Introduction
Under Sales Tax/VAT Laws , tax is levied on transaction of ‘sale’. ‘Sale’ can be said to have taken place when it fulfills minimum criteria laid down in the Sale of Goods Act. This aspect has also been dealt with by Honourable Supreme Court, in the landmark judgment, in the case of Gannon Dunkerley and Co. (9 STC 353). In respect of ‘sale’ transaction, Honourable Supreme Court has observed as under:
“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 the above passage, it is clear that to be a ‘sale’, the following criteria should be fulfilled.
(i) There should be two parties to contract i.e., seller and purchaser,
(ii) The subject matter of sale should be moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e., transfers of ownership from seller to purchaser.
If the above criteria are fulfilled, there is no doubt that it will be a ‘sale’. However, to come within sales tax net, the further requirement is that it should be in ‘course of business’.
Part/whole transfer of business – vis-à-vis Sale of Intellectual Rights
An issue arises when intellectual rights are transferred to transferee while transferring part or whole of business. In other words, there may be cases where a running division of a business concern may be transferred to other business concern or the whole business concern may be transferred to another entity.
Normally, transfer of division or whole business to other concern does amount to sale. It is a transaction of change in constitution. Reference can be made to determination order in case of Bharat Bijlee Ltd. (DDQ 11/2004/Adm-5/54/B-2 dt. 12-10-2004)
In this case, one division of the company was transferred to another company under a scheme of arrangement. Commissioner of Sales Tax, Maharashtra State, noted that the Division is transferred in its entirety and held that there is no sale of any goods as such. It is change of constitution and not ‘sale’.
The judgment in case of Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) was relied upon.
Coromandel Fertilisers Ltd. (112 STC 1)(A.P.)
In this case, the whole business was transferred to the other company. Sales tax authority considered the same as sale of ‘good’ i.e., the transfer of busi-ness was considered as sale of goods liable to tax. Honourable A.P. High Court rejected the contention, holding that it is not covered under Sales Tax Laws. The goods consisted in business were also held as not liable to tax, as business itself ended and transaction cannot be said to be in the course of business.
Kwality Biscuits (P) Ltd. vs. State of Karnataka (53 VST 66)(Karn)
Recently Honourable Karnataka High Court had an occasion to consider this situation.
In this case, the facts were as under:
“The petitioner- dealer was engaged in manufacture and sale of biscuits and confectionery, wheat products, jams, jellies and creams. Its promoters entered into an agreement with Britannia, under which the promoters of the dealer-company agreed to exit the business of biscuits by effecting a sale of the entire business as a whole and as a going concern. The entire assets as well as liabilities including the movables and immovables, goodwill, intellectual property assets such as registered trademarks and brand names as well as unregistered trademarks and brand names stood transferred by virtue of sale/transfer of equity shares held by the promoters along with their family members in the dealer-company in favour of Britannia. The question was whether the sale of intellectual property owned by the dealer-company attracted payment of sales tax under the Karnataka Sales Tax Act, 1957:
Honourable Court referred to various judgments, throwing light on various aspects involved like, meaning of ‘business’, ‘goods’ and others.
In respect of ‘business’, amongst others, reference made to judgment of Honourable A. P. High Court in Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) as under:
“22. In order to highlight the issue which we propose to address ourselves in extenso, it is necessary to note that the Act ordains that transfer of property in goods for valuable consideration must be ‘in the course of trade or business’ (vide section 2(1)(n)). This is so, because the incidence of tax falls on a dealer who ‘carries on the business of buying, selling, supplying or distributing goods’ (vide section 2(1) (e)). A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax under the APGST Act. The crucial question then is, whether these requirements are satisfied. Is there an element of business present in these disputed transactions? Assuming there was a sale of goods, did such sale take place ‘in the course of business’ and by a person who carries on the business of buying and selling goods?”
They have also referred to the meaning of the word “business” as explained in the aforesaid Raipur case [1967] 19 STC 1 (SC), as under (pages 14 and 29 in 112 STC):
“24. The expression ‘business’, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ‘profit-motive’, it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit motive may be easily discernible in some transactions; in others, it would have to be inferred from a review of the circumstances attendant upon the transaction.
70. We are therefore of the view that transfer of goods involved in the process of disposing of the entire cement manufacturing unit hitherto owned by the petitioner-company does not tantamount to ‘business’ within the meaning of section 2(1)(bbb) of the Act and the sale is not ‘in the course of business’. The charge to tax is therefore not attracted under the APGST Act.”
In the light of above, Honourable High Court made observations as under:
“Therefore, to attract the liability to pay tax u/s. 5 of the Act, a dealer must be carrying on the business of buying, selling, supplying and distributing goods. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. A person is a dealer within the meaning of the Act, when he carries on the business of buying or selling of goods for consideration paid or payable in future. What is required is that, sale or purchase must take place during the course of business of buying or selling in view of definition of “dealer” in clause (h) of section 2 of the Act. The expression “business”, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. “During the course of business” postulates a continuous exercise of an activity. It also connotes some real, substantial and systematic or organised course of activity or conduct set with a purpose. In taxing statutes, it is used in the sense of a whole time occupation or profession of a person which requires continuous attention and labour. The expression “carrying on business” requires something more than mere selling or buying. It is not merely the act of selling or buying that makes a person a dealer, but the object of the person who carries on the activity is important to attract levy of sales tax. “Sale” means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax. The taxing statutes must be construed with strictness and no payment is to be exacted from the subject, which is not clearly and unequivocally required by the statute.”
On the facts of the case, Honourable High Court held that the intellectual properties are required till business is running and there is no possibility of selling them. In other words, the High Court held that the sale is not in the course of business or incidental to carrying on business and no tax can be attracted on the same.
Conclusion
The judgment throws light on aspect of ‘course of business’ vis-à-vis such inevitable items where transfer can take place alongwith transfer of running business only and there cannot be independent sale, so as to become taxable as separate sale. It will be useful for dealers in taxation of similar transactions.
