2024 (3) TMI 131 - HC - Service Tax

Service tax not applicable on intellectual property transfer in slump sale under Sections 65(92) and 65(55b) Finance Act 1994

Principal Commissioner of Central GST And Central Excise, Vadodara II Versus M/s. Gharda Chemicals Ltd.

The Gujarat HC dismissed an appeal regarding service tax levy on intellectual property services in a slump sale transaction. The appellant contended that ... Levy of service tax - transfer of Intellectual Property Services - slump sale - transaction amounting to providing of service or not - service tax levied on the ground that it supplied their own invention and scientific discovery without clarification and bifurcation of the value in the sale and purchase agreement - HELD THAT:- After considering the facts of the case and referring to the statements recorded by the appellant during the course of investigation prior to issuance of the show-cause notice wherein it is made clear that the respondent has transferred the entire polymer division as a slump sale to SIPPL and accordingly the Tribunal has rightly observed after analysing the provisions of Section 65 pertaining to the definition of scientific or technical consultancy under Section 65(92) and intellectual property service as per Section 65(55b) of the Finance Act, 1994 read with the definition of slump sale as per Section 2(42C) of the Income Tax Act, 1961 has rightly held that in case of slump sale, there is no question of providing intellectual property service or scientific or technical consultancy as alleged by the appellant. The facts narrated in the impugned order of the Tribunal are not in dispute and in case of slump sale, there is no question of providing any service as per Section 65(92) as well as Section 65(55b) of the Finance Act, 1994 - the reasons assigned by the Tribunal and as such no question of law much-less any substantial question of law arises from the impugned order of the Tribunal. Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer of patents, technical know-how and related rights occurred as a permanent transfer pursuant to a slump sale or amounted to a taxable temporary transfer/permitting of use falling within 'Intellectual Property Service' under Section 65(55b) of the Finance Act, 1994. 2. Whether the transfer of technical know-how and patent rights constituted 'scientific or technical consultancy service' under Section 65(92) of the Finance Act, 1994. 3. Whether the transaction is to be characterised as a sale/purchase of goods under Section 2(h) of the Central Excise Act, 1944 (i.e., transfer of possession of goods in the ordinary course of trade) or otherwise falls within service tax exigibility. 4. Whether the Tribunal's findings were based on no evidence, omitted consideration of relevant admissible material, or involved misapplication of law/technical aspects in reaching its conclusion that the transaction was a slump sale and not a taxable service. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation as slump sale v. temporary transfer of intellectual property (IP) Legal framework: The Tribunal and Court applied the statutory definitions: 'Intellectual property service' under Section 65(55b) of the Finance Act, 1994 (covering temporary transfer or permitting use/enjoyment of IP), the definition of 'Intellectual property right' under Section 65(55a), and the Income-Tax Act definition of 'slump sale' under Section 2(42C) (transfer of one or more undertakings for a lump sum without values assigned to individual assets/liabilities). Precedent treatment: The judgment does not rely on or distinguish authoritative case law; rather, it performs a direct statutory interpretation and factual application of the definitions above. Interpretation and reasoning: The Tribunal examined the sale as a transfer of an entire division as a going concern for a lump sum consideration, supported by statements recorded during investigation and the sale documentation (including a supplemental agreement and schedules listing registered and applied patents). The Tribunal reasoned that Section 65(55b) covers temporary transfers or permitting use; where an entire undertaking is transferred as a slump sale, the transfer is not a mere temporary grant of rights but part of a complete transfer of business. The absence of any pleaded or demonstrated temporary arrangement (e.g., time-limited licence or retention of use by the seller) weighed against treating the transaction as an IP service. Ratio vs. Obiter: Ratio - where a business (including patents/technical know-how) is transferred as a going concern in a slump sale (lump sum without bifurcation), such transfer is not a 'temporary transfer' or 'permitting the use' and therefore does not, on that basis alone, constitute an 'Intellectual property service' liable to service tax. Obiter - observational comments regarding common commercial practice of slump sales and the general inapplicability of service categories to such transfers. Conclusions: The Court agreed with the Tribunal's statutory construction and factual findings: the transfer was by slump sale and not a temporary transfer or permitting of use under Section 65(55b), so service tax was not exigible on that ground. Issue 2 - Whether provision of technical know-how amounted to 'scientific or technical consultancy' (Section 65(92)) Legal framework: Section 65(92) defines 'scientific or technical consultancy' as advice, consultancy, or scientific/technical assistance rendered by a scientist/technocrat or institution to another person. Precedent treatment: No authorities were invoked; the Tribunal applied the statutory meaning to the record. Interpretation and reasoning: The Tribunal found no evidence that the seller provided advice, consultancy or technical assistance to the buyer in the course of the transfer; instead, the arrangement was the sale of an ongoing business unit. The recorded statement of the seller's representative denying provision of services supported the conclusion that there was no contemporaneous consultancy or assistance falling within Section 65(92). Ratio vs. Obiter: Ratio - absent evidence of advice/consultancy/technical assistance distinct from a bona fide slump sale of a business, the transaction will not attract tax under Section 65(92). Obiter - remarks on the temporal and factual requisites of 'consultancy' vis-à-vis transfer of business assets. Conclusions: The Court upheld the Tribunal's finding that the facts did not demonstrate provision of scientific or technical consultancy; therefore, service tax could not be sustained under Section 65(92). Issue 3 - Argument invoking Section 2(h) Central Excise Act and characterization as sale of 'goods' Legal framework: Section 2(h) of the Central Excise Act defines 'sale'/'purchase' as transfer of possession of goods for consideration in the ordinary course of trade; the appellant contended that patents/trademarks are not 'goods' under that definition and therefore the transaction should be captured as a taxable service. Precedent treatment: The Tribunal addressed the matter primarily under Finance Act definitions and the slump sale concept; the Court reviewed that approach. Interpretation and reasoning: The Court accepted the Tribunal's approach that the core question was whether the transaction was a slump sale (Income-Tax Act concept) such that the statutory service categories (Finance Act) would not apply. The Court observed that where an undertaking is transferred as a going concern for lump sum consideration without bifurcation, the transfer of associated IP and technical know-how is part of the transfer of the business and not a service supply; the contention that IP cannot be 'goods' under Central Excise did not displace this characterisation for service tax purposes. The Tribunal had examined the substance (transfer of the business) and not merely the labels in the agreement. Ratio vs. Obiter: Ratio - characterization by substance (slump sale of an undertaking) controls over treating component rights as separately taxable services under the Finance Act; taxability cannot be imposed by fragmenting an integrated slump sale into purported service supplies where the nature of the transaction is a lump sum transfer of a business. Obiter - discussion on the interplay between Central Excise definitions and service tax categories insofar as parties attempt to recharacterise transactions. Conclusions: The Court agreed that the Tribunal correctly declined to treat the slump sale as a taxable service under the Finance Act despite arguments invoking Central Excise sale definitions; the appellant's contention did not establish service tax liability. Issue 4 - Sufficiency and admissibility of evidence; consideration of technical aspects and application of law Legal framework: Administrative adjudication requires consideration of relevant admissible evidence and correct statutory interpretation. Precedent treatment: No contrary authority was relied upon to impugn the Tribunal's fact-finding. Interpretation and reasoning: The Tribunal relied on documentary evidence (sale and supplemental agreements, schedules listing IP), valuation reports, and recorded statements of authorised personnel including an admission that the polymer division was sold as a slump sale and that no services were provided. The Court found these factual bases sufficient and noted that the Tribunal applied the correct statutory provisions (Sections 65(55b), 65(55a), 65(92) of the Finance Act and Section 2(42C) of the Income-Tax Act) in reaching its conclusion. The appellant's complaint that the Tribunal failed to address retention of limited use by the seller was considered but the Tribunal had evaluated the contractual terms and factual matrix and concluded the arrangement was not a temporary transfer; the Court found no error in that analysis. Ratio vs. Obiter: Ratio - Tribunal's factual findings supported by documentary evidence and recorded statements are not vitiated for want of consideration of relevant admissible material; no misapplication of law or omission of technical aspects was demonstrated. Obiter - observations that transactional labels cannot override substantive characterisation when statutory definitions are applied. Conclusions: The Court concluded that the Tribunal's findings were supported by evidence and correct application of law; there was no merit in the contention that findings were based on no evidence or that relevant material was ignored. Overall conclusion The Court affirmed the Tribunal's decision that the transaction was a slump sale of an undertaking and did not attract service tax under the definitions relied upon by the revenue (Sections 65(55b) and 65(92) of the Finance Act, 1994); the appellant's contentions on temporary transfer, consultancy, Central Excise characterisation, and alleged insufficiency of evidence were rejected, and the appeal was dismissed for want of merits. No substantial question of law arose from the impugned order.