2025 (5) TMI 840 - HC - GST

Validity of auction sale of the Fortis trade mark conducted in enforcement of an arbitral award - absence of a reserve price and the limited publicity of the auction sale notice - levy of GST on the sale of the trade mark and the procedure for transfer of ownership in the trade mark registry - HELD THAT - Under Section 92 of the CGST Act where the estate of a taxable person is in control of the Court of Wards Administrator General the Official Trustee or any receiver or manager who manages the business under an order of the court tax payable could be recovered from such person. There is a fundamentally incorrect assumption that the Fortis trade mark is in custody of a court appointed receiver or is in the custody of this court or court auctioneer. The court has only appointed an officer to conduct the public auction for the sale of asset in execution. Court auctioneer is not a manager contemplated under Section 92 tasked with a duty to manage the business of Objector. There is no parity of judicial powers and authority of managers mentioned in Section 92 and that of Court Auctioneer. For this reason Section 92 has no applicability in the present case. The auctioneer can t be made liable under Section 92 to pay GST to the authorities and the liability remains that of the seller or buyer as the case may be under the GST Act and Rules. This Court is not competent to decide the issues of GST liability on the sale much less issue a direction that FHL shall be entitled to claim input tax credit in its GST filings as is sought in the submissions made by FHL. However if FHL is seeking a direction to pre-emptively resolve the GST issues apprehending non- payment of GST by Objector and not necessarily as direction under Section 92 of the CGST Act holding court auctioneer liable to pay GST for and on behalf of the liable entity then it is felt that such a direction is premature at this stage. It will be proper to first find out if Objector has refused to pay GST or is unable to pay the same due to its allegedly cancelled registration - Under the circumstances the only direction that could be issued at this stage is that the parties are expected to comply with the GST laws in relation to the payment of tax liability and compliances applicable to the present transaction. Transfer of ownership of the trade mark - HELD THAT - It is clarified that upon the confirmation of the sale of trade mark Fortis in favor of FHL it shall become the owner of the trade mark Fortis with all the attendant rights and liabilities. As an owner FHL is free to seek transfer of the trade mark in the records maintained by the trade mark registry who shall record the change of ownership in their record in accordance with laws and rules. List before the Joint Registrar (Judicial) on 16.04.2025 for confirmation of sale proceedings in terms of the Sale Proclamation Notice and execution of Sale Deed/Sale Certificate subject to payment of balance amount. Conclusion - I) The objections to the valuation and auction are without merit the auction is conducted fairly and in accordance with law and the sale of the trade mark Fortis in favour of FHL at Rs 200 Crores is confirmed. ii) Directions regarding GST compliance and trade mark transfer are clarified with the parties expected to comply with applicable laws and seek further directions if necessary.

Summary

Issues Presented and Considered

The core legal questions considered by the Court are:

(i) Whether the auction sale of the "Fortis" trade mark conducted in enforcement of an arbitral award was valid and should be confirmed, particularly in light of objections raised by the Objector regarding the valuation of the asset;

(ii) Whether the absence of a reserve price and the limited publicity of the auction sale notice affected the fairness and market value discovery of the auction;

(iii) Whether the valuation report relied upon by the Decree Holder (DH) was reliable and independent, particularly concerning the royalty rate used, and whether the Objector's valuation reports are more credible;

(iv) Whether the auction purchaser, Fortis Healthcare Limited (FHL), had a conflict of interest or any disqualification to participate in the auction;

(v) Whether the outstanding license fee arrears claimed by the Objector from FHL should be factored into the auction price or affect confirmation of the sale;

(vi) Whether the auction procedure complied with the legal requirements under the Code of Civil Procedure (CPC), and whether any material irregularity or fraud vitiated the auction;

(vii) The liability for Goods and Services Tax (GST) on the sale of the trade mark and the procedure for transfer of ownership in the trade mark registry following confirmation of sale.

Issue-wise Detailed Analysis

1. Validity and Confirmation of Auction Sale

The Court examined the objections raised by the Objector, who did not oppose the sale per se but challenged the valuation and fairness of the auction. The auction was ordered by the Court in enforcement of an arbitral award, with the trade mark "Fortis" sold by public auction. The Objector contended that the auction price of Rs 200 Crores was substantially undervalued.

The Court noted that the Objector was permitted by the earlier order dated 29.10.2024 to raise objections limited to valuation. The Court emphasized that the auction was a mechanism chosen to resolve the wide disparity in valuation estimates between the parties, and price discovery through auction is a legally recognized method.

There was no direct challenge to FHL's competence to participate in the auction, and the Court held that the participation of FHL was not barred by any order. The Court declined to entertain insinuations about conflict of interest beyond the limited mandate of valuation objections.

The auction was conducted in a complex factual context involving interlocking transactions, charges on the brand, and ongoing litigation between the parties. The Court found no evidence of manipulation or fraud in the auction process and held that the price discovered through auction must be accepted as the fair value of the asset unless material irregularities are proven.

2. Absence of Reserve Price and Publicity of Auction

The Objector argued that no reserve price was fixed, which led to failure in real price discovery, and that the sale notice was published only in local newspapers, limiting participation.

The Court explained that under Order 21 Rule 77 of the CPC, there is no requirement to fix a reserve price for sale of movable property, unlike immovable property. The absence of a reserve price was intentional to allow price discovery given the divergent valuations.

Regarding publicity, the Court found the asset-a widely known healthcare brand-did not require national newspaper publication to attract bidders. The lack of other bidders was attributed to the encumbrances and ongoing disputes surrounding the brand, not to inadequate publicity. The Court rejected the assumption that wider publicity would have resulted in higher bids.

3. Reliability and Independence of Valuation Reports

The DH's valuation report valued the brand at Rs 191.5 Crores based on a royalty rate of 0.25% of net revenue, derived from a license agreement that had expired in 2021. The Objector challenged the use of this expired license and questioned the independence of the valuer, alleging the valuation was based on a restrictive mandate from the DH.

The Objector produced two other valuation reports, one by KPMG (2017) valuing the brand at Rs 650-750 Crores and another by Transique Valuation Advisers (2022) valuing it between Rs 854-1205 Crores. The Objector argued these reports reflected correct methodologies and better EBITDA performance of FHL, justifying higher valuation.

The Court found both Objector's reports unreliable because they assumed ideal scenarios without accounting for the ongoing disputes and encumbrances that adversely affected the brand's marketability. The 2017 KPMG report predated the disputes and loan encumbrances, and the 2022 report itself acknowledged the litigation impact as a caveat. The Court also noted that the Objector's valuers might lack independence, similar to the DH's valuer, as both parties commissioned their own reports.

The Court concluded that the DH's valuation, while not perfect, was pragmatic and reflective of the distressed circumstances, and the auction was the appropriate mechanism to resolve valuation disputes.

4. Conflict of Interest and Competence of Auction Purchaser

The Objector alleged that FHL had a conflict of interest as it was both the licensee and holder of a charge on the brand, and that it had defaulted on royalty payments. The Objector contended that FHL's acquisition of the brand in auction gave it an unfair advantage.

The Court held that issues of conflict of interest, loan recovery suits, and the impact of acquisition on liabilities are matters for the suit pending between the parties and not for adjudication in these auction confirmation proceedings. The Court emphasized that FHL's participation was not barred and no fraud or manipulation was shown.

5. License Fee Arrears and Their Impact on Auction Price

The Objector claimed outstanding license fees of Rs 622 Crores plus interest and GST from FHL and argued that these arrears should be factored into the valuation or affect confirmation of sale.

The Court observed that the liability was disputed and pending adjudication, making it premature to factor arrears into the auction price. The Court clarified that confirmation of sale does not preclude the Objector from pursuing recovery of arrears in appropriate proceedings.

6. Compliance with Legal Auction Procedure and Material Irregularities

The Court examined the auction procedure under Order 21 Rules 66, 77, 78, and 90 of the CPC. It found that the sale proclamation notice was issued in accordance with the rules, and no material irregularity or fraud was established to vitiate the auction.

The Court reviewed case law relied upon by the Objector and found them distinguishable or inapplicable to the facts. It reiterated the principle that mere inadequacy of price is not a ground to refuse confirmation unless there is evidence of fraud or manipulation. The Court quoted a precedent stating: "what is expected of the judge is not to be a prophet but a pragmatist and merely to make a realistic appraisal of the factors, and, if satisfied that in the given circumstances the bid is acceptable, conclude the sale."

7. GST Liability and Transfer of Trade Mark Ownership

FHL sought directions clarifying GST liability on the sale and transfer of trade mark registration. It contended that under Section 9 of the CGST Act, the Objector as supplier is liable to pay GST but expressed apprehension due to Objector's cancelled GST registration. FHL proposed that the Court appoint an agent to pay GST and facilitate transfer of ownership in the trade mark registry.

The Court disagreed with FHL's reliance on Section 92 of the CGST Act, holding that the trade mark was not in custody of a court-appointed receiver or manager as contemplated under that provision. The Court clarified that the auctioneer is not liable to pay GST and that GST liability remains with the seller or buyer under the GST Act and Rules.

The Court declined to issue directions on GST payment or input tax credit claims at this stage, deeming such directions premature. It directed the parties to comply with applicable GST laws.

Regarding transfer of ownership, the Court held that upon confirmation of sale, FHL becomes the owner with all attendant rights and liabilities, free to seek transfer in the trade mark registry as per law. The Court left open the possibility of future directions to facilitate transfer if required.

Significant Holdings

"Once public auction route was chosen for sale, the price discovered in the said auction, must be assumed to be the fair value of the brand at the time of auction, unless fraught with material irregularities."

"There is no direct and overt challenge to the FHL's competence to participate in the auction... FHL's competence to participate in the auction is no longer a question open to challenge."

"The auction conducted is in accordance with the notice of sale proclamation which was settled in terms of Order 21 Rule 66."

"Mere inadequacy of the price is no reason to not confirm the sale... what is expected of the judge is not to be a prophet but a pragmatist and merely to make a realistic appraisal of the factors, and, if satisfied that in the given circumstances the bid is acceptable, conclude the sale."

"Section 92 of the CGST Act has no applicability in the present case... the auctioneer can't be made liable under Section 92 to pay GST... liability remains that of the seller, or buyer, as the case may be."

"Upon the confirmation of the sale of trade mark Fortis in favor of FHL, it shall become the owner of the trade mark Fortis, with all the attendant rights and liabilities."

The Court concluded that the objections to the valuation and auction were without merit, the auction was conducted fairly and in accordance with law, and the sale of the trade mark Fortis in favour of FHL at Rs 200 Crores was confirmed. Directions regarding GST compliance and trade mark transfer were clarified, with the parties expected to comply with applicable laws and seek further directions if necessary.