INTRODUCTION
In changing
business dynamics, business restructuring has become a norm whereby businesses
undertake activities of merger – wherein two or more entities come together to
form a new entity, resulting in the old entities ceasing to exist; or
amalgamation – wherein one or more entities are subsumed into an existing
entity such that the subsumed entities cease to exist. The next mode of
business restructuring is de-merger, where only specific business divisions are
transferred to a new entity, or are sold to an existing entity. When the above
activities are undertaken as a corporate, the same are governed by the
provisions under the Companies Act, 1956 (now 2013). In the non-corporate
sector, the restructuring transactions are generally undertaken by way of business
transfer arrangements, lease, leave and license and so on, which may not be
governed under any other statute.
Generally, a
business transaction is structured in such a manner that there is transfer of
assets and liabilities as per the terms of the transfer of the business or part
thereof which is being transferred to the transferee. However, this transaction
has its own set of challenges under GST, ranging from whether the transaction
would be liable to GST u/s 9, liability of transferor and transferee in case of
such transfers, input tax credit implications, registration implications, etc.
In this article, we
will try to decode the above aspects and the issues which revolve around
business restructuring.
TAXABILITY
OF CONSIDERATION RECEIVED FOR BUSINESS RESTRUCTURING TRANSACTIONS
An important aspect
which needs to be looked into while dealing with business restructuring
transactions under GST is whether or not the consideration received for the
said transaction attracts levy of GST u/s 9. This is very important since the
consideration involved is substantial and the applicability of GST on such
transactions may be a game-breaker. To analyse the same, one needs to analyse
from two different perspectives, one being whether transfer of business can be treated
as supply of goods, or supply of services or not, and the second being whether
or not the same can be treated as being in the course or furtherance of
business?
Let us first
discuss whether the activity of sale of business, as part of business restructuring,
can be treated as sale of goods, or sale of services, or none of the two. For
this let us refer to the definition of goods as defined u/s 2(52) of the CGST
Act which is reproduced below for ready reference:
‘goods’ means
every kind of movable property other than money and securities but includes
actionable claim, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before supply or under a contract of
supply;
On going through
the above definition of goods, it is evident that for any item to be classified
as goods it has to be movable property. Therefore, the question that needs to
be analysed is whether or not a business unit is a movable property. While the
term ‘movable property’ has not been defined under the GST law, one can refer
to the decisions under the pre-GST regime which specifically dealt with this
issue. In this context, reference may be made to the decision in the case of Shri
Ram Sahai vs. CST [1963 (14) STC 275 (Allahabad HC)] wherein the
Hon’ble High Court held that ‘business’ is not a movable property and therefore
it is not covered within the meaning of ‘goods’.
Similarly, in a
recent decision the Hon’ble Andhra High Court in the case of Paradise
Food Court vs. State of Telangana [Writ Petition No. 2167 of 2017] had
held as under:
‘16. Two
important things are to be noted from the definition part of the Statute. (i)
The first is that the sale of a business as such is not covered either by the
charging Section, viz., Section 4(1) or by the definition of the expression
goods. While the sale of a business may
necessarily include a sale of the assets (as well as liabilities) of the
business, the expression business is not included in the definition of the
expression goods under Section 2(16).’
While the above
decisions were in the context of the sales tax / VAT regime, it is important to
note that the definition of goods was similarly worded and, therefore, the
principles laid down by the above judgments should continue to apply even under
GST. For these reasons, it can be concluded that the activity of business
restructuring, by way of amalgamation, merger, de-merger or transfer of
business unit, cannot be treated as supply of goods for the purpose of GST.
We shall now
proceed to analyse whether sale of business, as a part of business
restructuring, can be treated as supply of services. For this, let us refer to
the definition of service as provided u/s 2(102) of the CGST Act, 2017 which is
reproduced below for ready reference:
‘services’ means
anything other than goods, money and
securities but includes activities relating to the use of money or its
conversion by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination for which a separate
consideration is charged;
On going through the above, it is evident that service has been very
loosely defined under GST. A literal reading of the definition indicates that
anything which is not classifiable as goods would be service. However, the
question that needs to be analysed is whether such literal interpretation of
the definition of supply can be done or not, or whether one needs to refer to
purposive interpretation. It would be relevant to refer to two decisions of the
Supreme Court to understand when purposive interpretation can be resorted to:
(i) Periyar & Pareekanni Rubbers
Limited vs. State of Kerala [2008 (13) VST 538 (SC)]
28. Tax
liability of the business concern is not in dispute. Correctness of the orders
of assessment is also not under challenge. The Tribunal or for that matter the
High Court were, therefore, not concerned with the liability fastened upon the
dealer. The only question was as to what extent the appellant was liable
therefor. It is impossible for the legislature to envisage all situations. Recourse to statutory interpretations therefore
should be done in such a manner so as to give effect to the object and purport
thereof. The doctrine of purposive construction should, for the said purpose,
be taken recourse to.
(ii) Tata Consultancy Services Limited vs.
State of Andhra Pradesh [2004 (178) ELT (022) SC]
68. It is now
well settled that when an expression is capable of more than one meaning, the
Court would attempt to resolve that ambiguity in a manner consistent with the
purpose of the provisions and with regard to consequences of the alternative
constructions.
See Clark
&Tokeley Ltd. (t/a Spellbrook) vs. Oakes [1998 (4) All ER 353].
69. In Inland
Revenue Commissioners vs. Trustees of Sir John Aird’s Settlement [1984] Ch. 382,
it is stated:
Two methods of
statutory interpretation have at times been adopted by the court. One,
sometimes called literalist, is to make a meticulous examination of the precise
words used. The other, sometimes called purposive, is to consider the object of
the relevant provision in the light of the other provisions of the Act – the
general intendment of the provisions. They are not mutually exclusive and both
have their part to play even in the interpretation of a taxing statute.
70. Although
normally a taxing statute is to be strictly construed, but when the statutory
provision is reasonable akin to only one meaning, the principles of strict
construction may not be adhered to.
[See Commnr.
of Central Excise, Pondicherry vs. M/s Acer India Ltd., 2004 (8) SCALE 169].
As can be seen from
the above, the need to resort to purposive interpretation arises only when the
literal interpretation results in ambiguity. It would therefore need to be
analysed as to whether according a transaction of business restructuring by way
of amalgamation, merger, de-merger or transfer of business assets as supply of
service would lead to absurdity? In general, depending on the terms of each
agreement, a transaction for business restructuring by any of the means referred
above would generally include transfer of assets, liabilities, employees, etc.
It would be difficult to perceive as to how a transaction, which involves
transfer of assets, liabilities, human resources, etc., would constitute
service, especially when there are identified elements of goods, transactions
in money, etc., involved. In other words, merely because all the above items
are sold as a bundle making the transaction take the character of a business
unit and going by the literal interpretation, since the transfer of business
unit is not classifiable as goods, it should be classified as service. This is
where the ambiguity / absurdity comes into the picture. Schedule II only deems
transactions of temporary transfer of right to use goods as service. This is
because in case of temporary transfer, the goods revert back to the owners. But
it is not the case here as the items being transferred would not revert back to
the owners. It is for this reason that such business restructuring activity
cannot be classified as service as well.
It may also be
relevant to note that notification 12/2017 – CT (Rate) exempts services by way
of transfer of a going concern, as a whole or an independent part thereof, from
levy of GST. However, merely because there is an entry in exemption
notification would not mean that the transaction was upfront liable to levy of
tax. However, if the entry is treated as valid, it would mean that the
transferor has made an exempt supply and, therefore, trigger the applicability
of the provisions of section 17(2) r/w/rule 42 / 43 of the CGST Rules.
Liability of
transferor vis-à-vis transferee – in case of
transfer of business by sale, gift, lease, leave and license, hire or in any
other manner whatsoever
In case of business
restructuring transactions, there is also a change of ownership. Section 85(1)
deals with liability to pay tax in such cases where the business restructuring
results in transfer of business by sale, gift, lease, leave and license, hire
or in any other manner whatsoever. The section provides that in case of
transfer of business, there shall be joint and several liability of the
transferor as well as the transferee to pay tax up to the time of such
transfer, whether determined prior to or subsequent to the said transfer.
Therefore, what needs to be analysed first is what is meant by the term
‘transfer of business’. This has been analysed by the Supreme Court in the case
of State of Karnataka vs. Shreyas Papers Private Limited [Civil Appeal
3170-3173 of 2000] while dealing with the scope of section 15(1) of the
Karnataka Sales Tax Act, 1957. In this case, the Court held that business is an
activity directed with a certain purpose, more often towards promoting income
or profit. Mere transfer of one or more species of assets does not bring about
the transfer of ownership of the business, which requires that the business be
sold as a going concern. The above view has been followed in multiple instances
wherein the Court has held that transfer of specific business assets cannot be
treated as transfer of business in itself. One may refer to the decisions in
the cases of Rana Girders Limited vs. UOI [2013 (295) ELT 12 (SC)],
Lamifab Industries vs. UOI [2015 (326) ELT 674 (Guj.)], Chandra Dyeing &
Printing Mills Private Limited vs. UOI [2018 (361) ELT 254 (Guj.)], Krishna
Lifestyle Technologies Limited vs. Union of India [2009 (16) STR 669 (Bom.)].
When comparing with
the provision under the Central Excise Act, 1944 (section 11), one important
distinction which comes to mind is that the proviso of section 11
required that the transferee should have succeeded in the business of the
transferor. This aspect was dealt with by the High Court in the case of Krishna
Lifestyle Technologies (Supra) where the Court held as follows:
‘16. Succession
therefore has a recognised connotation. The tests of change of ownership,
integrity, identity and continuity of a business have to be satisfied before it
can be said that a person succeeded to the business. The business carried on by
the transferee must be the same business and further it must be continuation of
the original business either wholly or in part. It would thus be clear from the
above that these tests will have to be met before it can be said that a person
has succeeded to a business. This would require the facts to be investigated as
to whether there has been transfer of the whole of the business or part of the
business and succession to the original business by the transferee.’
While the
provisions under GST do not require succession in interest by the transferee,
it remains to be seen whether the condition shall still be continued to be
applicable under GST, considering the decision in the case of Shreyas
Papers (Supra) wherein the Supreme Court has brought in the concept of
transfer of business as a going concern though no specific provisions were
contained in the Karnataka Sales Tax Act.
It would also be
relevant to note that there are instances where the business is transferred by
State Financial Corporations after taking over control of defaulting borrowers.
The statute under which the State Financial Corporations were incorporated
provided that in case of sale of such assets, though the sale would have been
executed by the State Financial Corporation, it would have been deemed that the
sale was being done by the defaulting borrowers and, therefore, the liability
to pay tax up to the date of transfer shall be on the transferee (refer Macson
Marbles Private Limited vs. UOI [2003 (158) ELT 424 (SC)].
Treatment of
Input Tax Credit in case of transfer of business, amalgamation, merger,
de-merger, etc.
Another GST aspect which revolves around the above set of transactions,
apart from the attached transfer of liability to the transferee, is the
permission to transfer the balance lying in the electronic credit ledger of the
transferor. Section 18(3) provides that in case of change in constitution of a
registered person on account of sale, merger, de-merger, amalgamation, lease or
transfer of business with specific provision for transfer of liabilities, the
taxable person shall be allowed to transfer the input tax credit which remains
unutilised in his credit ledger in such manner as may be prescribed. The manner
has been prescribed u/r 41 of the CGST Rules. While the provisions are silent
w.r.t. the manner of determining the credit appropriable to the transferee, it
provides that in the case of de-merger the input tax credit shall be
appropriated in the ratio of value of assets of new units as specified in the
de-merger scheme. However, in all other cases there is no method prescribed for
appropriating input tax credit. The only requirements prescribed for the
transfer of balance lying in electronic credit ledger are:
(1) A copy of the chartered accountant’s
certificate certifying that the sale, merger, de-merger, amalgamation, lease or
transfer of business has been done with a specific provision for transfer of
liabilities;
(2) Furnishing of Form GST ITC-02 by the
transferor which shall be accepted by the transferee on the common portal; and
(3) Accounting for the inputs and capital goods so
transferred by the transferee in his books of accounts.
REGISTRATION
IMPLICATIONS IN CASE OF BUSINESS RESTRUCTURING
In case of
transactions of amalgamation or merger, one needs to take note of the fact that
there are two different dates, namely, the effective date from which the scheme
would be given effect (which has to be indicated while filing the application
for the amalgamation or merger) and, second, the date of order, when the scheme
is approved by the Court or Tribunal. Generally, the effective date precedes
the order date and under the Income-tax Act, while till the time the order is
received both companies continue to have separate existence, the receipt of the
order requires them to re-file their tax returns as the company which has
merged or amalgamated into the other company has ceased to exist.
However, it is not
so under the GST regime. Section 87(2) specifically provides that the companies
party to a scheme shall continue to be treated as distinct companies till the
date of receipt of the order, and the registration certificate of the
amalgamated or merged company shall be cancelled only with effect from the date
of the order approving the scheme. This specific provision will help in dealing
with the following situations:
(A) Supply of goods or services, or both, between
the companies which are part of the scheme, and
(B) Supply of goods or services, or both, by the
said companies to other persons who are not part of the scheme.
This would imply
that till the date of the order approving the scheme is received, each of the
companies party to the scheme shall continue to comply with the various
provisions of the law, including filing of periodic tax returns, annual returns
and reconciliation statements prescribed u/s 35.
Similarly, section
22(4) provides that any new company which comes into existence in pursuance of
an order of a Court or Tribunal, as the case may be, shall be liable to get
registered with effect from the date on which the Registrar of Companies issues
a certificate of incorporation giving effect to such order.
Therefore, in case of amalgamation /
merger, one needs to take the registration aspect very seriously, to the extent
that upon receipt of approval of the scheme, the application for cancellation
of certificate of registration of the company which ceases to exist in view of
the order, and the application for fresh registration of the company which
comes into existence, is done within the prescribed time limits, and all future
supplies are made / received under the registration certificate of the
continuing company / new company and the use of the GSTIN of the company which
ceases to exist is discontinued with immediate effect.
