Mergers & Acquisitions

1. Mergers & Acquisitions Taxation Aspects The Institute of Company Secretaries of India Borivali Study Circle Meeting 12th August, 2012 Speaker: CA Janak Bathiya

2. Merger or Amalgamation? There is nothing called merger under the Income Tax Act But Amalgamation has been defined under Section 2(1B)

3. Amalgamation/Demergers whether taxable? • No, if a genuine purpose can be established • Yes, if not planned properly

4. Some abbreviations • Ag : Amalgamating Company • Ad : Amalgamated Company • Dd : Demerged Company • Rg : Resulting Company

5. Amalgamation under Income Tax Act "amalgamation", in relation to companies, means • the merger of one or more companies with another company • or the merger of two or more companies to form one company in such a manner that…

6. Amalgamation

7. Conditions for amalgamation • all the property should transfer • all the liabilities should transfer • Not less than three-fourth of shareholders continue (Excluding shares already held by amalgamated company in the amalgamating company)

8. Last Condition Otherwise than as a result of the • acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or • as a result of the distribution of such property to the other company after the winding up of the first-mentioned company

9. How and why is amalgamation Tax-free? Transactions not regarded as transfer s. 47 vi) : Transfer of capital asset by Ag to Ad if Ad is Indian company s. 47 vii) : Transfer by a shareholder of shares in Ag if transfer is against allotment of shares of Ad and Ad is Indian Company

10. Foreign Amalgamations Tax free? s. 47via) any transfer, of a capital asset being a share or shares held in an Indian company, by the Ag foreign company to the Ad foreign company, if— • (a) at least 25 % of the shareholders of the foreign Ag continue to remain shareholders of the foreign Ad company, and • (b) such transfer does not attract tax on capital gains in the country, in which the Ag company is incorporated;]

11. Carry forward of Losses/depreciation s. 72A : The accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be • the loss or allowance for unabsorbed depreciation of the amalgamated company • for the previous year in which the amalgamation was effected

12. Eligible entities for carry forward Ag should be • Company owning an Industrial Undertaking • Company owning a ship or hotel • PSU Co. engaged in operation of aircraft

13. Eligibility Conditions for Ag The amalgamating company— • has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for at- least 3 years; • has held continuously as on the date of the amalgamation at least 3/4th of the book value of fixed assets held by it two years prior to the date of amalgamation;

14. Eligibility Conditions for Ad The amalgamated company— • holds continuously for a minimum period of 5 years from the date of amalgamation at least 3/4th of the book value of fixed assets of the Ag; • continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation; • (iii) fulfils such other conditions as may be prescribed in Rule 9C

15. Conditions prescribed in Rule 9c From the date of amalgamation • AG shall achieve 50% level of production of the installed capacity before the end of four years • continue to maintain the said minimum level of production till the end of five years However CG will have power to relax conditions

16. Deemed dividend when subsidiary amalgamates with holding? Holding Undertaking/ Assets Nothing Subsidiary Circular 5P 1967

17. Demerger under the Income Tax Act "demerger", in relation to companies, means • the transfer, pursuant to a scheme of arrangement under sections 391 to 394 • by a demerged company of its one or more undertakings to any resulting company In such a manner that…

18. Demerger • Dd Rg • A • B

19. Conditions for demerger • All the property of the undertaking should transfer • All the liabilities relatable to the undertaking should transfer • Transfer should be at values appearing in the books of accounts immediately before demerger • Resulting company issues shares in consideration to the shareholders of the demerged co. (except itself)

20. Demerger Conditions (Cont’d) • 3/4th of the shareholders of Dd become shareholders of the Rg(except shares held by resulting co or its subsidiary) • Undertaking is transferred on a going concern basis • Is in accordance with notification by Central Government (no such notification yet)

21. Undertaking "undertaking" shall include • any part of an undertaking, or • a unit or • division of an undertaking or • a business activity taken as a whole, • but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

22. ‘Liabilities’ in demerger • the liabilities which arise out of the activities or operations of the undertaking • specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking • general or multipurpose borrowings, if any, of the demerged company in proportion of the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger

23. Carry forward of Losses/depreciation in Demerger • Directly relatable to the undertaking transferred - Full carry forward permitted, • Not directly relatable to the undertaking transferred - to be apportioned between the demerged company and the resulting company in proportion of the assets retained

24. How and why is demerger Tax-free? Transactions not regarded as transfer s. 47 vib) : Transfer of capital asset by Dd to Rg if Rg is Indian company s. 47 vid) : Transfer or issue of shares by Rg to the shareholders of Dd in consideration of demerger of undertaking s.2(22)v) : Dividend does not include any distribution of shares by the Rg to the shareholders of Dd

25. Foreign Demergers Tax-free? s. 47vic) any transfer, of a capital asset being a share or shares held in an Indian company, by the Ddforeign company to the Rgforeign company, if— • (a) at least 3/4th of the shareholders of the foreign Dd continue to remain shareholders of the foreign Rg company, and • (b) such transfer does not attract tax on capital gains in the country, in which the Ddcompany is incorporated;] Provided that s.391 to 394 not to apply to this provision

26. Certain other provisions in IT Act • 10AA: SEZ benefit to continue on amalgamation / demerger • 10B: EOU benefit to continue on amalgamation / demerger • 80-IB: Benefit to continue on amalgamation/demerger • 80-IA(12A): Benefit to not continue after amalgamation/demerger • 35 : Asset being Expenditure incurred on scientific research to be allowed after amalgamation

27. Certain provisions(cont’d) • 35DDA : VRS expenditure to travel • 35E : Amortization of expenditure incurred for prospecting of minerals to travel • S. 41 relating to deeming of income/gain arising after obtaining deduction for the same in any previous year to continue to apply to the Ad/Dd co.

28. Expenditure on Amalgamation and Demerger • Section 35DD any expenditure incurred exclusively for the purposes of Amalgamation/ Demerger shall be allowed as a deduction of 1/5th of the amount for the successive five previous years.

29. Cost of acquisition s.43(1) Expl. 7/7A: On amalgamation/demerger actual cost of transferred capital asset for the Ad/Dd to be same as the actual cost to Ag/Rg s.43C : On amalgamation/demerger cost of acquisition of transferred stock in trade for the Ad/Dd to be same as the cost of acquisition to Ag/Rg

30. Written down value (in case of depreciable assets) • Where any block of assets is transferred to Ad then the WDV in books of Ad shall be the WDV appearing in the books of the Ag till the date of Amalgamation • In case of demerger the WDV of the Undertaking to be recorded in the books of Rg shall be WDV of the transferred assets

31. Period of holding (POH)/Indexation • The POH of newly acquired shares of Ad and Rg shall be the period from which the shares of Ag and Dd are held by the shareholders. • Indexation will start from the date of acquisition of shares in the amalgamating company. CIT v. Manjula Shah(Bom) • Cost of acquisition of shares shall be the cost of shares of Ag/proportionate cost of shares of Dd

32. Section 79 compliance • Applies to companies in which public are not substantially interested • If Ad is a loss making then after amalgamation 51% of share holders of Ad should continue to remain same in the year of set-off of losses as compared to the year of incurring • S.79 applies to unabsorbed loss only and not depreciation

33. Why Tax Merger/Demergers? • Change of ownership of assets from one person to another • Mergers/Demergers only to reduce tax liability • GAAR

34. Direct Tax Code Provisions • Tax exemptions would not be explicitly available to amalgamation/demerger of a foreign company to an indian co. • AOP and BOI may be amalgamated into a company • For foreign amalgamations 75% shareholders should continue, instead of current 25% • Resulting co. to issue equity shares and not any shares as is the current interpretation

35. DTC (continued) • All losses can be carried forward and not only business losses • Incase of amalgamation no requirement to be an industrial undertaking or to be engaged for minimum of three years • Business continuity test made applicable to demerger as well

36. Service Tax The transaction between IBP and IOCL during the interim period (between the appointed date and effective date) could not be treated as between a service provider and service recipient. CCE, TRICHY Vs M/s IOC LTD CESTAT Chennai on 1.3.2011

37. Value Added Tax • Amalgamation on a going concern basis typically is not sale of goods in the and hence will not be liable to VAT. • However in some states there is a contrary view that a sale of business should be considered as taxable sale. • In such states one may have to constitutionally challenge applicability if VAT

38. VAT on inter-se Transactions • Inter-se Transaction after the appointed date but before the date of court order – VAT Refundable • Except in some states (Maharashtra/MP etc.) which have made express provisions.

39. Input Credit carry forward • CENVAT credit • VAT Credit • Both will be allowed to be transferred in case of Amalgamation/Demerger as the same is an asset for the Transferor and there are express provisions in the CENVAT credit rules and VAT laws.

40. Thank You! Contact Information janak.bathiya@shbathiya.com Board line number : 42758000

41. Mergers & Acquisitions Taxation Aspects The Institute of Company Secretaries of India Borivali Study Circle Meeting 12th August, 2012 Speaker: CA Jagruti Sheth

42. Case Study 1 A Co. Ltd. and B Co. Ltd., both being Indian companies, desire to merge together. At the end of the financial year 2012-13. A Ltd…

43. Cont’d • B Co. Ltd. – There is no loss or depreciation. • What is the method in which the merger should be effected so as to reduce any adverse effects to the minimum?

44. Cont’d Amalgamation can take the following three different forms: • It may not satisfy the conditions of sec 2(1B) and 72A • It may satisfy conditions of sec 2(1B) but may not satisfy the conditions of sec 72A; • It may satisfy the conditions of sec 2 (1B) as well as 72A.

46. Case study 2 X ltd. has two undertakings A and B. On April 1, 2011, Unit A is transferred to Y ltd., an Indian company, in a scheme of demerger. What will be written down value and actual cost in the hands of X ltd. and Y ltd.?

48. Depreciated value of assets on April 1, 2011 72,250 Less: WDV of assets transferred to Y ltd. (2,89,000) WDV on April 1, 2011 in books of X Ltd. Nil WDV on April 1, 2011 in the Books of Y Ltd. 2,89,000 By virtue of section 47(vib) income is not taxable under the head “Capital Gains”.

49. Practical Case 2010 B has incorporated since 1990 and now B has 4 Business Divisions. • Finance: Profitable. Inorganic growth possible by joining D’s Financial and NBFC business • Textile: Carried forward losses & land • Pharma: Profitable • Machinery: Has huge CENVAT credit and 80-IC benefit. Co. wants to sell division to C

50. Food for thought! • What is the best course for B to carry out above plan? • What is the best course for C to acquire Machinery business of B? • Whether B should amalgamate with D for joining hands in finance division? • Whether B should demerge its Machinery business into C and Textile business?