Business restructuring is a comprehensive process be it financial or technological or market or organisational. There are various modes by way of which it can take place such as re-organisation of capita, compromise/arrangement, merger/amalgamation, demerger, acquisition/takeover, slump sale, strategic alliance and such other similar modes. The primary motive behind undertaking any such rearrangement would be to prosper both in size and profits. The corporate restructuring process can be either be by any of the much traversed gradual way or a much faster way of selling off the business undertaking.
Here it is important to note that the sale can happen in two ways, one is an entity sale and the other is an asset sale. The type of sale is determine which items of the business shall form part of the ownership transfer. A buyer is benefited from an asset sale by availing the depreciation benefits early and avoiding acquiring the former company’s liabilities. However, from a seller’s perspective an entity sale is preferable so as to pay taxes at a low long-term capital gain rate, as compared to the higher ordinary income tax rate applicable on asset sales.
A slump sale is a mode of transferring the business undertaking as a “going concern” along with the liabilities, that is to say, on an ‘as is’ basis. In this restructuring exercise, companies usually sell off their unprofitable business activities and the business activity as a whole is sold along with all the assets and liabilities pertaining to such business activity.
CONCEPT OF SLUMP SALE
As discussed, ‘Slump Sale’ is a mere method of corporate restructuring. The company goes forward to sell its undertaking and this is one of the widely used ways of business acquisition in India. Slump sale is generally undertaken:
- To improve the performance of the business;
- To improve focus and eliminate negative synergy and facilitate strategic investment; and/or
- To avail tax and regulatory advantages associated with it.
The Finance Act, 1999 ushered in the concept of slump sale by inserting section 2(42C) and section 50B to the Income Tax Act, 1961. While the former defined slump sale, the later provided the mode of computation of tax on slump sale.
But there is a long drawn background history on the taxability of slump sale. A lot of doubts were created on the issue of taxability of slump sales long back in a list of cases.
Prior to the insertion of section 2(42C), courts have held that slump sale is a sale of a business on a going concern basis where the lump sum price cannot be attributed to individual assets or liabilities. In CIT V. Artex Manufacturing Co., the Apex Court treated the sale of the business on a going concern for a lump sum consideration as an itemised sale on the ground that the slump price was determined by the valuer on the basis of itemised assets whereas in CIT V. Electric Control Gear Mfg. Co. the sale of the business on a going concern was regarded as a slump sale since in that case, there was nothing to show that the slump price is attributable to any asset.
In the landmark case of PNB Finance Ltd. v. Commissioner of Income Tax, the Hon’ble Supreme Court while considering scope of s 41(2), 45 and 50B held that gains made out of slump sale transactions do not fall either within the ambit of business income or capital gain. To attract section 41(2), the subject matter should be depreciable assets and the consideration received should be capable of allocation between various assets. In case of a slump sale, there is an undertaking which gets transferred (including depreciable and Non‐depreciable assets) and it is not possible to allocate slump price to depreciable assets and therefore, the same cannot be taxed as such. Whereas to attract capital gain, the Court held that the charging section and the computation sections are integrated code and if one fails other fails i.e if the computation sections fail then even the charging section fails.
Section 2 (42C) of The Income Tax Act, 1961, recognises ‘Slump-Sale’ as a transfer of an ‘undertaking’ i.e. a part or a unit or a division of a company, which constitutes a business activity when taken as a whole. In other words slump sale means transfer of the entire business unit for a single lump sum consideration without assigning value to individual assets and liabilities. Under the slump sale the business is sold on a ‘going concern basis’ that is there is transfer of all assets/ liabilities, contracts, employees, etc so that the business able to carry on its activities as before such sale.
The essential elements of slump sale can be summed up as follows:
- Sale of the undertaking. The mode of transfer in this case has to be essentially “sale”. No other mode of transfer of the business undertaking will amount to a slump sale transaction. In the case of Ece Industries Ltd. vs Deputy Commissioner of Income Tax it was held that even if one out of several undertakings were sold, it would still amount to slump sale. Further, In Avaya Global Connect Ltd. v ACIT (26 SOT 397) the tribunal held that Section 2(42C) defines slump sale that it is only a transfer as a result of sale that can be construed as slump sale. Consequently, when the transfer could not be said to be as a result of sale therefore the provision of section 2(42C) would not apply.
- Going Concern Basis: This test lays down the ability to continue the business activity post transaction. The literal interpretation of the term ‘slump’ means dropping or falling heavily, indicating to an undertaking that has suddenly declined or deteriorated or sunk heavily, being operational or financial loss. However, in the absence of any such specific condition for the undertaking to be necessarily a slump, it can be inferred that it is not necessary that undertaking should be a slump to effect slump sale. Thus, the process of slump sale can be used even for transfer of profit-making company.
- Assets and liabilities: The main essence of slump sale is the transfer of an undertaking as a whole. In an event where the assets of an undertaking are transferred without transfer of liabilities, the same shall not qualify to be regarded as a slump sale. In such a case it cannot be stated that undertaking has been transferred as a whole and consequently the provisions of slump sale shall not be applied.
- Lump sum consideration without assigning values to the assets. Consideration should be as a whole and not attributed individually to assets. It should be one time consideration and not in instalments or any other mode. Recently the Kolkata Income Tax Appellate Tribunal held that, where only specified assets of an undertaking were sold, it could not be termed as Slump Sale in accordance with section 50B of the Income-tax Act, 1961 merely because the agreement of transfer referred to transfer of a “Going Concern”.
Slump sale is an attractive option for a business entity that is desirous of transferring/selling an undertaking, given the complexities involved in determination of the costs and taxes in case of itemised sale for the transfer of business it is prudent for parties to negotiate and commercially agree on the cost burden of each party at the very outset.
The option of selling a business as a going concern by way of slump sale or alternatively, selling the assets independently is to be selected by analyzing the various advantages and shortfalls in the mentioned mode of transferring the undertaking, which may differ from case to case basis.
BUSINESS TRANSFER AGREEMENT
A Business Transfer Agreement (“BTA”) is structured to give effect to a comprehensive sale of assets and liabilities of one entity to another entity. It is in a form of a purchase and transfer of ownership agreement wherein details regarding the sale of the business and its assets are captured. It outlines the type of transfer, type of sale, terms of sale and details of the transferrable. The BTA, inter-alia, lists down the assets, liabilities, capital, contracts, customer lists, leases, employee insurance, new employment rights, inventory, tax issues, copyrights and patents.
In common parlance, the transaction envisaged in a BTA is also referred to as slump sale. In order to give effect to such transaction, the parties typically enter into a BTA, which records the following terms and conditions:
- Assets and liabilities of the business undertaking to be transferred are listed in the schedule to the BTA;
- Lump sum consideration for the sale is specified (usually sale price is based on a business valuation report);
- The BTA specifies the date prior to which all necessary approvals, permissions, documents to consummate the transaction are to be obtained(usually referred to as the ‘Closing Date’);
- Requisite representations and warranties providing guarantee of good standing by the respective parties is often included, particularly, the selling entity with respect to the legal status and financial health of the business undertaking as on the Closing Date;
- The fact that upon obtaining all requisite documents and approvals, the transfer of business shall take place on the Closing Date is also captured.
BTAs are typically structured in two ways. First, it is structured as an “agreement to sell”, wherein the manner in which the business undertaking is to be sold shall be laid down. The agreement itself does not result into any immediate transfer of the undertaking, rather it is overarching agreement whereby the intent of parties to give effect to an intended slump sale is listed out, and the actual sale is effected by diverse agreements/documents to follow. In essence therefore, the BTA remains an indication of intent, effectuated by subsequent binding documents.
Second form of BTA is one where the BTA itself causes the sale of business undertaking and payment of consideration thereof. In order words, such BTA itself consummates the sale of the business undertaking. Therefore, in such cases BTA is nothing but a deed of conveyance itself.
STAMP DUTY IMPLICATIONS
Execution of certain documents and instruments attracts stamp duty under the Indian Stamp Act, 1899 (“Stamp Act”). Stamp duty is payable on the instrument and not on the transaction. Thus it is important to understand the instrument and the subject matter of the instrument to understand the stamp duty implication for the same.
The Stamp Act does not define a BTA or lay-down any explicit provision on charging of stamp duty on a BTA. Therefore, it is pertinent to identify each asset that is proposed to be transferred through the BTA. In this regard it is pertinent to analyze the provisions of the Stamp Act that will have implications in case of a BTA.
Section 2(10) in the Stamp Act defines Conveyance, it states that:
“Conveyance” includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule.”
On reading the aforesaid definition it is apparent that the definition of Conveyance does not distinguish between movable and immovable property.
Section 54 of the Transfer of Property Act, 1882 states that in the case of immovable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.
Further, as per the provisions of the Sale of Goods Act, 1930 read with Section 17 and 18 of the Registration Act, 1908, physical delivery/transfer of a movable property shall constitute a valid transfer if the same is done by obtaining an acknowledgement or receipt to that effect recording and/or acknowledging the transfer of title in such movables. In case the transfer of tangible movable property is by physical delivery, it will not require registration or stamping. However, stamp duty shall become applicable in case an instrument is executed in writing to record a transfer even for tangible movable property.
Similarly, actionable claims or goodwill are intangible movable property chargeable as conveyance, as it has to be transferred by executing a written instrument. In case Deputy Commissioner of Income Tax vs Mahadeo R. Mahadik on it was discussed that:
“The sale of movable property is governed by Sale of Goods Act, 1930, and it is the settled law that the transfer of movable property by way of sale can be effected by delivery of the goods from seller to the purchaser. By this process, the ownership in the goods is changed from one person to another. Under the Transfer of property Act, 1882, section 54 deals with the transfer of immovable property by ways of sale. It provides that where the value of immovable property is more than Rs. 100 it cannot be transferred unless the sale deed is registered under the provisions of Indian Registration Act. However, it is pertinent to note that immovable property having value less than Rs. 100 can be transferred by mere delivery of the property. It does not lay down any condition regarding the transfer of movable property. Therefore, it appears that the law has made a distinction between the transfer of immovable property having value more than Rs. 100 on one hand and the transfer of movable property as well as transfer of immovable property having value less than Rs. 100 on the other. In the former case, legal ownership is not transferred unless sale deed is registered while in the later case no formality is required except the delivery of the property.”
In case of immovable property, reference is drawn to the case of Duncans Industries Ltd v. State of UP , wherein it was discussed that when there is an intention to transfer the entire business undertaking on an as-is-where-is basis including plant, machinery and other assets, the machinery which formed the fertilizer plant permanently embedded to the earth with an intention of running, is to be treated as “immovable property” and liable to stamp duty as conveyance.
The fact that a typical BTA would have stamp duty implications has been well settled in the case of Abbott Healthcare Private Limited v. Raj Kumar Prasad & Ors., where the BTA was considered to be duly stamped. Further, there was no dispute on the fact that such a transfer would amount to a conveyance, as the deed which transferred the business undertaking including its goodwill was classified as “conveyance” by the revenue authorities in the case of Anil Purushottam Kakad v. Tax Recovery Officer. The Apex Court has further held in the case of Hindustan Lever & Anr. vs. State of Maharashtra & Anr. that a High Court order approving scheme of corporate arrangement under Section 394 of the Companies Act, 1956 (‘Companies Act’) is a ‘conveyance’ and, hence, subject to Stamp Duty. Thus a corporate arrangement is very much contemplated by the court when it comes to “conveyance”.
From the above discussion, it is thereby concluded that a typical BTA is stamped as a “conveyance” under the Stamp Act and the applicable rate will be as per the one applicable statewise.
However, an agreement which captures the intention to sell a business undertaking with its assets shall not amount to conveyance but shall merely be a contract to sell. Article 5 of the Indian Stamp Act, 1899 specifies the stamp duty chargeable on an ‘Agreement or memorandum of Agreement’ as follows:
|5.||Agreement or Memorandum of Agreement
(a) if relating to the sale of a bill of exchange;
|(b) if relating to the sale of a government security or share in an incorporated company or other body corporate;||Subject to a maximum of ten rupees, one anna for every Rs. 10,000 or part thereof of the value of the security or share|
|(c) if not otherwise provided for||Eight annas|
In case a contract is executed with an intention not to operate as an immediate transfer of the sale of property, the said instrument shall be categorized as an agreement to sell rather than a conveyance for calculating the stamp duty implications. In the case of Life Insurance Corporation of India vs. Dinanath Mahadeo Tembhekar and othersit was discussed as follows:
“Provisions of Section 3 in Chapter II makes the instruments chargeable with duty as contained in the Schedules appended to the Act and reference to other provisions like Sections 4 to 6 emphasises that it cannot be the intention of the Legislature to collect duty on transactions. There is a clear distinction in the legal affairs of men which can be taken note of in that transactions may be effected having legal effects without resort to formal inscribing of them in the shape of documents or instruments. Sometimes by the instruments the legal rights may stand conveyed and sometimes without it. Instruments may be inscribed and executed just to witness the completed transactions and similarly instruments or documents may come in existence with a view to create rights and obligations in future. There may be executed, executory as well executable instruments which may take the formal shape of agreements or which may be spelt out by the documents that pass between the parties. Question in each case while applying the provisions of fiscal statutes like the Stamp Act is a question of fact to be determined taking into account all the relevant circumstances, the nature of transaction and its legal effect, leaning always in case of doubt to favour the subject from the tax law.
Consequently, under the Stamp Act a business transfer agreement not evidencing a transfer of property shall be stamped as an agreement to sell under Article 5(c).
It is pertinent to note that instead of contemplating an immediate transfer, a business transfer agreement may direct the parties to execute a deed of conveyance. It has been clearly held by the Supreme Court in the case of Avinash Kumar Chauhan v. Vijay Krishna Mishra that agreement to sell would not be subject to payment of stamp duty which is payable on a sale deed. It stated that:
“Explanation.- For the purpose of this Article, where in the case of agreement to sell immovable property, the possession of any immovable property is transferred to the purchaser before execution after execution of such agreement without executing the conveyance in respect thereof, then such agreement to sell shall be deemed to be a conveyance and stamp duty thereon shall be leviable accordingly:
Provided that the provisions of section 47A shall apply mutatis mutandis to such agreement which is deemed to be a conveyance as aforesaid, as they apply to a conveyance under that section:
Provided further that where subsequently a conveyance is effected in pursuance of such agreement of sale, the stamp duty, if any, already paid and recovered on the agreement of sale, which is deemed to be a conveyance shall be adjusted towards the total duty leviable on the conveyance subject to a minimum of Rs.10.
The said explanation has been inserted by M.P. Act 19 of 1989 with effect from 15th November, 1989.By reason of the said provision, thus, a legal fiction has been created. Although ordinarily an agreement to sell would not be subject to payment of stamp duty which is payable on a sale deed, but having regard to the purpose and object it seeks to achieve the legislature thought it necessary to levy stamp duty on an instrument whereby possession has been transferred.
The validity of the said provision is not in question”
Based on the above provisions of law and relevant case laws, it can be concluded that where a BTA is in the form of an agreement to sell, it will be chargeable to stamp duty as per Article 5 (c) of Schedule I of the Stamp Act, and the conveyance deed through which the assets of the entity, whether movable or immovable property, is to be transferred, shall be liable to stamp duty as applicable on the nature of asset that is being transferred and the instrument executed to record such transfer. Therefore, in order to understand the stamp duty implications in the instant transaction, it is pertinent to analyse the nature of asset that is being transferred and the instrument through which it is being transferred.
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