Assets to be considered for apportioning unutilized ITC in case of de-merger: Karnataka AAR

Assets to be considered for apportioning unutilized ITC in case of de-merger: Karnataka AAR

Introduction:

An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR. The question of law which is address through this AAR are as follows:

• Whether the ‘value of asset’ for apportionment of ITC should include value of assets on which GST is not applicable such as bank, cash etc in case of demerger as provided under Section 18(3) read with Rule 41(1) of CGST Act and Rules, 2017.
• If point 1 above is in the affirmative, should assets created for the purpose of satisfying accounting standards and assets which do not form part of the de-merger, should be considered for ‘value of asset’.
• If point 1 and 2 are in the affirmative, should assets not attributed under specific GSTIN, should form part of GSTIN of head office of the Company for computation of asset ratio.

Facts of the application made to AAR, by taxpayer ‘M/S. IBM India Pvt. Ltd. (applicant)’, dated 30-Jul-2021:

The applicant, M/S. IBM India Pvt. Ltd, a division of International Business Machines Corporation (IBM), is an information technology company which deals with selling, production or licensing computer middleware, hardware and software and also provides services such as IT hosting, implementation and consulting services for a wide range of IT products ranging from mainframe computers to nanotechnology. IBM decided to de-merge its Managed Infrastructure Services (MIS) unit as a new company, which involved the infrastructure service unit, a part of IBM’s GTS or Global Technology Services segment which included identity management service, risk / regulatory / security management services, but excluded its public cloud offerings unit which was under the infrastructure service unit. Consequent to the de-merger, IBM can transfer its unutilized input tax credit (ITC) to the de-merged new company pursuant to Section 18(3) and Rule 41(1) of CGST Act and Rules, 2017. The ITC is to be apportioned basis the ratio of value of assets of new company as mentioned in the de-merger scheme. For the purpose of determining ‘Value of assets’, the total value of assets irrespective of whether ITC is taken has to be considered. For determining the ‘vale of assets’, the applicant has raised the above mentioned 3 questions to be clarified. Section 18(3) and Rule 41(1) of CGST Act and Rules were reproduced by the applicant as below. “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 business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilized, in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.” “Rule 41(1): A registered person shall, in the event of sale, merger, demerger, 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 ITC lying in his electronic credit ledger to the transferee. Provided that in the case of demerger, the ITC shall be apportioned in the ratio of value of assets of the new units as specified in the demerger scheme. Explanation: For the purpose of this sub-rule it is hereby clarified that the ‘value of assets’ means the value of the entire assets of the business, whether or not ITC has been availed thereon.

The first point raised by the applicant for AAR to clarify is whether the value of assets would include the value of assets which are outside the purview of GST such as cash/bank balances, security deposits etc. The applicant is of the contention that such assets need not be included in the value of assets and only those assets in which either ITC is availed or the ITC on such capital assets has been capitalized, need to be considered.

The second point raised by the applicant is to clarify whether the assets created due to accounting standards provisions such as building lease, deferred tax asset, advanced tax etc should form part of value of assets while computing the asset ratio for the purpose of apportionment of ITC on account of de-merger. The applicant contents that such assets which have been created in the books of account to comply with the account standards need not form part of value of assets.

The third point raised by the applicant is that the value of assets not forming part of the de-merger, need not be taken for the computation of asset ratio while apportioning ITC.

The applicant further reiterated the clause given in Rule 41(1) that the unutilized ITC at the time of demerger of the company shall be apportioned in the ratio of value of assets as mentioned in the demerger scheme, for the new company. Hence the applicant contended that only assets which fall under the purview of GST are to be considered in the determination of asset ratio, for apportionment of ITC for the new, demerged company.

Further it is seen that there are certain assets such as investments in subsidiaries, non-current tax assets including deferred tax assets, cash and cash equivalents and certain other current assets which cannot be divided amongst various GSTINs. Hence, the applicant contends that such assets should be entirely allocated to the head office accounts for computation of asset ratio for transferring ITC.

Observations and final ruling by AAR vide Order No. KAR ADRG 47/2021 dated 30.Jul.2021:

The AAR, on verification of the representation made by the applicant through its learned representative, acknowledged the 3 issues to be address as highlighted above. The authority took note of Section 18(3) and Rule 41(1) of the CGST Act and Rules, 2017. The AAR took note that the of ‘value of assets’ for the computation of asset ratio to apportion the ITC at the time of demerger has to be as per Rule 41(1) of CGST Rule, 2017 and also reiterated the point that the apportionment of ITC has to be based on ration of ‘value of assets’ of the new unit as mentioned in the demerger scheme. Also, the value of assets as per Rule 41(1) is the value of entire assets of the business, irrespective of whether ITC has been availed or not. Circular No. 133/03/2020-GST dated 23.Mar.2020 further clarified on following points.

• The value of assets of the new units has to be taken at the State level and not at the all-India level. An example was also given where for a de-merged unit, assets from two States where the business has operations were taken for the new unit and for the purpose of computation of asset ratio, the portion of asset transferred to new unit and total assets from each State were taken separately and further apportionment of unutilized ITC was made.
• Further the circular clarified that separation of unutilized ITC between CGST, SGST/UTGST, IGST need not be made and can be taken in total i.e if at the time of demerger, the balance in CGST, SGST and IGST amounts to INR. 5 lakhs each and 60% of assets is transferred to new unit, then the unutilized ITC which would be transferred would be INR. 9 lakhs.
• The date to be considered for transferring the unutilized ITC will be the date of filing of Form GST ITC – 02 by the transferor to new unit.
• Finally the date to be considered for computing the ratio of value of assets i.e the asset ratio will be the ‘appointed date of demerger’ as given by the demerger scheme.

Taking note of Section 18(3), Rule 41(1) and the above mentioned circular, it was concluded by the AAR that the entire assets of the transferor and transferee units have to be considered and points 1, 2 and 3 highlighted by the applicant are not valid with reference to considering only select assets for computation of asset ratio for the purpose of apportionment of unutilized GST. Further on the last contention of the applicant that assets which cannot be classified under any GSTIN should be accounted under the head office assets, the AAR concluded that the assets have to be considered under the particular state accounts from which the business has operations and transferred, to the new unit operations.

The AAR provided ruling that vide Order No. KAR ADRG 47/2001 dated 30.Jul.2021 as follows:

• For the purpose of computing value of assets to apportion unutilized ITC, the assets outside the purview of GST have to be included as per Section 18(3) and Rule 41(1) of CGST Act and Rules, 2017.
• The value of asset will include assets which are created for the purpose of accounting standards and
• Any asset which cannot be assigned to a GSTIN has to be accounted under the particular state accounts from which the business has operations and transferred, to the new unit operations.