The Authority for Advance Ruling in Karnataka, in the case of M/S Capfront Technologies Private Limited Advance Ruling number KAR ADRG 47/2022 dated 12.12.2022, held that the transfer of an independent segment of a business i.e., mobile software would fall within the criteria of transfer of a going concern and therefore such activity would constitute as “service by way of transfer of going concern as an Independent part” and is exempted from Goods and Services Tax (hereinafter referred to as “GST”) in lieu of Sr. No. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
M/S Capfront Technologies Private Limited (hereinafter referred to as “Applicant”) a startup providing data analytics, digital marketing services and product development. The Applicant has filed an application for Advance Ruling under section 96 of Central Goods and Service Tax Act, 2017 (hereinafter referred to as “CGST Act”) read with Rule 104 of Kerala Goods and Service Tax Rules, 2017 (hereinafter referred to as “KGST Rules”). The Applicant developed a mobile application known as “LoanFront” which is a personal finance Fintech application developed by them. The mobile application serves as a digital platform designed to facilitate the provision of short-term loans.
The Applicant wanted to transfer the said mobile application to its wholly-owned subsidiary M/s Vaibhav Vyapaar Private Limited (hereinafter referred to as “VVPL”) and in order to determine whether the Applicant would be liable to pay tax on the transfer of a part of its business i.e., “LoanFront” has filed the present Application.
ISSUES BEFORE THE AUTHORITY
Whether GST would be applicable on the transfer of mobile application software?
CONTENTIONS BY APPLICANTS
The Applicant asserted that, in accordance with accounting standards, the term “going concern” refers to the state of continuing operations in the foreseeable future. This implies that the enterprise has no intention or need to liquidate or significantly reduce its scale of operation.
The Applicant further argued that the transfer they made of the mobile application by then to VVPL falls within the scope of the mentioned transfer at Sr. No. 2 in Notification 12/2017 GST (Rate) dated 28.06.2017 and therefore qualifies for an exemption from “services by way of transfer as a going concern, as a whole or an independent part thereof”.
DECISION & FINDINGS
The Applicant suggests that the provisions of CGST and Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as “KGST”) are pari materia and have similar provisions in most matters excepting only a few specific differences. Consequently, unless there is explicit mention of such distinct provisions, referring to the CGST Act would also encompass the corresponding similar provision in KGST. The term “going concern” is not explicitly defined in the CGST / KGST Act. However, in accounting, it refers to a business entity that is expected to continue its operations in the foreseeable future without being liquidated or compelled to cease its activities for any reason.
The main issue to be decided whether the transfer of the LoanFront app can be classified as a service by way of transfer of a going concern, thereby qualifying the exemption under Notification 12/2017. Hence, “going concern” refers to a business entity that will continue operating in the foreseeable future without liquidation or discontinuation.
The aforementioned statement of facts indicates that the transfer of the business, specifically the “LoanFront” app, involves the complete operational component being sold to a new entity i.e., VVPL. This transfer encompasses both the rights over assets and the assumption of liabilities.
It establishes the notion of business continuity, as the functional part of the business is being transferred in its entirety to a new owner, thereby constituting the transfer of a going concern for that independent segment of the business and thus it will be exempted from being taxed under GST.
The relevant agreement between VVPL and the Applicant confirms the transfer of the business on a slump sale basis. It defines the assets to be transferred, including the LoanFront App and related software, and specifies the liabilities, such as employee gratuity. The Agreement indicates that the entire functional part of the business will be transferred to VVPL, ensuring continuity of operations and qualifying as the transfer of a going concern.
In the present case the transfer of the mobile application, LoanFront, from M/S Capfront Technologies Private Limited to its subsidiary, M/S Vaibhav Vyapaar Private Limited, includes the complete operational component and liabilities. This is essential for ensuring business continuity and fulfills the conditions for a going concern transfer, warranting the GST exemption.
Through this decision it was confirmed that such a transfer even for the digital asset properties would still fall under the category of “services by way of transfer as a going concern,” whether it involves the entire business or just a part of it. Consequently, it will be exempted from GST.
– Team AMLEGALS
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