The West Bengal Authority for Advance Ruling (AAR) has held that the transfer of an entire proprietorship business to a limited liability partnership without consideration constitutes a supply under GST. However, exemption for the transaction depends on whether the business qualifies as a “going concern”, with the authority declining to conclusively determine that status in the absence of supporting documentary evidence.

The bench of Yogesh Sugdeo Chitte and Jaydip Kumar Chakrabarti classified the proposed business transfer as a supply of services and held that the going-concern exemption would apply subject to fulfilment of the relevant requirements. 

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The applicant operates a wholesale and retail business dealing in gold and diamond ornaments and loose diamonds, including natural and lab-grown diamonds. He proposed to transfer the entire proprietorship business, in which he and Rashmi Hetamsaria are partners with equal profit-sharing ratios.

The proposed arrangement involved transferring all assets and liabilities without consideration. The assets included fixed assets, closing stock, debtors, deposits and cash balances, while the liabilities included capital, unsecured loans, sundry creditors and current liabilities.

Under the proposed memorandum of understanding, employees would continue working for the LLP without interruption or a break in service. Existing customer relationships, business rights and obligations would also pass to the transferee so that the business could continue substantially in the same manner.

After completing the transfer and the necessary statutory compliances, the proprietorship concern would cease to exist and seek cancellation of its GST registration.

The applicant sought an advance ruling on whether the proposed transfer constituted a supply under GST, whether it should be classified as goods or services, and whether it qualified for exemption under Entry No. 2 of Notification No. 12/2017–Central Tax (Rate), dated June 28, 2017.

He also asked whether GST would become payable on the transfer of closing stock, fixed assets and other assets if the exemption did not apply.

The applicant argued that the transaction involved the transfer of a complete operating business rather than the disposal of individual assets. Since the LLP would take over the assets, liabilities, employees and business operations and continue the same activity, he submitted that the transaction qualified as a transfer of a going concern.

The Revenue raised no objection to admission of the application and did not offer a substantive view on the questions placed before the authority.

Examining Section 7 of the CGST Act, the authority noted that the scope of supply is inclusive and encompasses specified activities undertaken without consideration.

It also referred to Entry No. 1 of Schedule I, which treats the permanent transfer or disposal of business assets as a supply without consideration where input tax credit has been availed on those assets.

Considering the proposed comprehensive transfer of assets, liabilities, employees and business rights, the authority concluded that the transaction would constitute a supply even though it involved no consideration and was outside the usual course of the applicant’s business.

Accordingly, it answered the applicant’s first question in the affirmative.

On classification, the authority examined Entry 4(c) of Schedule II to the CGST Act. This provision addresses goods forming part of business assets when a person ceases to be a taxable person and contains an exception where the business is transferred as a going concern to another person.

The AAR reasoned that a transfer of business as a going concern does not amount to a supply of goods. Referring to Section 2(102), which defines services as anything other than goods, money and securities, it held that the proposed transaction would amount to a supply of services.

The ruling therefore distinguished the transfer of an operating business as a whole from the transfer of its stock or assets individually.

The key qualification concerned the applicant’s entitlement to exemption.

Entry No. 2 of Notification No. 12/2017–Central Tax (Rate) exempts services involving the transfer of a going concern, either as a whole or as an independent part.

The authority observed that “going concern” is not defined in the CGST Act and examined the expression through common usage and financial principles. Its discussion covered the ability to meet financial obligations, financial health, continuity of operations, the absence of an intention or need to liquidate or materially curtail operations, and the viability of the business.

However, the applicant had not furnished documentary evidence establishing that the business qualified as a going concern. In response to a specific query during the personal hearing, his representative stated that the applicant operated a running business and regularly filed GST returns.

The authority nevertheless said it was not in a position to determine whether the business qualified as a going concern on the material furnished. It consequently made the exemption conditional on the business meeting the applicable going-concern standards.

The AAR further ruled that, if the business failed to qualify as a going concern, the transfer of stock, closing stock of assets and other relevant assets would be treated as a supply of goods under Entry 4(c) of Schedule II.

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