TRANSFER OF ASSETS – A SUPPLY?

[Mr. M. GOVINDARAJAN]

In re ‘Aquarelle India Private Limited’ – 2019 (10) TMI 753 - AUTHORITY FOR ADVANCE RULING, KARNATAKA the applicant is having his corporate office at 22, 32^nd D. Cross, 11^th Main, Jayanagar 4^th block, Bengaluru.  The applicant had taken the said premises on lease from 01.07.2011 to 30.06.2022 with a lock in period of first 3 years.  The applicant wishes to vacate the said premises in the near future and intend to hand over the possession of the premises to the owner along with the fixtures to the building in ‘as is where is’ without any consideration.  The applicant capitalized the said assets in his books of account before introduction of the GST law and no credit has been availed on the said assets in the pre GST period.

The applicant filed the present application before the Authority for Advance Ruling seeking advance ruling in respect of the following questions-

1. Whether disposing of assets (no CENVAT/VAT credit was taken) fastened to the building on delivering possession to the lesser, on which consideration will be received, shall fall within  the ambit of ‘supply’ as per section 7 of the CGST Act, 2017 and shall be chargeable with GST and rules contained therein?
2. If the answer to the above question is in affirmative, should the value appearing in the books as on the date of disposal may be construed as the ‘open market value’ on which GST is to be discharged as per Rule 27 of CGST Rules, 2017?

In regard to the first question the applicant submitted the following before the Authority for Advance Ruling-

• To bring the said transaction within the ambit of ‘supply’ as per para 4(a) of Schedule II of the Act, it is necessary to satisfy the following conditions-

• any of the goods forming part of the business assets;
• are transferred or disposed of so no longer to form part of business assets;
• whether or not for a consideration;
• by or under the directions of the person carrying on the business.

• The disposal of such assets in GST regime should not amount to supply and hence not liable to GST.
• If the said transaction is considered as ‘supply’ considering the essence of the provisions stated in Schedule II of the Act might lead to double taxation which is against the very spirit of GST law.

In regard to the second question the applicant submitted the following before the Authority for Advance Ruling-

• If the said transaction is treated as supply, it is important to ascertain the value on which GST is to be discharged.
• According to Rule 27, the value of such capital goods shall be  the open market value.

Rule 27 provides that where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,-

1.  be the open market value of such supply;
2.  if the open market value is not available under clause (a), be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply;
3.  if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
4.  if the value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by the application of rule 30 or rule 31 in that order.

The Authority for Advance Ruling considered the submissions put forth by the applicant.  The Authority for Advance Ruling also analyzed the relevant provisions of the Act and the rules.  Section 7(1) of the Act provides that for the purposes of this Act, the expression “supply” includes––

1. 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;
2.  import of services for a consideration whether or not in the course or furtherance of business and;
3.  the activities specified in Schedule I, made or agreed to be made without a consideration.

Section 7(1) clearly states that the activities specified in Schedule I agreed to be made without a consideration are also covered under the term ‘supply’.  Entry 1 of Schedule I to the Act provides that the permanent transfer or disposal of business assets where input tax credit has been availed on such assets will be treated as supply even if made without consideration.  The Authority for Advance Ruling observed that there is a permanent transfer of business assets and they are capitalized in the pre GST period and no input tax credit is claimed under that period and also in the GST era.  Therefore the said transaction is not covered under Entry 1 of Schedule I and hence not covered under section 7(1) (c) of the Act.

The Authority for Advance Ruling then analyzed the Entry 4(a) of Schedule II to the Act which provides that where goods forming part of the assets of a business are transferred or disposed or 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. 

The assets to be transferred are capitalized under the head ‘Office equipment, furniture and fittings’ and form part of the assets of the business of the applicant.  These assets are sought to be transferred or disposed of by the applicant and they undoubtedly no longer form part of those assets, then such transfer or disposal would be a supply of goods by the applicant.   It is immaterial whether the said transfer/disposal is for a consideration or not.   They would be treated as supply of goods under Entry 4(a) of Schedule II. 

The Authority for Advance Ruling then analyzed the provisions of section 7(1A) which came into effect from 01.02.2019.  Section 7(1A) provides that where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

The Authority for Advance Ruling observed that section 7(1A) can be invoked only if the transactions have happened after the insertion of section 7(1A).  Since the transactions of the applicant concluded before the effective date of amendment it would constitute a supply under the Act and hence is liable to tax at the appropriate rates applicable to the goods in question.

The Authority for Advance Ruling then analyzed the provisions of section 2(31) which defines the term ‘consideration’.  Section 2(31) defines the term ‘consideration’ in relation to the supply of goods or services or both as including–

1. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
2.  the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

If Section 2(31)(b) is considered it would include the monetary value of any act or forbearance by the applicant in response to supply or services.  The Authority for Advance Ruling observed that evidently, the writing off the value of assets in the balance sheet by the applicant is an act related to the transfer of property in assets and this monetary value of that act would form the consideration in relation to supply.

The Authority for Advance Ruling, in regard to question No. 1, held that the transfer of assets to the building on delivery possession to the lessor free shall amount to supply within the meaning of ‘supply’ under section 7 of the Act and is charge to tax under the Act.

Regarding to the question No.1, the Authority for Advance Ruling analyzed the provisions of Section 15.  Since the applicant does not pay any price to the said transaction, the Authority for Advance Ruling observed that section 15(4) would apply which provides that where the value of supply of goods or services or both cannot be determined under sub section (1), the same shall be determined in such manner as may be prescribed.

For this purpose the Authority for Advance Ruling analyzed the following Rules-

• Rule 27 – Value of supply of goods or services where the consideration is not wholly in money;
• Rule 30 – Value of supply of goods or services or both based on cost.
• Rule 31 – Residual method for determination of value of supply of goods or services or both.

The Authority for Advance Ruling, in regard to question No. 2 held as that the value of such supply of goods would be-

• Open market value of such supply;
• Value of supply of goods of like kind and quality;
• 110% of the book value of such goods in the books of account

and if none of the above is possible, it needs to be determined as per Rule 31.