Opinion – Levy of VAT on Transfer of Assets

Transaction

The transaction involves a global acquisition of a banking business by the Purchaser from the Seller. Consequent thereto, all assets and liabilities in India will be acquired by the Purchaser from the Seller. The acquisition of the assets and liabilities in India will either be through: (a) slump sale process, in which the undertaking as a going concern will be transferred by the Seller to the Purchaser for a lump sum consideration, or (b) through a court approved scheme of reconstruction under section 394 of the Companies Act and section 44 of the Banking Regulation Act under which all the assets and liabilities will be transferred from the Seller to the Purchaser, or (c) individual transfer of assets and liabilities by the Seller to the Purchaser. Typically, the assets which will be transferred under all of the abovementioned processes will comprise of:

(i) Movable Property (i.e., furniture, fixtures, systems, machines, fittings, etc.);

(ii) Immovable Property – freehold, leasehold and licensed premises;

(iii) Unsecured loans (i.e., monies which provided as a loan to the customer which the bank has to recover from the customer, which are unsecured).

(iv) Advances/deposits (i.e., advances of monies by the bank to the customer, which the bank has to recover from the customer).

(v) Contracts with suppliers; and

(vi) Interests under secured loans – mortgage, pledge and hypothecation.

The assets and liabilities are in several states in India being Maharashtra, Gujarat, Delhi, Haryana, UP, Rajasthan, West Bengal, Karnataka, Kerala, Andhra Pradesh, Tamil Nadu.

On these facts you have raised three queries. Your queries and our replies thereto are stated below.

Q.1 We understand that the VAT regime completely replaces the earlier Sales Tax regime and consequently now only the VAT regime is applicable. What will be the incidence of VAT in Maharashtra and the other states (specified above) with respect to the transfer of each of the assets (mentioned above) if each of such assets were to be transferred individually on an asset sale basis and not through a slump sale route or under a court approved scheme?

Ans. We have reproduced below some relevant definitions under the MVAT Act, 2002 to explain your queries in more details.

Section 2(24) – ‘sale’ means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly.

Explanation– For the purpose of these clause,-

a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956, (74 of 1956);

b) i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;

ii) the transfer of property in goods, (whether as goods or in some other form) involved in the execution of a [ [works contract including], and agreement for carrying out for cash, deferred payment and other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property];

iii) a delivery of goods on hire purchase or any system of payment by installments;

iv) the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or valuable consideration;

v) the supply of goods by any association or body of persons incorporated or not, to a member thereof for cash, deferred payment or other valuable consideration;

vi) the supply, by way of or as part of any service or any other manner whatsoever, of goods, being food or any other articles for human consumption or any drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration.

vii) *****

shall be deemed to be a sale.

Section 2(12) :- “goods” means every kind of movable property not being newspapers actionable claims, money, stocks, shares, securities or lottery tickets, and includes live stocks, growing crop, grass and trees and plants including the produce thereof including property in such goods attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

Section 6:- Levy of sales tax on the goods specified in the Schedule – there shall be levied a sales tax on the turnover of sales of goods specified in column (2) in Schedule B, C, D or, as the case may be, E, at the rates set out against each of them in column (3) of the respective Schedule.

(Underlining by us)

Thus, under section 6 of the MVAT Act, 2002, the State is empowered to levy tax on the sale of ‘goods’. ‘Goods’ has been defined to be movable property not being actionable claims, money, stocks, shares, securities etc. If the assets are sold individually then such sale will attract tax not only under the Maharashtra Value Added Taxation Act, 2002, but under any other Sales Tax Enactment of any State.

Kindly note that the sale of goods is governed by the Sale of Goods Act, 1930 and not by the Value Added Tax enactment of any State. It be further noted that under Article 246(3) the States has power to make laws with respect to any of the matters enumerated in List II in the Seventh Schedule appended to the Constitution of India. Tax on sale or purchase of goods falls in Entry
No. 54 of List II (State List). The States have enacted their Sales Tax law (VAT laws) under such powers derived under Entry No. 54 of the State List. ‘Goods’ have been defined under Article 366(12) to include all materials, commodities and articles. Thus the States are competent to levy tax only on movable properties.

Q.2 What will be the incidence of VAT, if any, in Maharashtra and the other states (mentioned above) if the undertaking as a going concern is transferred by the Seller to the Purchaser for a lump sum consideration under the slump sale route? Will your opinion be any different if the transfer is by a slump sale route but one of the assets namely unsecured loans have a separate value assigned to it which will be paid by the Purchaser to the Seller on the basis of a deferred consideration?

Ans. To answer your query regarding the incidence of VAT, if the undertaking is sold/transferred as a going concern for a lump sum consideration, I have reproduced below the observations of some of the High Courts which should answer your query.

i) Sri Ram Sahai vs. Commissioner of Sales Tax (1963) 14 Stc 275 (All)

“Business is not movable property and is, therefore, not goods and proceeds from sale of business are not turnover and no tax is payable on them under section 3(1) of the U.P Sales Tax Act, 1948. If, therefore, a dealer carrying on business of selling goods, sells his entire business, the proceeds of the sale need not be included in the turnover at all. In such a case, he need not rely on rule 44(f) of the U.P. Sales Tax Rules, 1948 to claim a deduction from the turnover for the purpose of taxation, because there can not be a deduction from a turnover of something which is not a turnover.”

ii) Deputy Commissioner (C.t) Coimbatore vs. K. Behanan Thomas (1977) 39 STC 325 (Mad.) at page 326.

“The combined effect of the definition of ‘business’ in section 2(d) of the Tamil Nadu General Sales Tax Act, 1959, ‘sale’ in section 2(n) and ‘turnover’ in section 2(r) will show that for a turnover to come within the scope of the Act, it must be the aggregate amount for which the goods are bought or sold in the course of business as defined in section 2(d). When a person who is carrying on business sells the entire business or a branch of the business, he sells the same as a running business or a going concern. The sale proceeds of such a transaction cannot be said to constitute turnover as defined in the Act, because the sale proceeds are not proceeds of sale of goods made in the course of business as defined in the Act. The closure of a branch by sale thereof as a running concern to another person, apart from not constituting as a sale of goods, cannot also be said to be a transaction in connection with or incidental or ancillary to such trade or commerce, adventure or concern mentioned in section 2(d)(i). Consequently, such sale proceeds being totally outside the scope of the Act cannot form part of the turnover as defined in the Act and hence such turnover is not exigible to tax under the provisions of the Act.”

iii) Coromandal Fertilisers Limited vs. State of A.P. 112 STC 1 (A.P.) at Page No.2

“Where there is a sale of an entire business undertaking as a going concern, the sale of movables involved in such a transaction cannot be regarded as a sale in the course of business, nor can we treat the seller as having been engaged in any business activity in disposing of the entire undertaking including movables and immovables and all other properties. The transfer of property in goods as an integral part of the agreement to sell is not “in the course of business” for the obvious reason that the seller wants to put an end to its entire business and cease to do the trade or manufacture. The expression “in the course of” implies not only a period of time during which business was in progress but also postulates a connected relation. An activity directed towards the end or termination of business is not a transaction in the course of business. Such a sale is not in the course of business within the meaning of section 2(1)(bbb).”

“When the entire movable property of a business including plant, machinery, equipment and other capital assets are transferred together with its immoveable and intangible assets, the assessee goes out of business. It cannot be said that such a step is incidental to or connected with the manufacturing, trading or other business activity the assessee was hitherto carrying on. A step to close down and dispose of the entire business is obviously not incidental or complementary to the business, that is to say, the manufacturing or trading activity which the assessee was carrying on. The transaction to be incidental and ancillary to business within the meaning of the second part of section 2(1)(bbb) should be something which takes place in the process and in the context of continued business activity and having the effect of aiding or promoting such business.

You propose to transfer one of the assets namely unsecured loans having the separate value assigned to it, separately. We advise you to avoid such separate transaction though unsecured loan which are to be transferred are not ‘goods’. We draw your attention to the following judgments which may come in your way.

i. Tools and Machineries Ltd. vs. The State of Madras (1956) 7 STC 740 (Mad.).

“Rule 5(I)(h) of the Madras General Sales Tax (Turnover and Assessment) Rules, 1939, exempts from inclusion in the turnover “ all amounts realized by the sale by a dealer of his business as a whole”. Where a dealer sold his entire stock-in-trade, but he continued to be in business and retained in his hands certain assets of the business which would be included in the “whole of the business”, there could be no sale of the “business as a whole” within the meaning of Rule 5(I)(h).”

ii. Commissioner of Sales Tax vs. K. Tajkhanji & Company (1975) 36 STC 130 (Bom.)

“Where a partnership firm carrying on the business as dealers in paints, varnishes and other painting materials assigned the business in favour of the respondents, but, in doing so, reserved to themselves and did not transfer to the respondents the right to perform the outstanding contracts as well as the liability to perform the same, it could not be said that the ownership of the business had been entirely transferred to the respondents within the meaning of Section 26(1) of the Bombay Sales Tax Act, 1953.”

Q.3 What will be the incidence of VAT, if any, in Maharashtra and the other states (mentioned above) on the order of the court/Reserve Bank of India approving the scheme of reconstruction under which all the assets and liabilities will be transferred from the Seller to the Purchaser?

Ans. We request you to refer to the judgments of the apex court in Marshall & Sons reported in 223 ITR 809.

We advise you to show us the Draft Agreement before you finalise the same. We also advise you to consider the following judgments of the Supreme court and Bombay High Court before finalizing the slump sale agreement.

i) Commissioner of Income Tax vs. Artex Manufacturing Company reported in 227 ITR 260

ii) Commissioner of Income Tax vs. Electric Control Gear manufacturing Company reported in 227 ITR 278.

iii) PNB Finance Limited vs. Commissioner of Income Tax 307 ITR 75

iv) Premier Automobiles Limited vs. Income Tax Officer reported in 264 ITR 193 (B.H.)

Author: Vinayak Patkar, Advocate