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Business Transfer Agreements and Tax Implications.

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Agreements Business restructuring is a comprehensive process, be it financial, technological, marketing, or organizational. Various methods can be adopted, such as capital reorganization, commitment/arrangement, merger/merger, split, acquisition/acquisition, cheap sale, strategic alliance, and similar methods. The main motivation for such a rearrangement is to be successful in terms of scale and profit.

The process of restructuring the company can be any gradual way that has been gone through many times, or it can be a faster way to sell a business. It should be noted here that the sale can be made in two ways, one is the physical sale and the other is the sale of assets. The type of sale determines which elements of the business should be part of the transfer of ownership. Buyers benefit from asset sales by using early depreciation earnings and avoiding the liabilities of the former company. However, from the seller’s perspective, the entity’s sales are desirable compared to the higher ordinary income tax rates applicable to asset sales in order to be taxed at a lower long-term capital gain rate. . Cheap selling is a model in which business operations are transferred as “continuing operations” along with liabilities, that is, “as is”.

In this reorganization process, the company generally sells its unprofitable business activities and sells all business activities together with all assets and liabilities related to those business activities. The concept of selling at a low price As mentioned above, “selling at a low price” is simply a method of restructuring the company. The company continues to sell its business, which is one of the most widely used business acquisition methods in India. Low-priced sales are generally made:

• Improve business performance

• Improve focus, eliminate negative synergies, and promote strategic investment and/or

• Utilize related to tax and regulatory advantages.

The Finance Act of 1999 introduced Section 2 (42C) and Section 50B of the Income Tax Act of 1961, introducing the concept of low-price sales. The first defines low-priced sales and the second provides a calculation model for low-price sales tax. However, the issue of low-priced sales taxes has a long history. Already in a number of cases, people had many questions about collapsing sales taxes.

Prior to the insertion of Article 2 (42C), the court had determined that the low-price sale was based on a continuous commercial sale, in which the single price cannot be attributed to a single asset or liability. In the case of CIT V. Artex Manufacturing Co. [1], the Supreme Court treated the one-time sale of continuing operations as itemized sales, on the basis that the appraiser determined the decline in the itemized asset price based on the following factors, and in CIT V medium. Manufacturing of electrical control equipment. Cooperation [2]. The sale of a business in continuing operations is considered an autumn sale because in this case, there is no evidence that the price drop can be attributed to any asset. in PNB Finance Ltd. v. The Income Tax Commissioner [3], the Honorable Supreme Court, when considering the scope of articles 41 (2), 45, and 50B, held that the income from the immersion operation does not fall within the scope of operating income or capital.

 To attract Article 41 (2), the object must be a depreciable asset, and the consideration received must be able to be distributed among the various assets. In the case of a low-priced sale, there is a transferred company (including depreciable and non-depreciable assets), it is impossible to assign the depreciable value to the depreciable assets, so it cannot be taxed as is. To attract capital gains, the court held that the collection part and the calculation part are integrated codes, if one fails and the other fails, that is, if the calculation part fails, then even the collection part fails. Section 2 (42C) of the Income Tax Act of 1961 recognizes “SlumpSale” as a transfer of “company”, that is, apart, unit or department of a company that constitutes a business activity as a whole. In other words, retailing means transferring entire business units at once without assigning value to individual assets and liabilities. Under the recession sale, the company is sold on the basis of continuing operations, that is, all assets/liabilities, contracts, employees, etc. have been transferred. So that the company can carry out its activities as previously mentioned.

 The basic elements of Slump sales can be summarized as follows,

• Sale of joint ventures. In this case, the transfer method must be an essential “sale”. No other business transfer methods constitute retail transactions. In the case of Ece Industries Ltd. v. IncomeTax Deputy Commissioner [4], the court held that even if one of several companies was sold, its sales would still fall. In addition, in Avaya Global Connect Ltd. c. ACIT (26 SOT 397), the court held that Article 2 (42C) defines retail as a transfer only as a result of sales that can be interpreted as retail. Therefore, if it cannot be said that the assignment was caused by the sale, the provisions of Section 2 (42C) will not apply.

• Basis of Continuing Operations – This test specifies the ability to continue business activities after the transaction. The literal interpretation of the term “pump” is a sharp drop or a sharp drop, which means that the business has suddenly fallen or deteriorated or suffered a serious collapse, operational or financial loss. However, in the absence of such specific conditions, the company must be

• Assets and liabilities: The main essence of retail is the transfer of the company as a whole. If a company’s assets are transferred without transferring liabilities, it cannot be regarded as retail. In this case, it cannot be said that the company has been transferred as a whole, so the retail terms will not apply.

• Flat rate consideration, no need to assign value to assets. The consideration must be a whole, not attributable to assets alone. It should be a one-time consideration, no fees or any other model. Recently, the Calcutta Income Tax Court of Appeal held that if only certain assets of a company are sold, they cannot be called a cheap sale under Section 50B of the Income Tax Act of 1961, simply because the transfer agreement refers to the transfer. of “continuing operations”. Retail is an attractive option for business entities wishing to transfer/sell a business due to the complexity involved in determining costs and taxes in the case of itemized sales for business transfers, and the parties negotiate and negotiate They are prudent to agree on the cost. loading of the parts from the beginning. By analyzing the various advantages and disadvantages of the aforementioned transfer operation method, the choice to sell the company at a low price or to sell the assets independently is the choice of the ongoing business. This can vary depending on the situation.

Business Transfer Agreement

The Business Transfer Agreement (“BTA”) is structured to fully sell the assets and liabilities of one entity to another entity. It takes the form of a property purchase and transfers agreement, which contains detailed information about the business and the sale of its assets. It describes the type of transfer, the type of sale, the terms of sale, and the details of the negotiable items. BTA lists assets, liabilities, equity, contracts, customer lists, leases, employee insurance, new labor rights, inventory, tax issues, copyrights, and patents. In simple terms, transactions covered by the BTA are also called low-price sales.

 In order for this type of transaction to take effect, the parties usually sign a BTA, which records the following terms and conditions:

• The assets and liabilities of the business to be transferred are listed in the annex of the BTA;

• One-time payment for designated sales (usually sales The price is based on a commercial valuation report);

• The BTA stipulates that all approvals, permits, and documents required to complete the transaction must be obtained (usually referred to as the “delivery date”);

• The necessary representations and guarantees to provide all parties with a good reputation guarantee It usually includes, in particular, the legal status and financial status of the commercial enterprise as of the closing date of the selling entity;

 • It also records the fact that the business transfer will take place on the closing date after obtaining all necessary documents and approvals. BTAS usually has two structures.

  1. First of all, its structure is a “sales contract”, which will determine the company’s sales method. The agreement itself will not lead to the immediate transfer of business, but a package agreement that lists both parties’ intentions to implement the planned price reduction sales. The actual sales are achieved through various agreements. /Subsequent files. Therefore, in essence, the BTA remains an indication of intent, which is implemented by subsequent binding documents.

2. The second form of BTA is that the BTA itself leads to the sale of business operations and the payment of consideration.

 In other words, said BTA itself completes the sale of the commercial promise. Therefore, in this case, BTA is nothing more than a transfer contract in itself. Stamp Tax Impact According to the India Stamp Tax Act of 1899 (“Stamp Tax Act”), a stamp tax is required to execute certain documents and instruments. Stamp duty is paid on tools, not transactions. Therefore, it is important to understand the document and the subject of the document to understand the meaning of stamp duty. The Stamp Tax Law does not define BTA nor does it establish clear regulations on the stamp tax of BTA. Therefore, it is necessary to determine each asset to be transferred through the BTA. In this regard, it is necessary to analyze the provisions of the Stamp Tax Law that impact BTA. Article 2 (10) of the Stamp Act defines the transfer. It points out that “transfer” includes the transfer of sale and all types of property, whether movable or immovable, and the means of transfer in the body. .

After reading the above definition, it is obvious that the definition of transfer does not distinguish between movable and immovable property. Article 54 of the Transfer of Property Act 1882 stipulates that for immovable property worth Rs 100 or more, or in the case of return or other intangible items In addition, in accordance with articles 17 and 18 of the Sales of Goods Act of 1930 and the Registration Act of 1908, if the physical delivery/transfer of movable property is completed by means of the Obtaining the confirmation will constitute a valid transfer or receipt for the registration and / or confirmation of the transfer of ownership of said personal property. The transfer of personal property by physical delivery does not require registration or stamp duty. However, if an instrument is signed in writing to record the transfer, even if it is tangible movable property, stamp duty will also apply. Similarly, actionable claims or goodwill are intangible movable properties that can be attributed to assignment because they must be assigned through an enforcement written instrument. In the case of the Deputy Commissioner of Income Tax c. Mahadeo R. Mahadik discussed in [5]: “The sale of personal property is governed by the “Property Sale Act” of 1930. The transfer of personal property by sale can be achieved in the following ways. This is the established law of the delivery of goods from the seller to Buyer’s process. Through this process, property ownership changes from one person to another.

 According to the Transfer of Property Act of 1882, Article 54 deals with the transfer of real property by sale. It stipulates that the real estate value exceeds Rs. 100 Unless the sales contract is registered in accordance with the provisions of the Indian Registration Act, it cannot be transferred. However, it is worth noting that real estate is worth less than Rs. Only 100 can be transferred by handing over the property. It does not stipulate any conditions on the transfer of movable property. Therefore, the law seems to make a distinction between the transfer of real property worth more than Rs. 100 On the one hand, the transfer of movable property and the transfer of real estate worth less than Rs. 100 on the other side. In the first case, legal ownership will not be transferred unless the contract of sale is registered, while in the second case, no formalities are required.

In the case of the Deputy Commissioner of Income Tax c. Mahadeo R. Mahadik argued in [5]: In terms of real estate, refer to the status of Duncans Industries Ltd v. UP [6], which discusses when the entire commercial enterprise is intended to be transferred to other places, including factories, machinery and Other assets, forming a machine permanently embedded in the fertilizer plant on the predetermined land. In the Abbott Healthcare Private Limited v Raj Kumar case, the fact that a typical BTA would have a stamp duty effect has been well resolved. Prasad & Ors. [7], found that the BTA was properly sealed.

In addition, there is no dispute as to whether this transfer constitutes a transfer, because in the Anil Purushottam Kakad v case, the contract for the transfer of the commercial company, including its goodwill, was classified as a “transfer” by the tax authority. .. Tax refund officials [8]. The Supreme Court also ruled in the Hindustan Lever & Anr case. Oppose Maharashtra and Anr. [9] The High Court’s order to approve the company’s plan of arrangement pursuant to Article 394 of the 1956 Company Law (“Company Law”) is a “transfer” and therefore subject to income tax. Therefore, when it comes to “transfer”, the court attaches great importance to corporate agreements. The conclusion drawn from the above discussion is that under stamp duty law, a typical BTA is marked as “transportation” and the applicable tax rate will be calculated according to the applicable tax rate in each state. However, an agreement containing the intention to sell the company and its assets should not constitute a transfer, but only a sales contract.

Section 5 of India Stamp Tax Act 1899 stipulates stamp tax of “agreement or memorandum of agreement” as shown below, 5. Agreement or memorandum of agreement (a) if related to the sale of a bill of exchange; dos annas (b) if it is related to the sale of a bill of exchange, government securities or corporations or other legal entities; up to ten rupees, one anna per rupees. 10,000 or part of the value of the securities or shares (c) If there is no other provision 8 annas If the performance of the contract does not intend an immediate transfer of the sale of the property, the aforementioned instrument should be classified as a sales agreement and is not used to calculate the impact of the stamp tax transfer. In the case of Indian Life Insurance Company v. Dinanath Mahadeo Tembhekar and others [10], the discussion is as follows: “The provisions of Chapter II, Section 3 make the instrument taxable in accordance with the provisions of the annex to the Law and articles 4 to 6 of reference and other Provisions emphasize that the legislature does not intend to collect taxes on transactions. There is an obvious difference in men’s legal affairs. It should be noted that transactions can have legal effect without resorting to formal documents or instruments. Register. Sometimes, through these instruments, legal rights can be passed, sometimes not. The recording and execution of tools can only be used to prove completed transactions. Similarly, the existence of tools or documents may be to create rights and obligations in the future.

 There may be executable, executable and executable documents, which can be in the form of a formal agreement, or they can be specified in the documents passed by both parties. In various situations, when applying the stamp duty law and other taxation regulations, the problem is a matter of fact. It is necessary to consider all relevant circumstances, the nature of the transaction and its legal effect, and always tend to hesitate to support this topic. The provisions of the tax law.

Therefore, under the Stamp Tax Act, business transfer agreements that do not prove the transfer of ownership will be sealed as sales agreements in accordance with Article 5(c). It should be noted that the business transfer contract does not consider immediate transfer, but can order the parties to execute the transfer deed. The Supreme Court clearly found that Avinash Kumar Chauhan v. Vijay Krishna Mishra [11] held that the sales agreement does not need to pay the stamp duty paid in the sales contract. It pointed out: “attached to the “Stamp Duty Act” Annex IA Article 23 to replace the M.P. Act No. 19 of 1989: “Interpretation. For the purposes of this article, in the case of a real estate sales agreement, the ownership of any real estate is transferred to the buyer after the said agreement is executed and before the execution, without executing the transfer related to them. , Such sales agreement will be . As long as the provisions of Article 47A apply mutatis mutandis to such agreements, is deemed to be the above assignment, as they apply to assignments under this Article. : As long as the subsequent transfer is made in accordance with the above sales agreement, the stamp duty (if any) that has been paid and recovered in the sales agreement will be adjusted to the full tariff. Taxation is imposed on transportation, with a minimum of Rs 10. Chapter , Act No. 19 of 1989, entered into force on November 15, 1989.

As a result of the aforementioned provisions, the legal fiction has arisen. Although in general terms, the contract of sale does not need to pay the stamp tax payable on the deed of sale, but considering the purpose and purpose it seeks to achieve, the legislature considers it necessary to impose the stamp tax on the documents that are already in possession. . He was transferred. There is no problem with the validity of the previous regulations ”. Based on the above legal provisions and relevant case law, it can be concluded that if BTA is sold by agreement, stamp duty will be charged. In accordance with Article 5 (c) of Schedule I of the Stamp Law, as well as the transfer contract adopted for physical assets (whether movable or immovable), the stamp tax must be paid according to the nature applicable. The assets that are transferred and the tools to record such transfers must Therefore, to understand the impact of stamp duty on instant transactions, it is necessary to analyze the nature of the assets transferred and the tools to transfer the assets.

References

[1] https://indiankanoon.org/doc/884541/

[2] https://indiankanoon.org/doc/397621/

[3] https://indiankanoon.org/doc/1182674/

[4] https://indiankanoon.org/doc/1207906/

[5]https://indiankanoon.org/doc/514000/

[6]https://indiankanoon.org/doc/135953/

[7] https://indiankanoon.org/doc/126370654/

[8] https://indiankanoon.org/doc/1873059/

[9] https://indiankanoon.org/doc/1859141/

[10]http://www.supremecourtjudgements.in/judgment?jid=149130

[11]https://indiankanoon.org/doc/1729274/

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