Query No. 1

A Public Limited Company ha s one separate division for retail business. There is separate Balance Sheet available for the same. The company wants to dispose of the division to another Public Ltd. Co. as a going concern.

The Balance Sheet contains assets like stocks and furniture etc. The disposal will be at lump sum consideration though values of assets and liabilities are mentioned in the agreement. The issue is whether any liability under Sales Tax Law will be attracted on above transaction.

Reply

Under Sales Tax Laws the tax is attracted on the transact ion of the “sale”. The term ‘sale’ is defined in sales tax laws. For example, under Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002), the term sale is defined as under in section 2(24).

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

The term sale is also subject matter of interpretation by various judicial forums .

The reference can be made to the landmark judgment of Hon’ble Supreme Court in case of Gannon Dunkerley & Co. (9 STC 353). In this case Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfill the minimum criteria as laid down in Sale of Goods Act. In fact Hon’ble Supreme Court has observed as under in relation to transaction of sale.

“Thus , according to the law both of England and of India , in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods …...”

From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled.

(i) There should be two parties to contract; i.e., seller/purchaser,

(ii) The subject matter of sale is movable goods,

(iii) There must be money consideration and

(iv) Transfer of proper t y i .e. , transfer of ownership from seller to purchaser.

Thus, if any asset is sold as an individual goods , it is a sale of goods l i able to t ax.

However when running business is taken over, it is transfer of business. No sale of individual asset is contemplated nor there is separate consideration for each goods involved in it.

Under above circumstances, there is no sale by transferor to transferee liable under MVAT Act.

Therefore, in aforesaid circumstances, there cannot be sale of any individual assets and no tax can be attracted on the same.

Reference c an be made to following important judgments where the above ratio has been followed.

(i) Basavraj Printing Press (S.A. 525 of 1986 dated 30-11-1987)

Noting that the transfer is of whole business and not any individual assets by way of sale, Tribunal held that there is no sale/purchase transaction of machinery.

(ii) Bharat Bijlee Ltd . ( DD Q 1 1 / 2 0 0 4 / A d m - 5/54/B-2 dt. 12-10-2004)

In this case one division of the company was transferred to another company under the scheme of arrangement .

Commissioner of Sales Tax noted that the division is transferred in its entirety and held that there is no sale of any goods as such. The judgment in case of Coromondel Fertilizer Ltd. (112 STC 1)

(A.P.) relied upon.

(iii) A reference c an a l so be made to the judgment repor ted in 260 ITR 668

(Cal.) wherein also the Hon’ble Calcutta High Court has dealt with similar issue and held that there i s no s a le of indiv idual a s set s when business is transferred.

(iv) Pearl Thread Mills Ltd. (S.A. 1064 & 1065 of 1993 dt. 31-3-2006)

“Vide agreement dated 5 - 7 - 1984 the screen graving unit was transferred to transferee. In assessment for 1984-85 it was held that there is sale of individual assets. The ground for so holding was that the a s set s and liabilities were shown separately in agreement. Before Tribunal, appellant submitted to look into intention of parties and agreement as a whole. It was shown that by agreement appellant is out and transferee is in and the business continues. Therefore this is a case of transfer and not sale of assets . The fact of taking over of workers and also condition for not to do similar activity was pressed to support the issue.

Department tried to justify the same by showing that certain assets are retained and hence it is not transfer of business.

Tribunal concurred with appellant. On terms/conditions Tribunal held that the intention is to transfer business. Business is not ‘goods’. So this was held as a case of succession u/s. 19(4) of BST Act, 1959, i.e. transfer of business and not the case of sale of assets.”

If the legal position is examined in the light of above judgments , it clearly transpires that if the intent ion of the trans action is to put the purchasing party as owner of the business where the vendor gets out of the business it will be a transaction of change in constitution and not of sale of any individual assets.

When the intent ion is to transfer the business as a going concern, certainly there is transfer of business and no itemized sale of any assets. The situation is required to be seen accordingly .

Even if the assets are mentioned in the agreement with their values still if the over all intention of the agreement is to transfer business as going concern it will be change in constitution and no individual sale. “Business” itself is not goods and hence there cannot be liability as sale of business also. In nutshell in the given circumstances there will not be any liability under Sales Tax Laws.