Friday 24 August 2012

Whether when assessee resorts to multiple agreements for sale of each tangible and intangible individual item, they can still be read as a whole, to establish a slump sale u/s 50B - YES: ITAT


THE issues before the Tribunal are - Whether when the entire line of business, including all tangible and intangible assets are sold off as a going concern and on an irrevocable basis, the same amounts to "slump sale" in terms of section 50B; Whether when there are multiple agreements for sale of each individual item, still they can be read as a whole, to establish the sale of "lock, stock and barrels" and Whether merely relying upon provisions of section 2(42C) can serve any purpose, when there is no valuation report required in terms of section 50B, for supporting the claim of itemised sale. And the verdict goes in favour of the Revenue.
Facts of the case
Assessee had sold its entire sealants and adhesives business, including the famous trademarks i.e. M-Seal and Mr-Fixit, including all copyrights, know-how, assets and goodwill to Pidilite Industrie Ltd (PIL). Appellant had filed the ROI and AO passed an order u/s.143(3). However, CIT was of the opinion that the order of the AO was erroneous and prejudicial to the interest of the Revenue, hence issued a notice to the assesee and passed an order u/s.263. Appellant preferred an appeal before the Tribunal but, the revision-order passed by the CIT was upheld. Meanwhile, the AO issued a fresh notice u/s 143(2) in pursuance of the order passed by the CIT u/s. 263 of the Act. The notice mentioned that though individual prices were fixed for taxation purpose but the assessee had sold its one whole business i.e sealant and adhesive business as a slump sale. Hence, section 50B which provided for taxation of capital gains arising in a slump sale shall be applicable. To, this the assessee responded that it was a sale of tangible and intangible assets for which separate considerations were individually negotiated at arms length price and for establishing this fact provided elaborate submissions before the CIT(A). It was submitted that principally, the written down value of depreciable assets was computed under section 43(6)(c)(i)(c) and book value of other assets on that date. Since no liabilities were taken over, none have been deducted from the gross value of the above assets. Information regarding depreciable assets were extracted from the working of IT depreciation for the whole company. However, the AO held the same to be a case of slump sale which was again confirmed by the CIT(A). Being aggrieved, the Appellant filed this appeal.
The AR in addition to the submissions already presented by the assessee, also submitted that since the AO, CIT (A) and the Tribunal have decided the matter without referring to Section 2(42C) hence the orders were bad in law.
In the counter argument, the DR submitted that the assessee had sold entire business and not separate assets, that M-Seal division was a complete division and whole unit was transferred, and that not offering all items transferred to PIL was not as per provisions of law. He also submitted that the CIT u/s 263 and the Tribunal had already decided the issue in the first round of litigation, that basis for valuation of assets had never been revealed by the assesee at any stage. There was tremendous goodwill of the brand M-Seal, and the provisions of section 50B were clearly applicable to the facts of the case.
Having heard the parties, the Tribunal held that,
++ appellant sold/transferred/assigned trademarks (notably M-Seal and Mr-Fixit), copyrights, know-how, assets and goodwill pertaining to the Sealants and Adhesives Business. PIL paid Rs.32 Crores to the Appellant. Sale consideration amounting to Rs.1.89 Crores, received on account of good will and non compete fee, was offered for tax by the Appellant. Appellant and PIL signed nine agreements in this regard. A bare look at the section reveals that (i) it is a special provisions for computing capital gains chargeable to tax in the case of a slump sale and, therefore, would prevail over the general provision in case of any conflict, (ii) the provisions of sections 48 and 49 have been made applicable , subject to some modification, for computing capital gains in the case of a slump sale, (iii) the net worth of the undertaking transferred shall be deemed to be the cost of acquisition and cost of improvement for the purpose of sections 48 and 49 and (iv) the net worth shall be computed in accordance with the provisions of Explanations 1 and 2. The definition of slump sale u/s. 2(42C) read with Explanation 1 to section 2(19AA) of the Act, makes it clear that slump sale means transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. For the purpose of this section, undertaking as defined in Explanation 1 to section 2(19AA) includes any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Combined reading of all the three sections reveal that the Section 50B of Act is the only provision which provides for computation of capital gains in the case of slump sale, though sale of business undertaking as a going concern involves sale of assets forming block of assets on which depreciation is allowed. There is difference in the mode of computation of capital gains for a slump sale under section 50B. As per provisions of section 50 assets have to be first classified as long-term and short-term capital assets and then for the purpose of sections 48 and 49 the net worth has to be computed in terms of Explanation 1 to section 50B;
++ in commercial world transactions have to be seen and considered in totality. The controversy of form versus substance is as old as taxation laws and from the very beginning substance, rather than form, has been held the deciding factor in such matters. Secondly, treatment given by an Appellant to a transaction in his books of accounts or an agreement entered into by him do not and cannot alter the real character of that transaction. In this background study of agreements/deeds signed by the Appellant and PIL is not only useful but essential. Directors in their report to the shareholders stated that in accordance with the approval of the shareholders the company had transferred and assigned the Trademarks (notably Mseal and Mr fixit) Copyright, Know how, Assets and Goodwill pertaining to the Sealants and Adhesives Business being carried out by it to PIL. As a result of the negotiations between the Appellant on the one hand and PIL on the other business of Sealants and Adhesives was sold ‘entirely and exclusively’ to PIL. As per the Agreement to Grant Appellant had agreed to sell/transfer and assign all rights,benefits,titles,interests of any nature in relation thereto business of Sealants and Adhesives. As per clause 8.1 of the said agreement Appellant agreed to use different trademark (other than M Seal) in respect of Cable Jointing insulating compounds within 30 days from the closing date. It also agreed that on closing date appellant shall apply for amendment of the registration certificate of the trademark M Seal so as to specifically exclude Sealants and Adhesives. Clause 9.5 of the agreement is also important. As per that clause both the parties agreed that if at a future date Appellant wished to include any sealants and Adhesives products as as a component of the Cable Jointing kits terminations Appellant would give prior intimation to PIL as when it intends to put Sealants and Adhesives products as a component of the Cable Jointing kits or terminations and shall provide adequate descriptions relating to the users of such product in the context of Cable Jointing business. As per clause 15 of the agreement the parties agreed that PIL would not engage or compete with and in the business of manufacture, sale, distribution, marketing of Cable Jointing kits, Cable Jointing terminations and components and Cable Jointing insulating compounds. On the other hand Appellant agreed that it would not engage or compete with PIL in the business of Sealants and Adhesives. In terms of the assets purchase agreement Appellant agreed to sell fully and absolutely the assets to PIL on an ‘as is where is’ basis. Annexure B to the Asset purchase agreement gives details of the machinery (more than 50 items) transferred by the Appellant to PIL;
++ as per Clause 2.1 of ‘Agreement to purchase Technical know-how’ appellant agreed to sell PIL technical know-how ‘fully and absolutely’. A close analysis of the agreement and the deeds entered into by the appellant with PIL leaves no doubt that the business as a whole was sold,-it was not an itemised sale of assets. Directors’ report, Auditors’ report talk about ‘sale of business’. One may say that agreements and deeds should be seen in substance and their form should be ignored to arrive at a definite conclusion. So, now we will consider the ‘substance aspect’ of the arrangement of the business of Sealants and Adhesives. The term business denotes an abstract thing that includes physical adjuncts like plant and machinery and stock as well as the intangible elements like goodwill,intellectual properties and licences etc. In the case under consideration Trademarks,Copyrights, goodwill, manufacturing process, plant and machinery were transferred by the Appellant to PIL. As a result of the nine agreements/ deeds mentioned earlier, business of Sealants and Adhesives carried out by the Appellant had gone to PIL irrevocably. In other words not only the manufacturing apparatus of the Appellant but the business, as a whole, had also changed hands for ever. We are aware of the fact that the Appellant was the elite owner of the Trademark M Seal. Appellant had also applied for registration of Trademark ‘Mr.Fixit’. Trademarks were undeniably assets of the Appellant's business duly registered with the trademark authorities. Trademarks, Plant and Machinery,Technical Knowhow, Copyright along with Goodwill and renunciation of right to compete are part and parcel of the same business.They were integral, indivisible components of a composite unit sold to PIL. In short when all the agreements are read together, it emerges that what was sold by the Appellant to PIL was ‘the running business as a going concern’ and not a few assets only;
++ agreements/deeds entered in to by both the parties prove that they are part of the one transaction only. Different colours of a rainbow may appear separate entities prima facie, but in reality rainbow is a single phenomenon. Same is the position of the transaction being considered by us. In these circumstance it is a case of sale of proverbial lock stock and barrels or a sale of going concern;
++ after selling tangible and intangible assets as well as manufacturing process Appellant was left with business of Cable Jointing kits, Cable Jointing terminations and components and Cable Jointing insulating compounds. Nobody can claim that business of Cable Jointing is same as the business of Sealant and Adhesives. Definition section of the main agreement gives details of both the businesses. In the definition of component Sealants and Adhesives products have been especially excluded. Sealants and Adhesives products by their nature are for filling voids and cracks whereas Cable Jointing are insulating compounds. In the Schedules of Trademark Rules both the items have been included in different schedules and classes. In short, both the businesses are as different as chalk and cheese are. We are of the opinion that from the peculiar facts of the case under consideration, it is clear that it was a slump sale, though the Appellant had treated it as itemised-sale of assets. The Appellant had sold business of Sealants and Adhesives as a whole to PIL. Therefore, the provisions of Sec.50B have been rightly invoked by both the lower authorities;
++ AR submitted that the AO, the CIT(A) and ITAT had not considered provisions of Sec.2(42C) of the Act while deciding the issue. We do not find any mention of Sec.2(42C) of the Act in the Ground of Appeals. Similarly, the Appellant has not discussed the said issue in the covering letter for the Return of Income filed before the AO in submission before the AO at the time of original assessment, in submission made before the CIT. As the submission made before the ITAT during earlier hearing have not been submitted, so we are not in a position to comment upon it. If the Appellant had not raised issue regarding Section 2(42C) before any of the authorities how can he expect an adjudication order about it ? We do not hold that orders of the lower authorities or the earlier order of the Tribunal were bad in law. We have considered the provisions of Sec.2(42C). No doubt it speaks of slump sale and of assigning of values to the individual assets and liabilities, but explanation 2 to the section clearly mentions that value determined for registration purposes shall not be regarded value of to the assets or liabilities.Word shall has been used with a purpose. As per the principles of jurisprudence legislature always uses words keeping in mind a certain goal. We are of the opinion that by rejecting the stamp duty/ registration fee valuation it has indicated that valuation of assets should be done on scientific basis supported by sound principles of accounting. From the case records and the material produced before us we are unable to find any basis for valuation done by the Appellant. The AO had specifically inquired about the basis of valuation adopted by the Appellant, but till date no valuation report has been filed. If the AO and the CIT(A) has ignored the ‘agreed valuation as determined by the Appellant and PIL’for purposes of Sec.50B r.w.s.2(42C) no fault can be found with them. We are of the opinion that if the appellant wanted to claim the transaction an itemised sale a proper valuation report, as required by the provisions of Sec.50B(3), should have been filed. Considering the peculiar facts and circumstances of the present case we are of the view that provisions of Sec.50B r.w.s.2(42C)and Explanation 1 to section 2(19AA) of the Act are applicable to the transaction entered into between the Appellant and PIL. In short, it was a slump sale of a business as a whole. So, upholding the decision of the CIT (A), we dismiss the appeal filed by the Appellant.

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