Here are some queries on taxation and service tax liabilities, addressed by Ernst & Young. Readers may mail their queries to fesmes@gmail.com
We are a Pune-based service provider. We are planning to sell a business division. Since we are not dealing in sales of goods, we do not have a VAT registration. Please advise whether VAT/ CST is leviable on the sale of business?
VAT is typically levied on the sale of goods, i.e. movable property. Further, such sale must be in the course of business. Sales which are incidental or ancillary to the business are also subject to VAT. However, transfer of business as a going concern, is a distinct species of a sale transaction. There are various judicial decisions wherein it has been held that the sale of a business as a going concern cannot be equated with the sale of ?movable goods?. Therefore, such sale should not attract the VAT. Courts have applied this principle to include a sale of an independent unit of an overall business. Further, the courts have held that such a sale i.e. ?transfer of business as a going concern? is not a sale in the course of business nor is it incidental or ancillary to the business and hence is not liable to VAT. For a transaction to be incidental or ancillary to the running of a business, it must be a transaction of frequent or at least of occasional occurrence, arising out of such business.
Based on an analysis of various judicial decisions, to qualify as transfer of business as ?a going concern?, the sale should be of the entire business as a ?going concern?, i.e all assets, liabilities, rights, stock in trade, goodwill, employees are transferred to the purchaser. Further, the consideration should be a lumpsum amount without stipulating separate prices for individual items.
However, the Maharashtra VAT legislation has a specific provision covering sale of assets. The definition of ?business? under the legislation specifically provides that ?any transaction in connection with the commencement or closure of a business shall be deemed to be a transaction comprised in business?. Based on the above definition, the authorities could contend that the transfer of assets/liabilities qualify as transactions in connection with closure of business.
However, it can be argued that the above provision would only cover sale of trading stock in the course of winding up of the business and should not cover the actual transfer of the entire business itself as a going concern.
Further, it can be contended that a sale of the entire unit should qualify as a transfer of the business unit as a ?going concern? and, so, should not attract VAT even if there is a provision for levy of VAT on commencement or closure of business. However, given the specific language in the Maharashtra VAT legislation, such a view could be litigative.
We provide event management services. We had availed cenvat credit of certain input services. The service tax authorities observed that we were not allowed to avail of this credit and demanded interest from the date of availment of credit. However, we have not utilised such credit against output service tax liability. Please clarify whether we need to pay such interest?
As per the Cenvat Credit Rules, 2004, where a cenvat credit has been wrongly taken or utilised, the credit would need to be reversed and interest paid on the same. Further, the service tax authorities have vide Circular No. 897/17/2009-CX dated 3 Sept 2009 clarified that interest shall be recoverable when credit has been wrongly taken, even if it has not been utilised.
However, it is a well settled principle of law that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. There are various judicial pronouncements which have held that interest is not applicable on credit availed of but not utilised by the assessee. Given the above, a view can be adopted that interest would only be applicable if the Cenvat credit is incorrectly utilised and no interest would be payable where the credit is only availed of but not utilised. However, such a viewpoint can be litigative given the contrary provisions in the legislation.
The replies do not constitute professional advice. Neither E&Y nor FE is liable for any action taken on the basis of these replies