply.
F. COMPLIANCES AND OTHER OBLIGATIONS UNDER THE GST LAW
34. Certain procedural aspects which every registered person would be required to comply in the case of transfer of business may be examined, It should be borne in mind that these compliances will have to be undertaken separately in each of the States where the transferor conducts or is engaged in business.
35. APPLICATION FOR REGISTRATION AND CANCELLATION OF EXISTING REGISTRATION UNDER GST
35.1. Section 29(1) of the CGST Act provides that when the business is transferred for any reason or amalgamated or demerged, etc. the certificate of registration shall be cancelled. For this purpose, an application for cancellation will be required to be filed in accordance with the provisions of Rule 20 of the CGST Rules within 30 days of the occurrence of the event, warrantying the cancellation. This provisions covers transfer of business under a business transfer agreement as well as amalgamation, merger or demerger under an order of the Court or Tribunal.
35.2. Transfer of Business under a Business Transfer Agreement
(i) Section 22(3) of the CGST Act provides where a business carried on by a registered person is transferred as a going concern, the transferee will be required to obtain registration from the date of such transfer. This provision covers transactions of transfer of business under a business transfer agreement only and not amalgamation, mergers or demergers under an order of the Court or Tribunal.
(ii) The implication of this provision read with section 29(1) will be that the effective date of cancellation of registration of the transferor and the grant of registration of the transferee will be the same date, ensuring continuity of the registration in respect of the business. The transferee will, therefore, be entitled to continue the business with immediate effect without any interruption or pause therein.
(iii) Similarly, section 85(2) provides that the transferee of the business shall be liable to pay tax on the supply of goods or services made from the date of effect of the transfer and shall, if already registered, apply for amendment to the certificate of registration.
35.3. Amalgamation, Merger or Demerger
(i) Section 22(4) of the CGST Act provides that in the case of transfer pursuant to sanction of a scheme or an arrangement for amalgamation or demerger of two or more companies pursuant to an order of a High Court or Tribunal, the transferee shall be liable to be registered and obtain a fresh registration, with effect from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal.
(ii) On the other hand, Section 87(2) of the CGST Act provides that in the case of amalgamation or merger pursuant to the order of the Court or Tribunal where the merger has to take effect from an anterior date (called the ‘appointed date’), the two companies shall be deemed to be distinct companies from the appointed date upto the date of the order of the Court or Tribunal and the Certificate of Registration of the said companies shall be cancelled with effect from the date of the order of the Court or Tribunal.
(iii) The above provisions highlight the dichotomy. In terms of section 87(2) and 29(1), the certificate of registration of the transferor is required to be cancelled with effect from the date of order of the Court or Tribunal whereas the transferee, amalgamated, demerged or the resultant company is entitled to obtain registration only with effect from the date when the Registrar of Companies issues the certificate of incorporation giving effect of such order of the High Court or Tribunal. Therefore, there could be a time lag between the cancellation of registration of the amalgamating or demerging company and the new registration of the amalgamated, demerged or the resultant company.
36. JOINT AND SEVERAL LIABILITY IN THE CASE OF TRANSFER OF BUSINESS UNDER A BUSINESS TRANSFER AGREEMENT
36.1. Section 85(1) of the CGST Act provides that in case of transfer of business, the liability of the transferor and the transferee shall be jointly and severally liable for any demand of tax, interest and penalty upto the date of transfer. Therefore, the transferee of the business shall become liable of the tax dues in respect of transactions prior to the date of the transfer.
36.2. As stated above, section 85(2) provides that the transferee will be liable to pay tax on the supply of goods or services from the date of transfer. Therefore, it should be clear that the creation of the joint and several liability under section 85(1) is for the purpose of recovery of demands only. All the proceedings, including audits, enquiries, assessments, appeals, etc. will be required to be undertaken in the name of the transferor. Recovery of the demands of tax, interest and penalty from the transferee can be made only when it is not possible to recover the demands from the transferor.
36.3. It may be noted that the provisions of section 85 will be applicable only in the case of transfer of business under a business transfer agreement and not in the case of amalgamation, merger or demerger under an order of the Court or Tribunal.
37. BALANCE OF UNUTILISED INPUT TAX CREDIT OF THE TRANFEROR
37.1. It is pertinent to bear in mind that the transfer of business, which is considered as ‘supply of services’ and is specifically exempted under Entry No.2 of Notification No. 12/2017-Central Tax (Rate) dated 28 June, 2017 or not liable to tax as not being in the course of business, will also be required to be considered for the purposes of reversal of common input tax credit in accordance with Section 17 (2) of the CGST Act read with Rule 42 of the CGST Rules. Moreover, supply of any goods or services used directly or exclusively for effecting such transfer shall not be available by way of input tax credit. Accordingly, the transferor of the business will be required to reverse the input tax credit in respect of the supplies attributable for effecting the transfer of the business.
37.2. Further, under section 18(3) of the CGST Act, the transferor of business shall be allowed to transfer balance of unutilized input tax credit lying in its electronic credit ledger to the transferee of business. However, such transfer of input tax credit is subject to the condition that the liabilities of the business are also transferred along with the business.
37.3. Also, Rule 41(1) of the CGST Rules prescribes that the transferor of the business is required to furnish complete details of sale, amalgamation, merger, demerger, etc., along with a request for transfer of unutilized input tax credit to the transferee. The details and request are required to be furnished in Form ITC-02 and submitted electronically on the common portal, that is, the GST portal.
37.4. Proviso to Rule 41(1) states that in case of demerger, input tax credit shall be transferred to the resulting company in the ratio of the value of assets of the new units as specified in the scheme of demerger. Explanation to the said sub-rule states that ‘value of assets’ means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.
37.5. In this context, the question arises regarding the phrase ‘value of assets’. While the proviso to Rule 41(1) specifies that the value of the assets will have to be as per the scheme of demerger, the Explanation refers to ‘value of assets’ of the entire business. A rational comparison will have to be on like basis, that is, for the purpose of the determination of the ratio for input tax credit to be transferred to the transferee, the basis of value of the assets will have to be identical. Therefore, where the value of the assets in the Scheme of Demerger is at book-value, the ratio will have to be determined on the basis of book values of all assets only.
37.6. The other issue to be borne in mind is that locations of a business entity having separate registrations are treated as ‘distinct persons’ under section 25(4) and (5) of the CGST Act and under Explanation to section 8 of the Integrated Goods and Services Tax Act, 2017. Therefore, the transfer of business will take place at all the locations where the transferor has been conducting its business. Accordingly, the transfer of the balance of unutilised input tax credit will require filing of separate details in Form ITC-02 in each of the State where the business exists.
37.7. Moreover, from reading of Section 18(3), 25(4) and (5) of the CGST Act and Rule 41 of CGST Rules, it would be seen that the rule refers to the business of a registered person and not the business of the Company. Therefore, in the case of demerger, the computation of the amount input tax credit eligible for transfer will have to be undertaken and determined separately for each State. Therefore, the value of assets forming part of the demerged business as well as the value of the assets of the entire business will have to be considered separately for every registration.
37.8. Rule 41(3) of the CGST Rules provides that the transferor shall also submit a copy of a certificate issued by a practicing Chartered Account or Cost Accountant certifying that the sale, merger, demerger, amalgamation, or transfer of business has been done with a specific provision for transfer of liabilities.
37.9. Upon filing of the application in Form ITC-02 by the transferor, the transferee of the business is required to accept the details so furnished by the transferor on the common portal and, upon such acceptance, the unutilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger of the transferee.
37.10. Moreover it is important to note that section 18(3) states that the registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger. Rule 41(1) of CGST Rules provides for furnishing of details of the transfer of business in Form ITC-02 with a request for transfer of the balance of unutilised input tax credit. Therefore, even in case there is no un-utilized balance lying in electronic credit ledger, the transferor company is required to furnish the details of the transfer of business by filing Form ITC-02. Moreover, use of the words ‘shall be allowed’ in section 18(3) indicates that the transfer of the unutilised balance is optional and the transferor may retain the unutilised balance of input tax credit for future utilisation.
37.11. It is also important to note that, these provisions only pertain to transfer of unutilized balance of input tax credit. These provisions are not applicable to unutilized balance lying in electronic cash ledger or for transfer of any other amounts.
38. INTER-SE TRANSACTIONS BETWEEN AMALGAMATING COMPANIES DURING THE INTERVENING PERIOD
38.1. Many times, amalgamation or merger of Companies may take effect from a retrospective date (called the ‘appointed date’). Therefore, the amalgamating companies will continue to be distinct legal entities upto the date of order of the High Court or Tribunal and, in fact, upto the filing of the order with the Registrar of Companies for giving effect to the order.
38.2. In the interim, there may be transactions of supplies of goods or services between the amalgamating companies during this period, that is, ‘inter-se’ transactions during the ‘intervening period’. ‘Intervening Period’ refers to the period between the appointed date (i.e., date from which business of the transferor vests with the transferee) and the effective date (i.e. when the Court order is submitted to the Registrar of Companies, in cases involving transfer of business through a Court scheme).
38.3. In such cases of an amalgamation or merger with retrospective effect, two companies would be considered as a single entity from the appointed date and thus, any supplies of goods and services between the appointed date and effective date would be considered as transaction with oneself. Under the GST Laws, transactions with oneself shall not be liable to GST as there will be no supply.
38.4. However practically, until the Court order is received and submitted to the Registrar of Companies, both the Companies would treat themselves as distinct legal entities and charge and pay tax on the inter-se transactions.
38.5. The question which has arisen was about the treatment of the inter-se transactions during the intervening period. Should the transactions be unwound and reclassified as inter-unit transactions, which may or may not be liable to tax? Should the taxes paid, if any, be refundable? Should the input tax credits be reversed? Similar issues and questions had also arisen under the sales tax and VAT regimes.
38.6. There are two schools of thought on this issue. According to the first school of thought, amalgamation or merger from a retrospective date results in nullifying all inter-se transactions and converting all transactions as supplies to self. Therefore, any taxes paid (which were otherwise not payable on inter-unit or intra-entity transactions) should be reversed and should be claimed by way of refund. This amounts to unwinding of the transactions, amending the returns filed (where permitted) and claiming the refund of the excess taxes. A corollary would be that input tax credits claimed will also be required to be reversed.
38.7. According to the other interpretation, amalgamation or merger from a retrospective effect has no implications on transactions during the intervening period, be it with third parties or inter-se between the amalgamating companies. Such an amalgamation only requires that the results of the amalgamating company during the intervening period be recognised, recorded and accounted as part of the results of the amalgamated or merged entity. However, the individual transactions do not become the transactions of the amalgamated or merged entity. This is supported by the fact that in such cases, the amalgamating companies do not record the individual transactions which take place during the intervening period in the books of account of the amalgamated or merged entity. Further, documentation of the transactions which take place during the intervening period are not amended and reissued. For example, the invoices raised on third party customers are not revised or reissued in the name of the amalgamated or merged entity, similarly despatch documents, e-waybills, etc. are not amended or reissued, the claim of input tax credit originally availed during the intervening period is not reversed by the amalgamating company and re-availed by the amalgamated company and so on. Only the assets, liabilities and results of the business are recorded in the books of account of the amalgamated or merged entity.
38.8. The above treatment is in accordance with the earlier Accounting Standard 14 which required accounting of amalgamations under the Pooling of Interest Method, that is, at the existing carrying amounts of the transferor or the Purchase Method, that is, by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. Similarly, the balance of the Profit and Loss Account appearing in the financial statements of the transferor is aggregated with the corresponding balance appearing in the financial statements of the transferee company or transferred to the General Reserve. Under Ind AS 103, the accounting is basis the Acquisition Method, where the acquirer measures identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. Therefore, it is argued that the amalgamation or merger from a retrospective date will have not implications on inter-se transactions during the intervening period.
38.9. Some of the States, recognising potential claims for refunds and the decision of Courts, incorporated provisions under their respective State Sales Tax laws and VAT laws to provide that in the case of amalgamation or merger from a retrospective date, the companies will be deemed to be distinct entities upto the date of the order of the High Court or Tribunal or upto the date of filing of the order with the Registrar of Companies. It was further provided that all inter-se transactions will be liable to tax.
38.10. Similar provision has also been made under Section 87 of the CGST Act to provide that in such cases, the companies will be deemed to be distinct companies upto the date of the order of the Court or Tribunal and all inter-se transactions will be included in the turnover of supplies and tax paid thereon.
39. INTER-UNIT OR INTRA-ENTITY ACTIVITIES DURING THE INTERVENING PERIOD IN THE CASE OF DEMERGER
39.1. It is pertinent to note that section 87 of the CGST Act is applicable only in the case of amalgamation or merger of companies. Demerger has not been specifically provided thereunder. Therefore, the question is about the treatment in the case of demerger of companies. In such cases, will demerger from a retrospective date have the effect of converting inter-unit transfers or intra-entity activities into supplies requiring payment of GST? Will there be liability on account of deemed supplies between the entity and the demerged company by invoking clause 2 of Schedule I? Will there be liability for payment of interest on account of a creation of retrospective liability? What will be the fate of input tax credit otherwise available to a recipient?
39.2. The answer will be determined basis one of the two schools of thought discussed above, which will eventually hold the field. The omission of ‘demerger’ in section 87 of the CGST Act is evidently by design and not an oversight. The GST authorities will certainly invoke the provisions of section 87 to raise demands on inter-se activities in the case of demergers with retrospective effect. An important criteria before a demand for payment of GST can be raised will be the existence of ‘consideration’, though this will not be applicable in the case of deemed supplies between related persons or distinct persons. The DDQ Order of the Maharashtra Sales Tax department in the case of UltraTech Cemco Ltd. may be referred.
39.3. Therefore, the argument that amalgamation or merger from a retrospective date cannot unwind or reclassify any inter-se transactions during the intervening period should also apply with equal force to demergers with a retrospective effect. Such demerger cannot be said to create or give rise to inter-se supplies, when there were none.
39.4. This interpretation should find support and, therefore, recognition, from provisions of section 22(4), which provides that the transferee shall be liable to be registered and obtain a fresh registration, with effect from the date on which the Registrar of Companies issues a certificate of incorporation giving effect to such order of the High Court or Tribunal. Therefore, in any case, inter-unit or intra-entity activities undertaken by or emanating from the demerged business is not liable. The question, and therefore, the debate will raise in the case of inter-unit and intra-entity activities undertaken by the on-going business units of the demerging entity,
40. FILING OF FINAL RETURN IN FORM GSTR-10, ANNUAL RETURN (GSTR 9) AND RECONCILIATION STATEMENT (GSTR 9C)
40.1. In view of section 45 of the CGST Act, the transferor of business whose registration is cancelled after the transfer will be required to furnish a final return within 3 months from the date of cancellation or date of order of cancellation, whichever is later. Under Rule 81 of the CGST Rules, the Final return is required to be furnished electronically in Form GSTR -10 through the Common Portal.
40.2. Similarly, the transferor of the business as well as the transferee will be required to comply with the requirements of Section 44(1) of the CGST Act which requires every registered person to furnish an annual return for every financial year in Form GSTR 9 on or before 31st December following the financial year to which such annual return pertains. Also section 35(5) requires registered persons to get their accounts audited and submit an audited Reconciliation Statement when the turnover exceeds the prescribed limit.
40.3. Therefore, for the period when the registrations of the transferor and the transferee were effective, and depending upon the turnover of the respective entities, there will be requirement to file the Annual Return in Form GST 9 and the audited Reconciliation Statement in Form GSTR 9C by the transferor as well as by the transferee of the business.
G. OPEN AREAS REQUIRING ATTENTION
41. There are various areas which will require attention of the transferee post transfer of business. Some require guidance, clarification or appropriate amendments to the GST law.
42. Reversal of ITC in case of non-payment to the supplier of goods / services within 180 days
42.1. Second proviso to Section 16 (2) of the CGST Act read with Rule 37 of the CGST Rules requires that where the recipient of goods or services fails to pay the amount towards the value of supply along with tax payable thereon to the supplier within 180 days from the date of invoice, the recipient of supply shall be required to reverse the Input Tax Credit along with interest thereon.
42.2. Further, the Third proviso to Section 16(2) of the CGST Act read with Rule 37(4) also provides that, the recipient shall be entitled to avail of the credit of input tax once the amount towards the value of supply of goods or services along with tax payable thereon is paid to the supplier.
42.3. Therefore, the following situations may arise:
(i) Requirement of reversal of input tax credit claimed, after the transfer of business;
(ii) Eligibility to re-claim the input tax credit already reversed prior to the transfer of business.
42.4. In the above situations, the reversal or re-claim of the input tax credit should be required to be undertaken by the transferee of the business. While, this would be undisputed in the case of amalgamation, merger or demerger by an order of the Court of Tribunal, disputes may arise in the case of transfer of business under a business transfer agreement. Section 85 of the CGST Act creates joint and several liability of the transferor and transferee in respect of demands of tax, interest and penalty in respect of periods prior to the date of transfer. However, there is no specific provision creating any other obligations against or granting any rights in favour of the transferee in respect of periods prior to the date of transfer. However, such obligations and rights should be recognised as part of the principle of ‘going concern’ where the transferee steps into the shoes of the transferor and continues the business. Therefore, the obligations and rights of the transferor of the business arising after the date of transfer should also fall upon and be available to the transferee.
42.5. Therefore, in the above situations, the transferee of the business:
(i) Should be required to reverse the input tax credit claimed prior to the date of transfer, where the time limit of 180 days under Second proviso to Section 16(2) expires after the transfer;
(ii) Should be entitled to claim the re-claim the input tax credit under Third Proviso to Section 16(2) read with Rule 37(4) as and when the payment for the goods or services is made to the supplier.
43. Invoices appearing in the GSTR 2A of the Transferor Company after filing of Form ITC-02
43.1. Under Rule 36(4) of the CGST Rules, every registered person is entitled to avail ITC only to the extent of invoices appearing in its GSTR 2A. The Rule also further allows the registered person to avail Input tax credit in respect of the invoices not appearing in the GSTR 2A upto 10 percent of the eligible ITC appearing in the GSTR 2A.
43.2. GSTR-2A is a dynamic report available from the common portal and is, therefore, subject to change. The transferor of the business may be faced with the following situations:
(i) Invoices in respect of which input tax credit was not availed by the transferor in view of the restrictions under Rule 36(4);
(ii) Invoices reported or amended by suppliers after the date of filing of details in Form ITC-02 which appears in the GSTR-2A of the transferor after the date of transfer and cancellation of registration.
43.3. As stated above, the rights of the transferee of business should be recognised in the case of ‘going concern’. However, considering the mandate of the Rule 36(4), the claim for input tax credit by the transferee will require that the transactions pertaining to periods upto the date of transfer of the business are carried over to the GSTR-2A of the transferee so as to enable the transferee to avail the same and comply with the provisions of the GST law.
43.4. At present, the GST Portal does not recognise the rights of the transferee and does not enable carry over or re-routing of the transactions relating to the business transferred to the registration of the transferee. Therefore, claim of such input tax credit will prove to be a challenge and will result in disputes and litigation.
44. Adjustment of tax paid on Advances received by the Transferor in respect of which services are not supplied upto the date of transfer of the business
44.1. On the date of transfer or the date of order of the Court or Tribunal, the transferor may have unadjusted advances for supply of services to be made, on which tax is already discharged by the transferor.
44.2. The following situations may arise in such cases:
(i) The services are rendered by the transferee after the transfer of the business;
(ii) The orders are cancelled and the transferee is required to refund the advances.
44.3. Therefore, in both the above situations, as discussed above, the transferee of the business should be entitled to adjust the taxes paid by the transferor on the advances received. However, there is no facility to report or record such instances on the common portal. Suitable facility will have to be provided for reporting such advances as part of Form ITC-02 so that the same may be adjusted by the transferee of the business with suitable reconciliation.
45. Issue of a Credit Notes or Debit Notes by the Transferee for Supplies made by the Transferor
45.1. After the effective date of transfer, all the on-going contracts including contractual rights and obligations pertaining to the transferor is transferred to the transferee.
45.2. Thus, there may be a possibility that, the transferee may be required to issue Credit Notes or raise Debit Notes towards the supplies of goods or services for which an invoice was already issued by the transferor before the transfer of business.
45.3. So far, the common portal did not permit the registered person to report any Credit Notes or Debit Notes without mentioning the details of the corresponding Tax Invoices to which such Credit Notes or Debit Notes relate. Therefore, since the Tax Invoices were reported by the transferor, the GST portal did not enable the transferee to report the Credit Notes or Debit Notes issued after the date of transfer.
45.4. This issue has been resolved recently by the common portal by de-linking the Credit Notes and Debit Notes from the original Tax Invoices. Therefore, to this extent, this issue has now been resolved, albeit from a prospective date.
46. Amendments to transactions reported in GSTR-1 after cancellation of registration
46.1. Transactions reported in the returns in Form GSTR-1 are eligible for amendment in the subsequent returns. However, in cases where the registration of the transferor or the amalgamating entity, no returns are required to be filed for subsequent periods.
46.2. There is no provision under the GST law or on the common portal to amend transactions reported in the preceding financial periods although no returns are require to be filed. Suitable facility will have to be provided for making amending the transactions reported in the returns relating to the period prior to the transfer of business, so that the input tax credit of the recipient of the goods or services is protected.
47. Proceedings relating to the Transferor of the business
47.1. In the case of transfer of business under a Business Transfer Agreement, the transferor and the transferee continue to exist as separate persons even after the transfer of the business. Therefore, all proceedings under the GST law in respect of the periods prior to the transfer will be taken up against the transferor of business. The CGST Act already creates a joint and several liability of the transferor and the transferee in respect of demands of tax, interest and penalty for the periods upto the date of transfer. Therefore, all proceedings, namely, audits, assessments, show cause notices, adjudication, appeals, etc. will be taken up against and in the name of the transferor. The transferee of the business will be called upon to discharge the demand of tax, interest or penalty only in the event that the transferor fails to do so.
47.2. However, the implications are different in the case of transfer under a scheme of amalgamation, merger or demerger. The scheme of amalgamation, merger or demerger usually provides that all claims, suits, liabilities of whatever nature pending in the name of the transferor company shall be continued in the name of the transferee company and the transferee company will be responsible for the same. Moreover, in the case of amalgamation or merger, the transferor ceases to exist.
47.3. Therefore, in the case of amalgamation, merger or demerger by an order of the Court or Tribunal, all proceedings in respect of periods prior to the date of amalgamation, merger or demerger will have to be instituted against and in the name of the transferee, that is, the amalgamated, merged or resultant company.
47.4. This has been held by Courts including the Supreme Court in various cases under the provisions Income Tax Act, 1961 and initiation and continuation of assessment proceedings against a non-existent entity has been held to be unsustainable.
47.5. While the GST law does not make any specific provision or prescribe procedures for transfer of proceedings in the case of amalgamation, mergers or demergers, suitable facility will have to be provided for transfer of pending and on-going proceedings as part of Form ITC-02.
GST laws cover all business and all kinds of business transactions. Transfer of business, whether under business transfer agreements or amalgamation, mergers or demergers are the order of the day and will continue to be the preferred mode of reorganising or restructuring businesses, with a view to sustain the competitive edge in these trying times.
Although the GST laws have made some provisions in relation to transfer of business, there are various areas of debates, potential disputes and the resultant litigation. These issues need to be examined and addressed by the GST Council to ensure that such business reorganisation or restructuring continue to enable the businesses to achieve the desired benefits and do not suffer the burden of GST.
ANNEXURE – PRINCIPLES LAID DOWN BY COURTS
(The case laws are for reference only. Their application to transfer of business under the GST regime should be evaluated with the facts of every case)
1. Sri Ram Sahai v. Commissioner of Sales Tax [1963 14 STC 275 All HC]
‘Business’ is not a movable property and therefore is not covered within the meaning of ‘goods’. Sale proceeds from such sale of business is not to be included in turnover and no tax is payable thereon.
2. Monsanto Chemicals of India (P.) Ltd. v. State of Tamil Nadu [1982 51 STC 278 Mad HC]
It was held that, a person may carry on several lines of business and each line of the business would be a unit of business by itself. If there was a sale of that unit of the business as a whole, no tax is payable on such sale proceeds Alternatively, there was no sale in the course of business as closure of a line of business could not be incidental or ancillary to its carrying on of the business.
3. Deputy Commissioner (C.T.), Coimbatore v. Behanan Thomas [1977 39 STC 325 Mad HC]
Sale of an independent unit or branch by itself is also a sale of a business as a going concern. Such sales proceeds cannot be regarded as proceeds received from sale of goods and can neither be said to be transaction in connection with or incidental or ancillary to such trade or commerce, adventure or concern. Accordingly, such sales proceeds are not exigible to tax.
4. The Deputy Commissioner (C.T.), Coimbatore Division, Coimbatore -2 v. Cheran Transport Corporation Limited [1985 59 STC 95 Mad HC]
Sale proceeds received on transfer of workshop unit to another company will not form part of the taxable turnover and the assesee would not be liable to pay tax on the amount representing the value of articles transferred to another company as a result of the closing down of the workshop.
5. The Deputy Commissioner of Sales Tax (Law) v. Dat Pathe [1985 59 STC 374 Ker HC]
It was held that sale of such 3 out of 4 businesses though carried on under a common certificate of registration and sole proprietorship of the assesse amounts to separate businesses. Sale of each of such business is not liable to tax.
6. State of Tamil Nadu v. Jeewanlal (1929) Ltd. [1993 89 STC 515 Mad HC]
Sale of a unit which is a separate and an independent unit and where no part of the business pertaining to such unit is retained or carried on by the assesse shall not be liable to tax.
7. M/s. Paradise Food Court v. state of Telangana [Writ Petition No. 2167 of 2017 on 18-04-2017]
When a business in transferred in entirety as a going concern, with all the rights and liabilities, (i) there is no sale of any taxable goods and (ii) that even if there is a deemed sale of goods, as understood in common parlance, it does not take place in the course of trade or business. No business can be transferred in the course of trade or business, unless a person is in the very business of buying and selling business houses. Therefore, unless a sale takes place in the course of trade or business, it is not covered by the Act.
Further, it was held that to treat the transfer of business as a sale of goods merely on the ground that all the assets of business are individually mentioned in the Schedule together with their value, is completely contrary to the Statutory prescription.
8. Coromandal Fertilisers Limited v. State of A.P. [1999 112 STC 1 AP HC]
Disposal of entire business as a slump sale is not covered in the course of business even if it involves transfer of certain movables hence it is not covered by the definition of “goods”. It further held, that the transfer of property in goods as an integral part of the agreement to sell is not “in the course of business” for the obvious reason that the seller wants to put an end to its entire business. An activity directed towards the end or termination of business is not a transaction “in the course of business”.
9. Zacharia v. State of Kerala [1977 39 STC 221 Ker HC]
Where liabilities are not transferred but agreed to be settled before the sale of business, it does not mean that business is not sold as a whole. So long as there is nothing to suggest any part of assets were retained by the seller, it cannot be suggested that business was not transferred as a whole.
10. CIT v. Artex Manufacturing Co., [227 ITR 260 (SC)]
Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected.
11. Triune Projects Pvt. Ltd v. DCIT [TS-6237-HC-2016(DELHI)]
It was held that, the fact that certain assets of the “undertaking” are left out of the sale transaction because it would cause inconvenience for the purchaser does not mean that the transaction is not a “slump sale”. To expect a purchaser to buy and pay value for defunct or superfluous assets would be against common and commercial sense.
12. Castrol India Ltd. v. State of Tamil Nadu [1999 114 STC 468 Mad HC]
The Court held that, the amalgamation took place from an anterior date and from that date, the transferor company continued only for the benefit of the transferee company. When it had no separate entity (since that anterior date) transfer of goods by the assesse dealer in favour of the transferor company could not be regarded as the sale which could attract Central Sales Tax.
13. Mohan Breweries & Distilleries Limited v. Commercial Tax Officer, Porur Assessment Circle, Madras [1996 103 STC 424 TNTSP]
The Tamil Nadu Taxation Special Tribunal held that, since the order of the Board for Industrial and Financial Reconstruction passed an amalgamation order giving effect from an anterior date, the request of petitioner to adjust the taxes paid by the transferor company on the inter se transactions during the intervening period (i.e. from the appointed date till the date of the order) against the sum payable by the petitioner towards tax and surcharge were in order.
14. Marshall Sons & Co. v. ITO [1997 2 SCC 302]
The Supreme Court held that, in case of an amalgamation from an anterior date, an assessment can be made in the name of the transferee Company taking into account the income of both the transferor and transferee companies.
15. Principal Commissioner of Income Tax v. Maruti Suzuki India Ltd [Order dated 25.07.2019 in Civil Appeal No. 5409 of 2019]
In the present case, despite the fact that the assessing officer was informed of the amalgamating company having ceased to exist as a result of the approved scheme of amalgamation, the jurisdictional notice was issued only in its name. Thus, it was held that, initiating such assessment proceedings in the name of a non-existent company was unsustainable and against the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.
16. C.I.T., New Delhi v. M/s. Spice Enfotainment Ltd. (Order dated 02.11.2017 in Civil Appeal No. 285 of 2014)
The Supreme Court affirmed the decision of the Hon’ble Delhi High Court in Spice Entertainment v. Commissioner of Service Tax [(2012) 280 ELT 43] which held that, the framing of assessment against a non-existing entity/person goes to the root of the matter which is not a procedural irregularity but a jurisdictional defect as there cannot be any assessment against a “dead person”.