Stamp Duty issues in slump sale transactions

Slump Sale

Slump sale is a commonly used method of business acquisition wherein an undertaking as a “going concern”is transferred from one entity to another. The term ‘slump sale’ incorporated under the Income Tax Act, 1961 [See End Note 1] (“IT Act”) has been defined to constitute the following elements: (a) sale of an undertaking/business activity [See End Note 2] taken as a whole– lock, stock and barrel; (b) sale shall be for a lump sum consideration; and (c) no separate values shall be assigned to individual assets and liabilities.

However, specific values can be assigned to individual assets or liabilities for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees. This is because the assets constituting the business in a slump sale transaction may include movable property (tangible and intangible, including intellectual property), immovable property (land, buildings, plant & machinery that are permanently fixed or embedded to the earth), unsecured loans, advances/deposits, human resources and contracts, and stamp duty chargeability and registration requirement for each type of asset/liabilities shall vary. In order to give effect to the transaction, the parties typically enter into a Business Transfer Agreement (“BTA” or “Agreement”), which inter alia records the following terms and conditions: 

• The assets of the business undertaking to be transferred to the Purchaser are listed in the schedule to the Agreement;
• The lump sum consideration for sale is specified (sale price is generally based on a business valuation report);
• The BTA shall specify the date (“Closing Date”), prior to which all necessary approvals, permissions, documents to consummate the transaction are obtained;
• Typically, the seller shall make requisite representations and warranties with respect to the legal status and financial health of the business undertaking as on the Closing Date;  
• Upon obtaining all requisite documents and approvals, the transfer of business takes place on the Closing Date.

Stamp Duty chargeable on BTA

Stamp duty is a duty payable upon the execution of certain instruments or documents specified in the Indian Stamp Act, 1899 (“IS Act”) or the relevant state Stamp Act as the case maybe. In absence of any State stamp legislation, the IS Act applies. The general principle with regard to stamp duty is that duty has to be determined with reference to an instrument, not in reference to a transaction.[See End Note 3] Therefore, to understand the stamp duty liability for a specific transaction, it is important to understand the instruments involved in the transaction and the subject-matter of the instrument.[See End Note 4]

It is common practice for a BTA to be structured as an “agreement to sale”. In such cases, the Agreement provides a general framework pursuant to which the business undertaking is transferred on the Closing Date. BTA in itself may not contemplate any transfer and can mandate the execution of a deed of “conveyance”[See End Note 5] on or before the Closing Date to effectuate the transfer. However, there are instances where the Agreement contains recitals with respect to the payment of consideration, handing over of the possession of property along with title deeds of such property. In such cases, the BTA assumes the color of a “conveyance” and stamp duty is levied accordingly.

Since the transfer envisaged under the Agreement is the sale of a business undertaking as a whole, it cannot be specifically equated with the sale of movable or immovable property. The IS Act as well as State Stamp Acts do not contain specific provisions levying duty on an agreement relating to the transfer of “business” as such. Therefore, it is imperative that each asset proposed to be transferred to the purchaser vide a BTA is individually identified for the purpose of stamp duty as movable or immovable. The levy of stamp duty depends on the State in which the Agreement is executed. For better clarity, let us examine the stamp duty implications on a BTA under Central and certain State legislations.

Positon under the Indian Stamp Act, 1899

On perusal of the definition of “conveyance” under the IS Act, it is understood that no distinction is made between moveable and immovable property.[See End Note 6] Tangible moveable property can be sold by delivery to the purchaser on receipt of the price without an actual conveyance, but if a conveyance in writing comes into existence, it is chargeable to duty as such. Intangible movable property such as actionable debt or goodwill has to necessarily be transferred under a written instrument and chargeable as conveyance. Whereas land/buildings are immovable property, machinery installed in a factory premises (fixed to the ground) can be considered as an immovable property, depending on the degree and permanency of the attachment, and the purpose of installing and attaching the machinery. For instance, the sale of a fertilizer plant as part of a slump sale along with land and building, would be considered as immovable property if it was always intended that the plant remains permanently affixed to the land and building being transferred.[See End Note 7]

Article 5 to the Schedule of the IS Act prescribes the stamp duty chargeable on an “Agreement or Memorandum of an Agreement”. Article 5 further sub-classifies several categories on the basis of the subject-matter of an agreement prescribing specific duty applicable to a particular instrument. A residuary provision is provided under Article 5(c) wherein all such agreements not specifically provided for are classified and duty payable is separately prescribed.

If a contract does not intend to operate as an immediate transfer of the sale of property, such instrument is required to be stamped as an agreement rather than a conveyance. An agreement to sell a business undertaking with its assets including goodwill, would not amount to conveyance but would be merely a contract to sell, although the parties intended that when the transaction was completed, it should take effect from the date of the agreement and although in order to effect the contemplated sale, no actual deed of conveyance was prepared subsequently with regard to goodwill and movables (a sale deed being executed only in respect of immovable property).[See End Note 8]

Therefore, under the IS Act, a BTA not evidencing a transfer of property shall be duly stamped as an agreement under Article 5(c), thereby requiring deed of conveyance to be executed on or before the Closing Date. Whereas the execution of a conveyance deed for the purpose of immovable property is absolutely necessary to establish title and ownership, transfer of ownership of movable property can be made by delivery of such property. In the event the BTA records the transfer of both movable and immovable property without the requirement of executing a conveyance deed, the BTA shall be construed as a conveyance and stamp duty as prescribed under Article 23 would be leviable on the said instrument.   

Position under the Bombay Stamp Act, 1957 (“BS Act”)

The BS Act follows a scheme similar to the IS Act, wherein Article 5 of its Schedule prescribes stamp duty to be levied on an instrument which is an “Agreement or its records or Memorandum an Agreement”. It is to be noted that Article 5(h)(A)(iv) specifically identifies an agreement that: (a) creates any obligation, right or interest; (b) has monetary value; and (c) is not covered under any other provision of the BS Act.

The stamp duty chargeable may extend up to two rupees for every thousand rupees of the monetary value stated in the Agreement. An agreement in the nature of a BTA squarely falls under Article 5(h)(A) of the BS Act. Despite the generic nature of the description in Article 5(h)(A), the BS Act has retained a residuary provision under Article 5(h)(B) which prescribes stamp duty of only INR Hundred (100) with respect to agreements not otherwise provided for. Given that Article 5(h)(A) describes the instrument more specifically, a BTA executed in the State of Maharashtra should be duly stamped under Article 5(h)(A) rather than Article 5(h)(B).

Article 25 of the BS Act prescribes the stamp duty payable on an instrument of conveyance with respect to movable and/or immovable property, as the case may be. However, the BS Act specifically states that if an agreement to sell an immovable property effectuates the transfer of possession of such property before or after execution, the same shall be deemed to be a conveyance and stamp duty shall be levied accordingly. The BS Act also provides an exemption in case the ‘agreement to sale’ is deemed as a conveyance. That is, in case the BTA itself effectuates the transfer of movable and immovable property constituting the business, resulting in such instrument being duly stamped as conveyance under Article 25 of the BS Act, the stamp duty paid on such agreement shall be adjusted towards the total stamp duty leviable on the conveyance deed.

Position under the Karnataka Stamp Act, 1957 (“KS Act”)

The KS Act deviates from the BS Act as well as the IS Act, in light of specific provisions dealing with the transfer of movable and immovable property under Article 5 of KS Act. Article 5(e) of the KS Act prescribes the stamp duty chargeable on an agreement relating to sale of immovable property with part-performance of the contract being made. In the event possession of the property is delivered or agreed to be delivered prior to execution of conveyance, the stamp duty prescribed is the same as the duty prescribed with respect to a conveyance deed as specified in Article 20. Similar to the BS Act, the KS Act also provides for set-off of the stamp duty against the duty paid on the conveyance deed. In the event possession of the property is not delivered, the stamp duty liability on such agreements shall be restricted to INR twenty thousand.

Similarly, Article 5(g) of the KS Act prescribes the stamp duty payable with respect to an agreement relating to the sale of movable property. In the event possession of movable property is delivered or agreed to be delivered without executing a conveyance deed, the stamp duty prescribed on such agreement is three percent (3%) of the consideration or the market value of the property, whichever is higher. In the event the possession of the property is not delivered, the stamp duty liability is restricted to INR twenty thousand. Apart from these provisions, a residuary clause under Article 5(j) of the KS Act provides that any agreement not specifically provided for in Article 5 shall be duly stamped for INR two hundred. Therefore, the stamp duty payable on a BTA executed in the State of Karnataka shall depend upon the structure of the BTA, whether conveyance deed is proposed to be executed by the parties with respect to the movable properties forming part of the business undertaking and whether a business undertaking purported to be transferred under a BTA can be equated to a movable property or an immovable property.

Word of caution

BTA typically comprises of numerous items of transfer, which may include all kinds of tangible, intangible, contracts, movable property and immovable property. While a slump sale transaction is the preferred mode of business acquisition from an income-tax perspective, given the complexities involved in the determination of stamp duty on the instrument of transfer, it is recommended that the parties should approach the relevant stamp authority for adjudication of stamp duty [See End Note 9] and seek the opinion of the District Officer with respect to the determination of the duty chargeable on the instrument, if there is any ambiguity in the concerned Stamp Act. It is always necessary and beneficial for the parties to treat stamp duty aspects very carefully to avoid any penalties, which can be as high as ten times the actual stamp duty payable. 

[The authors are Associate and Joint Partner, respectively in Corporate Practice, Lakshmikumaran & Sridharan, Bengaluru]

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