Slump sale between related parties- Taxability and Valuation under GST

[Balasubramanian Natarajan]

Slump sale between related parties- Taxability and  Valuation under GST

The following questions came up for consideration before AAR-Karnataka in the case of M/S RAJASHRI FOODS PVT. LTD-[ 2018 (5) TMI 1651 - AUTHORITY FOR ADVANCE RULING - KARNATAKA ]

Supply of goods and/or services - Intent to sell unit situated at Hiriyur along with all assets and liabilities - Whether the transaction would amount to supply of goods or supply of services or supply of goods & services? - N/N. 12/2017-Central Tax (Rate) dated 28.06.2017 - Whether the transaction would cover under sl.no.2 of the N/N. 12/2017-Central Tax (Rate) dated 28.06.2017?

The AAR ruled as under:

AAR has held that it is a supply of service

Ruling: - The transaction of transfer of business as a whole of one of the units of the Applicant in the nature of a going concern amounts to supply of service - The transaction of transfer of one of the units of the Applicant as a going concern is covered under SI. No. 2 of the N/N. 12/2017-Central Tax (Rate) dated 28.06.2017 subject to the condition that the unit is a going concern.

The Sl NO 2 of the said Exemption Notification is extracted below:

2- Chapter 99- Services by way of transfer of a going concern, as a whole or an independent part thereof. –Rate-Nil – Conditions-Nil. That is any rate in excess of Nil is exempted. That means the transaction is fully exempt.

Accordingly the slump sale will be treated as sale of going concern and thus will fall under entry 2 above and  is fully exempt without any conditions attached to it.

Input Credit:

Now we need to examine whether the transferee is entitled to input credit in case of slump sale

 Section 16(1) of CGST Act,2017 states” 16. (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Invoice by the supplier in case of slump sale:

In this case tax invoice cannot be issued. Instead he has to issue Bill of supply as per Section 31(3)( c ) as given below:

(c) a registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed:

As such the question of ITC on such transaction does not arise.

Input Tax Credit of ITC transferred on slump sale –On transfer of business

The other issue which needs to be examined is the availability if ITC balance transferred as part of slump sale-

CGST Act, 2017-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.

CGST Rules 2017 - 41. Transfer of credit on sale, merger, amalgamation, lease or transfer of a business.-(1) A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

 (2) The transferor 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.

(3) The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC 02 shall be credited to his electronic credit ledger.

 (4) The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account

As such the transferee is entitled to the ITC transferred as part of transfer business as a going concern in the form of slump sale.

Valuation:

CGST Rules 2017 – Rule 28 deals with valuation between related parties-

28. Value of supply of goods or services or both between distinct or related persons, other than through an agent.-The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

 (a) be the open market value of such supply;

 (b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person:

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services

30. Value of supply of goods or services or both based on cost.-Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

In this case the following are to be noted

• Open market value – Slump sale is not an open market sale , since it is not normally made available In the market
• Each slump sale is unique and there cannot be any services of a like kind and quality
• The proviso is not applicable as it is not intended for further supply as such
• Cost of production or manufacture is not applicable
• Cost of acquisition is not applicable as the supply is one of service of business as going concern

In view of the above analysis we may conclude Rule 28 is not applicable .

However rule 30 talks about cost of provision of service. In this case the consideration payable may be treated as cost of provision of service.

If it cannot be treated as cost of provision of service, then the rule 30 is also not applicable.

In that case the residuary rule 31 will come in to play:

31. Residual method for determination of value of supply of goods or services or both.- Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter: Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.

This rule states that this rule can be adopted in case of services ignoring rule 30.

In fine, we may say that the transaction value will be the net consideration agreed between the parties.

To summarise:

1. The transaction of slump sale will be treated as Supply of service-Transfer of business as whole as going concern

2. The transaction is fully exempt under GST

3. The Supplier has to issue a Bill of Supply

4. The net consideration payable as agreed between the parties will be the transaction value of supply of service

5. The transferee is entitled for the ITC transferred as part of slump sale

 

Balasubramanian n

14^th June 2018