Background
The assesse (tax payer) has sold / assigned trademarks (M-Seal and Mr. Fixit), copyrights, know-how, assets and goodwill pertaining to its Sealant and Adhesives business to Pidilite Industries Limited (PIL) by assigning separate considerations for the individual items.
The assessee and PIL signed nine agreements/deeds in connection with the transfer/assignment of assets, trademarks, goodwill, copyrights and know-how.
Out of the total sale consideration, the consideration on account of goodwill and non- compete fee was offered to tax by the assessee. However consideration received on sale of trademarks, know-how and copyright was not offered for taxation as the assessee was of the view that the same being capital receipt
was not taxable.
After completion of the initial scrutiny assessment, the Commissioner of Income tax (CIT), holding that the order of of the AO was erroneous and prejudicial to the interest of the revenue, passed an order under section 263 of the Income tax Act, 1961 (ITA). The Income tax Appellate Tribunal (ITAT) upheld the revision order of CIT.
Pursuant to the order under section 263 of the ITA, the AO issued notice to the assessee and completed the assessment holding that the transaction in question was a „slump sale‟ and computed the capital gains accordingly. The Commissioner of Income tax (Appeals) (CIT(A)) upheld the position adopted by the AO.
Issues before the Tribunal
Whether the sale proceeds of Trademarks, know-how, copy rights were taxable in the hands of the assessee?
Whether the transaction in question should be regarded as an „itemised sale‟ or a „slump sale‟ under the provisions of ITA?
Contentions of the Assessee
The transaction in question was not a slump sale as the assesse had specifically mentioned the individual sale price of the assets transferred in the various agreements entered into by the assessee with PIL.
The transaction was at arm‟s length as PIL was not related to the assessee in any manner.
The purpose of the transaction was to sell individual assets. The assessee had sold only plant and machinery and not the land forming part of the business.
The AO and the CIT (A) had decided the matter without referring to the provisions of slump sale1 and the orders of these authorities are bad in law because of non-consideration of the said section.
The assessee relied upon various judicial precedents in support of the arguments that the transaction was an itemised sale and not a slump sale under the provisions of section 50B of ITA.
Observations and Ruling of the Tribunal
The transaction has to be viewed in totality and the „substance‟ rather than the „form‟ of the transaction is the deciding factor while determining the taxability. Treatment given by the assessee to a transaction in his books of accounts or an agreement entered into by him cannot alter the real character of the transaction. Accordingly, the study of the agreements /deeds signed by the assessee and PIL would be essential.
A close analysis of the agreements would reveal the following facts:
– The Directors report and Auditors report of the assessee stated about „sale/transfer of sealants And adhesives business‟
– The paper book submitted by the assessee mentioned that the business was sold „entirely and exclusively‟ to PIL. As per the paper book, more than 35 products of Sealants and Adhesives business were transferred to PIL.
– As per the clauses of the agreements entered into by the parties, PIL agreed that on a best efforts basis and at its sole discretion, it would absorb personnel from assessee‟s officers category. For the absorbed personnel, the assessee would transfer the gratuity, leave and other retirement benefits to PIL.
– Under the non-compete agreement, the assessee had agreed not to engage in or compete with PIL in the business of sealants and adhesive.
– Vide assets purchase agreement, assessee agreed to sell „fully and absolutely‟ the assets to PIL on an „as is where is‟ basis.
– Under the agreements, technical know-how was sold „fully and absolutely‟.
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, licenses etc. In the present case, trademarks, copyrights, goodwill, manufacturing process, plant and machinery of the assessee were transferred to PIL. As a result of the nine agreements mentioned above, business of sealants and adhesive carried out by the assessee had gone to PIL irrevocably.
The assessee was the elite owner of the trademark „M-seal‟ and has also applied for registration of trademark „Mr. Fixit‟. The trademarks were undeniably the assets of the assessee‟s business. Trademarks, technical know- how,
Copyright, Plant and Machinery, goodwill and renunciation of right to compete are part and parcel of the same business. These are integral, indivisible components of the unit sold to PIL.
In view of the above what was sold by the assessee to PIL was „the running business as a going concern‟ and not a few assets only.
After the sale of Sealants and Adhesives business, the assessee was left with business of Cable joining Insulating Compounds which was entirely different from the Sealants and Adhesives business.
Regarding the contention of the assessee that the land was not transferred, the non-transfer of a plot of land is not a deciding factor in such transactions. PIL could start the business of Sealants and Adhesives on the land owned by it and the business of PIL was not crippled because of non- transfer of land. Had the trademarks, copyrights and technical know-how were not transferred to PIL, it could have been held that the business was not transferred.
Based on the peculiar facts of the case, the transaction is a slump sale though the assessee has treated it as an itemised sale. The provisions of section 50B were rightly invoked by the authorities.
As the assesse had not raised an issue regarding section 2(42C) before any authorities, an adjudication of this matter cannot be expected. Further, the ITAT also held that to apply provisions of section 2(42C) to argue that the transaction is not a slump sale, the valuation of assets should be done on a scientific basis supported by sound principles of accounting. Since the assessee has not filed any proper valuation report, the transaction could not be regarded as an itemised sale.
Conclusion
The ruling brings out the rule of „substance over form‟ that in determining the real character of a transaction, the substance would be the deciding factor rather the form of the transaction.
It also conveys a message that even though a transaction has the components of an itemised sale, it could be characterized as a slump sale under the provisions of ITA, in substance, based on the structuring of various agreements /deeds entered into in respect of the transaction.
Source: Mahindra Mainers Engineering & chemical Products Limited Vs.Income tax Officer 2(2)(2) (Mumbai Tribunal) (ITA No.2544/Mum/2010)
The assesse (tax payer) has sold / assigned trademarks (M-Seal and Mr. Fixit), copyrights, know-how, assets and goodwill pertaining to its Sealant and Adhesives business to Pidilite Industries Limited (PIL) by assigning separate considerations for the individual items.
The assessee and PIL signed nine agreements/deeds in connection with the transfer/assignment of assets, trademarks, goodwill, copyrights and know-how.
Out of the total sale consideration, the consideration on account of goodwill and non- compete fee was offered to tax by the assessee. However consideration received on sale of trademarks, know-how and copyright was not offered for taxation as the assessee was of the view that the same being capital receipt
was not taxable.
After completion of the initial scrutiny assessment, the Commissioner of Income tax (CIT), holding that the order of of the AO was erroneous and prejudicial to the interest of the revenue, passed an order under section 263 of the Income tax Act, 1961 (ITA). The Income tax Appellate Tribunal (ITAT) upheld the revision order of CIT.
Pursuant to the order under section 263 of the ITA, the AO issued notice to the assessee and completed the assessment holding that the transaction in question was a „slump sale‟ and computed the capital gains accordingly. The Commissioner of Income tax (Appeals) (CIT(A)) upheld the position adopted by the AO.
Issues before the Tribunal
Whether the sale proceeds of Trademarks, know-how, copy rights were taxable in the hands of the assessee?
Whether the transaction in question should be regarded as an „itemised sale‟ or a „slump sale‟ under the provisions of ITA?
Contentions of the Assessee
The transaction in question was not a slump sale as the assesse had specifically mentioned the individual sale price of the assets transferred in the various agreements entered into by the assessee with PIL.
The transaction was at arm‟s length as PIL was not related to the assessee in any manner.
The purpose of the transaction was to sell individual assets. The assessee had sold only plant and machinery and not the land forming part of the business.
The AO and the CIT (A) had decided the matter without referring to the provisions of slump sale1 and the orders of these authorities are bad in law because of non-consideration of the said section.
The assessee relied upon various judicial precedents in support of the arguments that the transaction was an itemised sale and not a slump sale under the provisions of section 50B of ITA.
Observations and Ruling of the Tribunal
The transaction has to be viewed in totality and the „substance‟ rather than the „form‟ of the transaction is the deciding factor while determining the taxability. Treatment given by the assessee to a transaction in his books of accounts or an agreement entered into by him cannot alter the real character of the transaction. Accordingly, the study of the agreements /deeds signed by the assessee and PIL would be essential.
A close analysis of the agreements would reveal the following facts:
– The Directors report and Auditors report of the assessee stated about „sale/transfer of sealants And adhesives business‟
– The paper book submitted by the assessee mentioned that the business was sold „entirely and exclusively‟ to PIL. As per the paper book, more than 35 products of Sealants and Adhesives business were transferred to PIL.
– As per the clauses of the agreements entered into by the parties, PIL agreed that on a best efforts basis and at its sole discretion, it would absorb personnel from assessee‟s officers category. For the absorbed personnel, the assessee would transfer the gratuity, leave and other retirement benefits to PIL.
– Under the non-compete agreement, the assessee had agreed not to engage in or compete with PIL in the business of sealants and adhesive.
– Vide assets purchase agreement, assessee agreed to sell „fully and absolutely‟ the assets to PIL on an „as is where is‟ basis.
– Under the agreements, technical know-how was sold „fully and absolutely‟.
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, licenses etc. In the present case, trademarks, copyrights, goodwill, manufacturing process, plant and machinery of the assessee were transferred to PIL. As a result of the nine agreements mentioned above, business of sealants and adhesive carried out by the assessee had gone to PIL irrevocably.
The assessee was the elite owner of the trademark „M-seal‟ and has also applied for registration of trademark „Mr. Fixit‟. The trademarks were undeniably the assets of the assessee‟s business. Trademarks, technical know- how,
Copyright, Plant and Machinery, goodwill and renunciation of right to compete are part and parcel of the same business. These are integral, indivisible components of the unit sold to PIL.
In view of the above what was sold by the assessee to PIL was „the running business as a going concern‟ and not a few assets only.
After the sale of Sealants and Adhesives business, the assessee was left with business of Cable joining Insulating Compounds which was entirely different from the Sealants and Adhesives business.
Regarding the contention of the assessee that the land was not transferred, the non-transfer of a plot of land is not a deciding factor in such transactions. PIL could start the business of Sealants and Adhesives on the land owned by it and the business of PIL was not crippled because of non- transfer of land. Had the trademarks, copyrights and technical know-how were not transferred to PIL, it could have been held that the business was not transferred.
Based on the peculiar facts of the case, the transaction is a slump sale though the assessee has treated it as an itemised sale. The provisions of section 50B were rightly invoked by the authorities.
As the assesse had not raised an issue regarding section 2(42C) before any authorities, an adjudication of this matter cannot be expected. Further, the ITAT also held that to apply provisions of section 2(42C) to argue that the transaction is not a slump sale, the valuation of assets should be done on a scientific basis supported by sound principles of accounting. Since the assessee has not filed any proper valuation report, the transaction could not be regarded as an itemised sale.
Conclusion
The ruling brings out the rule of „substance over form‟ that in determining the real character of a transaction, the substance would be the deciding factor rather the form of the transaction.
It also conveys a message that even though a transaction has the components of an itemised sale, it could be characterized as a slump sale under the provisions of ITA, in substance, based on the structuring of various agreements /deeds entered into in respect of the transaction.
Source: Mahindra Mainers Engineering & chemical Products Limited Vs.Income tax Officer 2(2)(2) (Mumbai Tribunal) (ITA No.2544/Mum/2010)
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