The West Bengal Authority for Advance Ruling (WBAAR) has held that transfer of an entire proprietorship business to an LLP, along with its assets, liabilities, employees, rights and business operations, constitutes a supply of services under GST, even where the transfer is made without consideration.
However, the Authority has clarified that the benefit of the Nil-rated exemption for transfer of a going concern under Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) would be available only if the business actually satisfies the requirements of a going concern.
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The applicant operates a registered business engaged in the wholesale and retail trade of gold and diamond ornaments and loose diamonds, including natural and lab-grown diamonds.
The applicant proposed to transfer the entire proprietorship business as a going concern to LLP, in which he is a partner.
The proposed transfer contemplated the transfer of substantially the entire business undertaking, including: Fixed assets; Closing stock; Debtors and receivables; Deposits and cash balances; Capital and unsecured loans; Sundry creditors and current liabilities; Employees; Business rights and claims; Customers and business relationships; ETC.
The proposed arrangement was to be implemented through an internal Memorandum of Understanding (MoU).
Four Questions Placed Before the Authority
The applicant sought a ruling on four principal issues:
- Whether transfer of the business by way of merger of the two registrations/distinct persons constitutes a supply under GST;
- Whether the transaction constitutes a supply of goods or services;
- Whether the transaction is covered by Serial No. 2 of Notification No. 12/2017-Central Tax (Rate); and
- If the exemption is unavailable, whether GST would be payable on the transfer of closing stock, assets and fixed assets.
Applicant’s Argument: Entire Business, Not Individual Assets, Is Being Transferred
The applicant argued that the transaction was not a sale of individual assets or merely a transfer of closing stock.
According to the proposed MoU, the entire business would be transferred as a functional undertaking. The employees would continue with the LLP without interruption, the business would be carried on substantially in the same manner, existing customer relationships would be preserved and the LLP would assume the business liabilities and obligations.
The applicant therefore contended that what was being transferred was the business as a whole, rather than individual goods.
The applicant relied upon various statutory provisions, including Sections 18(3), 22(3) and 85 of the CGST Act and Rule 41 of the CGST Rules, to contend that the GST legislation itself recognises transfer of business as an event having tax consequences.
Particular reliance was also placed on earlier advance rulings including those concerning Jayesh Popat, Airport Authority of India, SCV Sky Vision, Cosmic Ferro Alloys Limited and Rajashri Foods Pvt. Ltd.
Why the Applicant Claimed the Transaction Was a Supply of Services
The applicant submitted that a business as a whole could not be regarded as “goods” merely because individual assets forming part of the business may constitute goods.
Referring to Section 2(52), it was argued that “goods” means movable property, whereas Section 2(102) defines “services” broadly as anything other than goods, money and securities.
Accordingly, the applicant contended that transfer of the business undertaking as a whole should be regarded as a supply of services.
The applicant further relied upon Serial No. 2 of Notification No. 12/2017-Central Tax (Rate), which provides a Nil ratefor:
“Services by way of transfer of a going concern, as a whole or an independent part thereof.”
AAR: Transfer Can Constitute Supply Even Without Consideration
One of the significant aspects of the ruling is the Authority’s treatment of the transaction as a supply despite the absence of consideration.
The Authority examined Section 7 of the CGST Act and observed that the concept of “supply” is inclusive in nature.
The Authority noted that transfer of a business, for practical purposes, may neither be undertaken in the usual course of business nor necessarily for furtherance of business. Nevertheless, the scope of supply under the GST legislation is sufficiently wide to cover such a transaction.
The Authority therefore held that the proposed transfer could constitute a supply even though it was without consideration.
Entire Transfer of Assets and Liabilities Was Material
The Authority placed considerable emphasis on the structure of the proposed transfer.
Under the MoU, all fixed assets, closing stock, debtors, deposits and cash balances were proposed to be transferred along with capital, unsecured loans, creditors and current liabilities.
The employees were also to continue with the LLP without interruption. Further, the transferee was required to continue the business in substantially the same manner and preserve business relationships with customers.
On these facts, the Authority concluded:
the transfer of the business, even without consideration and not in the usual course of business, would be considered a supply under the CGST Act.
Transfer of Business as Going Concern Is Not Supply of Goods
The Authority then examined whether the transaction should be classified as a supply of goods or services.
It referred to Schedule I, under which permanent transfer or disposal of business assets on which ITC has been availed can constitute a supply even without consideration.
However, the Authority specifically considered Entry 4(c) of Schedule II, which deals with goods forming part of business assets when a taxable person ceases to be taxable.
That provision contains an important exception where:
the business is transferred as a going concern to another person.
The Authority reasoned that where a business is transferred as a going concern, the transaction does not amount to a supply of the goods forming part of the business merely because the transferor ceases to be a taxable person.
Consequently, the Authority held that the transfer in the present case constitutes a supply of services.
“Going Concern” Becomes the Decisive Issue
The most important qualification in the ruling concerns the status of the business as a going concern.
The CGST Act does not specifically define the expression “going concern”. The Authority therefore considered the concept in common parlance and from a financial perspective.
According to the Authority, a going concern broadly refers to a business expected to continue its operations rather than being forced into liquidation in the near future.
The Authority identified factors including:
- Financial stability;
- Ability to meet financial obligations;
- Financial health and revenue-generating capacity;
- Absence of an intention or need to liquidate or materially curtail operations;
- Use of assets in the ordinary course rather than immediate liquidation; and
- Operational integrity and viability of the core business.
Crucial Finding: Applicant Had Not Produced Documentary Evidence to Establish Going Concern
Despite accepting that the transaction constituted a supply of services, the Authority stopped short of giving an unconditional finding that the transaction qualified for the exemption.
The Authority specifically noted that the applicant had not furnished documentary evidence sufficient to establish that the business was a going concern.
During the personal hearing, the applicant’s representative stated that the business was running and that GST returns were being filed regularly.
However, according to the Authority, this was not sufficient for it to conclusively determine whether the business satisfied the requirements of a going concern by all applicable standards.
This becomes the key practical takeaway from the ruling.
The Authority stated that if the business qualifies as a going concern by all standards, the transfer would be covered by Serial No. 2 of Notification No. 12/2017-Central Tax (Rate).
GST Exemption Available Only If Going Concern Conditions Are Satisfied
Serial No. 2 of Notification No. 12/2017-Central Tax (Rate) covers:
Services by way of transfer of a going concern, as a whole or an independent part thereof
with a Nil rate.
The Authority reiterated that the exemption is available for both transfer of an entire going concern and transfer of an independent part of a going concern.
Thus, the ruling establishes a two-stage position:
First: Transfer of the entire business can constitute a supply of services.
Second: Such supply can qualify for Nil-rated treatment only where the business satisfies the requirements of a going concern.
What Happens If the Business Is Not a Going Concern?
The Authority also answered the applicant’s fourth question by setting out the consequence where the going-concern test fails.
If the business does not qualify as a going concern, the transfer of stock and other business assets would be treated as a supply of goods under Entry 4(c) of Schedule II.
Such goods would then be taxable at the rate applicable to the respective goods.
This distinction is particularly important in business restructuring transactions involving transfer of inventory and fixed assets.
A transaction cannot automatically receive the going-concern exemption merely because the parties describe the arrangement as a “business transfer” or “merger”.
Final Ruling of the West Bengal AAR
The Authority answered all four questions as follows:
| Question | Ruling |
| Whether transfer of business constitutes supply? | Yes |
| Whether it is supply of goods or services? | Supply of services |
| Whether covered by Serial No. 2 of Notification No. 12/2017-CT (Rate)? | Yes, subject to the business qualifying as a going concern |
| If it fails the going-concern test, treatment of stock/assets? | Supply of goods, taxable at applicable rates |
