In re Merck Life Science Private Limited (GST AAR Maharashtra)
Question 1:- Whether applicant’s direction to the seller (directed in agreement dated 21 June 2018) for direct transfer of BP business to MSPL and PM business to MPMPL, respectively would qualify as a ‘supply between the applicant’ and ‘MSPL/MPMPL’?
Answer : Answered in the affirmative as per details discussed above.
Question 2 : If the answer to the above question is ‘affirmative’ then as the parties are related, even in absence of the actual consideration does the applicant have to attribute a notional consideration and charge GST in line with schedule 1 of GST Act to be compliant?
Answer : The value is to be determined as per Rule 28 of the CGST Rules, 2017
Question 3 : If the answer to both the questions are ‘affirmative’ then as the recipients (MSPL/MPMPL) are eligible to avail full input tax credit then the notional consideration (percentage of the business transfer value) would be only academic and will the invoice value be considered as open market value?
Answer: Not answered in view of answer in respect of Question No 2 above.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING MAHARASHTRA
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Merck Life Science Private Limited, the applicant, seeking an advance ruling in respect of the following questions.
i. Whether applicant’s direction to the seller (directed in agreement dated 21 June 2018) for direct transfer of BP business to MSPL and PM business to MPMPL, respectively would qualify as a ‘supply between the applicant’ and ‘MSPL/MPMPL’ ?
ii. If the answer to the above question is ‘affirmative’ then as the parties are related, even in absence of the actual consideration does the applicant have to attribute a notional consideration and charge GST in line with schedule 1 of GST Act to be compliant?
iii. If the answer to both the questions are ‘affirmative’ then as the recipients (MSPL/MPMPL) are eligible to avail full input tax credit then the notional consideration (percentage of the business transfer value) would be only academic and will the invoice value be considered as open market value?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the “GST Act”.
02 FACTS AND CONTENTION – AS PER THE APPLICANT
The submissions, as reproduced verbatim, could be seen thus-
A. STATEMENT OF FACTS HAVING A BEARING ON THE QUESTIONS RAISED
1. The Merck Life Science Private Limited (hereinafter referred to as ‘the Applicant’) has entered into business transfer agreement dated 21 June 2018 with Merck Limited (seller) wherein the seller has agreed to sell, transfer, convey, assign and deliver to the applicant or to any affiliates as directed by applicant for the BPL business which would be transferred as a slump sale on going concern basis. BPL business means BP business, LS Business and PM business as going concern as outlined in ‘Definitions and Interpretations’. Refer Exhibit 1 for details of agreements. Pursuant to the above, another agreement executed between the seller and Merck Specialties Private Limited (hereinafter referred to as the MSPL’)/Merck Performance Materials Private Limited (hereinafter referred to as “the MPMPL’) for direct transfer of the BP and PM Businesses where in the applicant has only directed to seller for transfer. The applicant vide above agreements has directed the seller to transfer the BP business to MSPL and PM business to MPMPL as going concern on a slump sale basis. Accordingly, only LS Business will be sold to applicant. Refer Exhibit 2 for details of agreement.
In terms of above agreement, the Seller would be receiving lump sum consideration for each slump sale of BP business, PM Business and LS business independently from the MSPL, MPMPL and the applicant respectively which is exempt from GST vide serial no 2 of Notification No.12/2017 – central tax dated 28th June 2018 as amended from time to time. Necessary intimation regarding slump sale as going concerns were filed before the regulatory authority such as National Stock Exchange of India Limited vide letter dated 21 June 2018. Refer copy of the said intimation in Exhb 3.
2. At the outset, we would like to make it clear that the provisions of both CGST Act and MGST Act are same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purpose of this advance ruling application, a reference to such a similar provision under the CGST Act/MGST Act would mentioned as being under the ‘Goods and Service Act (GST Act).
C. APPLICANT’S INTERPRETATION OF LAW OR FACTS. AS THE CASE MAY BE
Applicants direction to the seller basis which the seller would make an independent third party sale does not qualify as an activity nor as a ‘supply of service’ between the applicant and the third party (MSPL/MPMPL):
In the present case, the applicant and the seller entered business transfer agreement for transfer of BPL business as going concern on slump sale basis wherein the applicant has only directed to transfer BPL business or part thereof to its affiliates.
In this regard, it is relevant to refer extract of business transfer agreement between the applicant and seller which is reproduced (refer page 4) below for ease of reference:
“….Subject to the terms and conditions set forth herein, the Seller hereby agrees to sell, transfer, convey, assign and deliver (as the case may be) to the purchaser (or to an affiliate of the purchasers, as directed by the purchaser) hereby agrees to purchase, take assignment and deliver of all of the sellers right, obligations, title and interest, liabilities, claims and demands whatsoever at law and in equity, in and to the BPL business on the closing date on a slump sale basis as going concern “
On perusal of above, it is evident that the purchaser (i.e. in the present case applicant) can direct to the seller for transfer of BPL business (i.e. BP business, PM business and LS business) as going concern on slump sale basis to its affiliates. As per Schedule 12- Definition and Interpretation of business transfer agreement, the term ‘Affiliates means in relation to any party, any subsidiary or any parent company of that party and any subsidiary of any such parent companies, in each case from time to time.
MSPL and MPMPL are fellow subsidiary (affiliates) of MLSPL, all three entities are subsidiaries of the Company’s ultimate holding company, Merck KGaA, Darmstadt, Germany. Hence, in the present case, the applicant, MSPL and MPMPL qualifies as affiliates.
Further, the applicant vide agreement for transfer of BP and PM businesses has directed the seller to transfer, convey, assign, and deliver (as the case may be) BP business to MSPL and PM business to MPMPL as going concern on a slump sale basis. However, it is pertinent to note that the direction is given by the applicant to the seller and there is no activity between the applicant and its affiliates i.e. MSPL and MPMPL. In this regard, it is relevant to refer definition of ‘supply’ as per section 7 of GST Act which is reproduced below for reference:
“….7. (1) For the purposes of this Act, the expression “supply” includes-
(a) 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;
(b) Import of services for a consideration whether or not in the course or furtherance of business,
(c) The activities specified in Schedule I, made or agreed to be made without a consideration; and….”
As per section 7(1)(b) of GST Act, the term ‘supply’ includes supply of goods or services or transfer etc. made or agreed to be made for a consideration by a person in the course or furtherance of business. However, in the present case, as discussed supra, there is no activity which constitute goods or service to qualify as ‘supply between the applicant and MSPL/MPMPL.
In the present case, the board of directors of MSPL/MPMPL have independently evaluated the opportunity and valued the businesses. Basis their independent evaluations the acceptance has been given to the seller. The direction provided by the applicant has not resulted in any economic benefits or reduction in the consideration for the related parties (MSPL/MPMPL). This further strengthen the above stand.
7. In absence of the element of ‘supply’ between the applicant’ and ‘MSPL/MPMPL’, the evaluation of applicability of schedule 1 does not arise.
Further, as per above agreements there is no consideration paid by MSPL/MPMPL to the applicant for transfer of business as going concerns. Hence, in the instant case, it is relevant to analyses provision of schedule 1 of GST Act.
In terms of section 7(1 )(c) of the GST Act, activities specified in Schedule I to be treated as supply which are made or agreed to be made without a consideration as extracted below for reference:
“…SCHEDULE I
[See section 7] ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business….”
In the instant scenario, the applicant and MSPL/MPMPL are related parties in terms of explanation to section 15 of GST Act. Hence, any supply of goods or services between the applicant and MSPL/MPMPL even without consideration can be considered as ‘supply’ under GST Act. However, as discussed in foregoing para, there were no activity between the applicant’ and ‘MSPL/MPMPL’ and there is no business consideration between the applicant’ and ‘MSPL/MPMPL’.
Hence an independent direction by applicant to seller for transferring a business to a related party would not qualify ‘as supply’ between the applicant’ and ‘MSPL/MPMPL’ under GST Act.
8. Since full input tax credit is available to MSPL/MPMPL the notional consideration should be considered to be open market value.
Without prejudice to above, even for argument sake it is presumed that the above transaction qualifies as supply between the applicant and MSPL/MPMPL, both being related parties, the notional consideration (percentage of business transfer value) would be an academic discussion and the invest treated as open market value as per Rule 28 of GST Rule.
Notwithstanding above, in the present case, if supply’ exists between the applicant and MSPL/MPMPL than value of supply being related parties may be determined under Rule 28 of GST Rules,
In the present case, MSPL and MPMPL are affiliates (fellow subsidiary) of applicant, all three entities being subsidiaries of the Company’s ultimate holding company, Merck KGaA, Darmstadt, Germany hence, they are related parties.
Hence, in absence of any consideration between the applicant and MSPL or MPMPL, value for levy of GST may be computed under Rule 28 of GST Rules. The extract of said provision produced below for reference:
” 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 subsection (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 37, 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”
In terms of section 16 of GST Act, every registered person 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 furtherance of his business.
On perusal of above provision, it is evident that in the present case also MSPL and MPMPL are registered person under GST Act in the state of Maharashtra. Further, the transaction would be used or is intended to be used in the course or furtherance of business by MSPL and MPMPL. Hence, both MSPL and MPMPL are eligible to claim input tax credit on GST charged by the applicant. Therefore, in view of above, the applicant may adopt to value the proposed transaction as per the second proviso to Rule 28 of CGST Rules. As per said proviso, the value of the transaction may be adopted as percentage of business transfer agreement.
D. APPLICANT’S UNDERSTANDING
As discussed in above para,
