Tricky issues around slump sales3 min read . Updated: 10 Sep 2007, 12:02 AM IST
Tricky issues around slump sales
Tricky issues around slump sales
Media reports in recent times have revelled in the coverage of the booming mergers and acquisitions activity in India. Some of the most high-profile corporate transactions occur by acquisition of shares. But many transactions also occur through contractual transfers/disposals of business undertakings or assets of a firm, as opposed to the tradtitional share-purchase ones. Such transactions potentially deliver the undertaking free of baggage from the transferor firm. The most popular form of such deals falls under the less-than-glamorous appellation of “slump sale", defined in the Income-Tax Act, 1961, as the transfer or sale of one or more undertakings for a lump sum consideration.
No values are assigned to individual assets and liabilities in such transactions. An undertaking is understood to be a business activity taken as a whole (as a “going concern") and not individual assets or liabilities or any combination of such assets/liabilities. The main elements of a slump sale are therefore (a) sale of an undertaking; (b) lump sum consideration; and (c) no separate values are assigned to individual assets and liabilities.
If the undertaking has been held for less than 36 months prior to the date of slump sale, then the income would be taxable as short-term capital gains, the effective rate of which is currently 33.99%.
The other tricky issue that arises is that of stamp duty. Although individual values cannot be assigned to the various assets for purposes of the transaction in a slump sale, appropriate values have to be considered for purposes of stamp duties. Under the Indian Stamp Act, 1899, stamp duty is payable in relation to transfer of immovable properties. Generally, anything embedded in, or attached to, the earth (such as land or buildings) is considered immovable property and any transfer of the same can attract significant stamp duties. So, in any business transfer arrangement that seeks to transfer plant and machinery together with the land, and such plant and machinery is embedded in, or attached to, the earth, the same will be treated as immovable property and its transfer will be stampable accordingly.
While land/buildings are considered immovable property, whether machinery that has been installed becomes immovable property depends on the degree and permanency of the attachment, and the purpose of installing and attaching the machinery. For instance, the Supreme Court has held that a fertilizer plant, sold as part of a slump sale along with land and building, is immovable property as it was always intended that the plant remains permanently affixed to the land and building being transferred. However, this finding was specific to the facts of that case (Duncans Industries Ltd vs State of UP, AIR 2000 SC 355).
Another important consideration is that of indirect taxes. A view has been taken that there is no sales tax payable on the transfer of a business as a going concern, including the transfer of a whole unit or division of any business under the value-added tax laws or the local sales tax laws. This is based on the rationale that the sale of an entire business cannot be equated with the sale of movable goods, the latter being subject to sales tax.
The prevalent view in relation to sales tax in the case of a slump sale is that such sale would not attract sales tax since a business is not considered to be “goods" under sales tax laws.
While a slump sale is an attractive option for a business entity desirous of transferring/selling an undertaking, given the complexities involved in determination of the costs and taxes on any such arrangement 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.
This column is contributed by AZB & Partners, Advocates & Solicitors. Send your comments to firstname.lastname@example.org