Regulating Legislative acts: – The Indian revenue enhancement system is governed by the Income Tax Act, 1962 which determines the levy and aggregation of revenue enhancement in India. As per the act Companies come under the significance of individual[ 2 ]and all individuals whose income under the five falls under Section 5 read with Section 9 of the Act are capable to revenue enhancement. The Indian income revenue enhancement is yearly amended by the Finance Acts passed in the parliament and the same have to considered. Along with the Act the in a cross-border M & A ; A as foreign entities are involved the Double Taxation Avoidance Agreements ( DTAAs ) signed by India with other provinces will besides come into drama if the geting entity or the mark entity are a foreign national and their occupant province has signed a DTAA with India.
A. Tax of Amalgamations
Amalgamation that will non be called every bit merger as per income-tax act – In the Act there are no separate definitions of amalgamations, mergers and acquisitions therefore amalgamations are treated as merger under the act for taxing intents. However the same is non required in acquisition since in acquisition the reorganisation is through sale transportation of portion capital. Merely the commissariats related to Capital Gains use. Therefore the present treatment is focal points on amalgamation and will use mutatis mutandis to acquisitions if demand be.
The definition ‘amalgamation ‘ in Section 2 ( 1B ) of the Act includes amalgamation in it its horizon nevertheless the Section specifically provides that in the undermentioned two instances there is no merger for the intent of the Act, though the component of amalgamation exists: –[ 3 ]
( I ) Where the belongings of the company, which merges, is sold to the other company and the amalgamation is the consequence of a dealing of ‘sale ‘ .
( two ) Where the company, which merges, is wound up in settlement and the murderer distributes its belongings to the other company.
One of the most popular and tax-efficient agencies of corporate consolidation in India is merger. merger enjoys favourable intervention under income revenue enhancement and other Torahs, capable to fulfilment of stipulated conditions.[ 4 ]
The benefits and revenue enhancement grants available to a amalgamation is the conditions in Section 2 ( 1B ) are met with and the coalesced company is an Indian company are as follows: –[ 5 ]
Non-chargeability of capital addition on the transportation of a capital plus including portions held by stockholder at the clip of merger,[ 6 ]
Eligibility of coalesced company for the tax write-off in regard of any plus stand foring outgo of a capital nature on scientific research,[ 7 ]
Eligibility of the coalesced company for the tax write-off in regard of acquisition of patent rights or transcript rights,[ 8 ]
Similar tax write-off in regard of outgo on know-how,[ 9 ]
Amortization of outgo for obtaining telecom license fees.[ 10 ]
A.1. Tax impact on the mixing company & A ; its stockholders
Benefit to the stockholders of mixing company – As the commissariats Capital Gains in Section 45 are non applicable to a stockholder associating to capital additions will non use to any transportation by a stockholder when a stockholder in the strategy of merger transportations the portions held by him in the amalgamating-company if the undermentioned conditions as per Section 47 ( seven ) are satisfied:
The transportation is made in consideration of allocation to him of portions in the coalesced company ; and
The coalesced company is an Indian company.
The inquiry is which arises is that whether in the absence of or on failure to fulfill the conditions specified in subdivision 47 ( seven ) , a stockholder having portions in the coalesced company will be taxed under Section 45 or non. The instance CIT v. Rasiklal Maneklal[ 11 ]replies the same. The determination in Rasiklal Maneklal exempts stockholder from paying any capital additions revenue enhancement, since an merger does non affect exchange or relinquishing of the assets or the merger of any right therein or the mandatory acquisition under any jurisprudence. Amalgamation does non affect an exchange or relinquishing of portions by the mixing company.[ 12 ]However, no benefit will be available under Section 47 ( seven ) if the stockholders of mixing company are allotted something more than portions in the coalesced company, viz. , bonds or unsecured bonds.[ 13 ]
Benefits to the amalgamating ( Transferor ) company:
Depending benefits arise to the transferor company depending on the nationality of the same
IN CASE OF AN INDIAN AMALGAMATING COMPANY – As per Section 47 ( six ) there will be no capital additions revenue enhancement on transportation of a capital plus by the mixing company to the amalgamated company in the strategy of merger if the coalesced company is an Indian company.
In ClT v. Surat Cotton Spinning & A ; Weaving Mills Private Limited[ 14 ], it was held that the book value of point in the books of transferor company would stand for cost to the transferee- company. In Shaw Wallace and company Limited v. CIT[ 15 ]where the net assets of the subordinates were taken over by the assessee at a much lower value than the value of portions held by the assessee in the subordinate companies. It was held that the difference can non be claimed as a capital loss. Under the general jurisprudence, a parent company can non be said to hold made any addition or loss under such a strategy. Forbes Forbes Campbell & A ; Company Ltd. v. CIT[ 16 ], the Bombay High Court held that the extra value of the net assets of the subordinate company on the day of the month of its merger over the cost of the parent company ‘s shareholding in the subordinate is non indictable to revenue enhancement on capital additions under Section 45 of the Income-tax Act, 1961.
IN CASE OF TRANSFER OF SHARES HELD IN AN INDIAN COMPANY BY A FOREIGN COMPANY – There will be no capital addition on transportation of portions held in an Indian company in a strategy of merger by the mixing foreign company to the amalgamated foreign company if the undermentioned conditions are satisfied as per Section 47 ( via ) :
At least 25 % of the stockholders of the mixing foreign company continue to stay stockholders of the coalesced foreign company, and
such transportation does non pull revenue enhancement on capital additions in the state in which the amalgamating company is incorporated.
Exchange/Sale of portions –
PURSUANT TO AMALGAMATION – Stockholders of the mark company would go the stockholders of the amalgamated company by having portions in stead of their bing shareholding. Conceptually such an ‘exchange ‘ is ‘transfer ‘ . However, the Act does non see it as a transportation, where the exchange is in consideration of allocation of portions in the coalesced company and such company is an Indian company[ 17 ]. Though any hard currency or other benefit given, to the full or partly, in exchange for the portions would ensue in nonexempt capital additions.
POST AMALGAMATION – Where share-holders later decide to sell the portions of the amalgamated company ( acquired pursuant to the amalgamation ) , the additions on sale would be apt to revenue enhancement as capital additions. For calculating such capital additions the cost of acquisition and the period of keeping would be as under[ 18 ]:
Cost of acquisition of their original retention in the amalgamating company prior to the merger ; and
Time period of keeping would include the period during which the portions of the mixing company were held before the merger.
A.2. Tax impact on the amalgamated company –
Expenses in connexion with merger – Typically, certain costs like stamp responsibility, Court fees, consultancy fees, etc. , incurred to consequence a amalgamation may be important.[ 19 ]Section 35 DD of the Act allows the coalesced company to claim, on a deferred footing, the outgo incurred entirely and entirely for the intent of the merger. The tax write-off allowed is 1/5th of such an outgo over a period of 5 consecutive old ages, get downing with the twelvemonth of merger.
The Application of Dividend Distribution Tax station the amalgamation – As per the Section 2 ( 22 ) of the Act certain distributions, payments, etc. , made by a company are deemed to be dividends in the custodies of the receiving system. Companies are apt to pay dividend distribution revenue enhancement at specified rates on dividends, when dividends including deemed dividends atre distributed by them.
Merely if the issue/allotment of portions of the coalesced company to the stockholders of the mixing company may falls under the range of ‘deemed dividend ‘ and, so the amalgamated company is apt to pay DDT.
However, the Central Board of Direct Taxes ( CBDT ) has clarified25 that where a company merges with another company in a Scheme of Amalgamation, the proviso associating to dividend distribution [ Section 2 ( 22 ) ( a ) or ( hundred ) of the Act ] is non attracted.
Therefore, the coalesced company would non be apt to DDT on such allocation of portions.
A.3. Carryf orward and Set-off of Losses and Depreciation
The Act allows the that concern losingss and unabsorbed depreciation allowance are allowed to be carried frontward and put off against income for eight old ages after which such losingss expire or unabsorbed depreciation is absorbed.[ 20 ]In fact this place is considered one of the cardinal advantages of amalgamations as it allows the transportation of losingss and unabsorbed depreciation topic to certain conditions.
Section 72A stipulates certain conditions and if they are met with so all the accrued losingss and the unabsorbed depreciation which were originating before the the amalgamating company would be deemed to be the loss or depreciation of the coalesced company for the old twelvemonth in which the merger is effected.. the conditions are as follows: –
( I ) There is an merger of a company having industrial project, ship or hotel with another company or a banking company with the SBI or any subordinate of the SBI. Section 72A is besides applicable in the instance of an merger of a public sector air hoses with another public sector air hoses.[ 21 ]
( two ) The mixing company has been engaged in the concern in which the accrued loss occurred and depreciation remains unabsorbed for three or more old ages.[ 22 ]
( three ) The mixing company has held continuously as on the day of the month of the merger fixed assets held by it two old ages prior to the day of the month of merger.[ 23 ]
( four ) The amalgamated company continues to keep at least three- fourths in the book value of fixed assets of the mixing company, which is acquired as a consequence of merger for five old ages from the effectual day of the month of merger.[ 24 ]
( V ) The amalgamated company continues the concern of the mixing company for a minimal period of five old ages from the day of the month of merger.[ 25 ]Or any other conditions as prescribed[ 26 ].
If the the above mentioned conditions are non followed so the set off, loss or depreciation allowed in the old twelvemonth in the custodies of the amalgamated company will be income in the custodies of the amalgamated in the twelvemonth in which these conditions are non complied with and would be apt to revenue enhancement consequently.[ 27 ]
A.3 Return of income for the twelvemonth of amalgamation
In instance the blessing for the amalgamation is non granted by the jurisdictional High Court by the day of the month of filing of the Returns of Income of mixing and the coalesced company, both the companies would hold to register their Tax returns of Income as if the merger has non taken topographic point.[ 28 ]Due revelation by manner of a note should be made in the return of income saying that the returns shall be suitably revised after the blessing of the Scheme of amalgamation is obtained from the High Court.[ 29 ]There will besides be taxability of bad debts of the amalgamating ( mark ) companies in the custodies of the coalesced company. Debts provided for and considered in calculating income of the mixing predecessor company, may be claimed as a tax write-off by the amalgamated company if the same become unrecoverable later.[ 30 ]
A.4. International Taxation Aspects
If there exists a DTAA between the State of the foreign company and the India so the commissariats of the DTAA will use and overrule the Act as per Section 90 of the Act which farther allows an assessee to even take the domestic jurisprudence commissariats if more favorable. Whatever revenue enhancements are levied particularly on the repatriation of income station the strategy of amalgamation whether by agencies
B. Tax in instance of Acquisitions
Indian concerns can be acquired by the purchase of portions or the purchase of all or some of the assets. Therefore in instance of cross-border acquisitions merely capitals additions revenue enhancement are levied capable to Section 9 of the Act and the applicable DTAA if any. However the same is coup d’etat wherein the portions are straight purchased from a recognized stock exchanges in India such transportations are exempt from revenue enhancement, provided Securities dealing revenue enhancement is paid. Other additions on sale of assets are nonexempt. Apart from capital additions revenue enhancements other disbursals such as Stamp responsibility etc would besides be applicable. However the sale of assets is may be capable to VAT or any other indirect revenue enhancement.
Therefore in instance of acquisitions jurisprudence related to the levy capital additions revenue enhancement are the regulating factor.
B.1. Capital additions and its revenue enhancement facets
-Capital Gains is the net income originating on history of the difference between the a higher cost of acquisition ( herein- after called CoA ) and the sale monetary value originating from any ‘transfer ‘ of a ‘capital plus ‘ as defined under Section 2 ( 47 ) and Section 2 ( 14 ) of the Act severally ; 2 during the fiscal twelvemonth. Such addition is apt to be taxed on the custodies of transferor as income topic to Section 35 of the Act..
nevertheless, if such income is nonexempt or non depnds on the nature of the assets whether the plus being transferred is – long-run or short-run. Generally, assets continuously retained before transportation for a period of 36 months are long-run assets. The remainder are short-run assets. The period of keeping is 12 months in the instance of portions. Additions from transportation of a capital plus are computed as per the commissariats contained in Section 48 and capable to other commissariats under chapter VI ( E ) of the Act if need by. The tax write-offs as provided by Section 48 which are deducted from the full value of consideration received ( or accruing ) are as follows: –
Outgo incurred entirely or entirely in connexion with such a transportation ;
Cost of acquisition or indexed cost of acquisition of the plus ( in instance of non-residents, the indexation benefit is non available and accommodations on history of foreign exchange fluctuation are accounted for ) ;
Cost of betterment, if any, thereto. The benefit of “ cost rising prices index ” is provided in the calculation of nonexempt capital additions with mention to the cost of betterment.
Capable to prescribed conditions, certain minutess even though amounting to reassign under Section 2 ( 47 ) 13 are expressly exempt from capital additions revenue enhancement. Some of them are as follows: –
Transportation of capital assets by a keeping company to its fully-owned subordinate or frailty versa, provided the transferee is an Indian company.
Transportation in a strategy of qualified merger/amalgamation or de-merger.
Transportation of capital assets, when a sole proprietary concern or partnership house is succeeded by a company.
International Taxation Aspects
In instance of cross boundary line acquisitions the Sections 45, 2 ( 1 ) , and 2 ( 27 ) are to be read with Section 5 and 9 if the acquirer company or the mark company are non an Indian Company
In a cross boundary line acquisition nevertheless apart from the above the Capital Gains clause in the relevant DTAA is besides applicable. Furthermore post the Finance Act, 2012 indirect transportations are besides capable to revenue enhancement as per the Explanations 4 and 5 added to Section 1 ( I ) read with Explanation 2 added to Section ( 47 ) . The alterations in the Finance Act have created a state of affairs wherein, a capital plus is deemed to be situated in India, even if it is any portion or involvement in a company or entity incorporated. Capable to the fact that such portion or involvement derives its value well from assets located in India. The transportation of such an plus in any mode whether taking topographic point in India or non is nonexempt. Furthermore if the deemed capital plus is even transferred indirectly fluxing from the transportation of portions of two companies incorporated in India so besides such a transportation is apt to be taxed in India.
These alterations have widened the revenue enhancement cyberspace and make a sitituation wherein if A and B two companies situated in Mauritius enter into an understanding to sell 90 % of A ‘s portions to B, in which A clasp ‘s 100 % portions of C a company runing India. Then for the intent of this capital additions the portions of A which derive value from Indian Assets being portions of C are deemed to be situated in India and are hence apt to be taxed as per Section 45 in India. These alterations were introduced with retrospective consequence and when brought about the chnages sparked a state broad argument sing their cogency.
B.2. Acquisition through Purchase of Assetss
Acquisition through purchase of assets can be done either by a
a ‘slump-sale ‘ or ‘itemized sale ‘ . Transportation of assets through these agencies whould pull stamp responsibility a province levy the rates of which depend on the nature and value of plus being sold..
A ‘slump sale ‘ is when the full concern project is transferred for a ball sum consideration as traveling concern so the commissariats and benefits sing slack sale as nowadays in the Act will use. An itemized sale on the other manus is where certain selected assets and liabilities as devided are transferred for single consideration for each. In instance of an ‘itemized sale ‘ , is Value Added Tax levied on the separate points being sold.
Purchase monetary value: The cost of the plus is taken as the cost for calculating the capital additions. However the same is dependent on the nature of the plus and is of import from a taxing position.
In instance of slack sale as the
full concern project is transferred as a traveling concern for a lump-sum consideration. The recognized cost of the plus is taken as the just value arrived at a on sensible commercial basis.. In the instance of itemized sale minutess, the cost paid by the acquirer as in agreement upfront may be accepted as acquisition cost, capable to certain conditions.[ 31 ]
B.3. Acquisition through Purchase of portions
This is a more common agencies of acquisition particularly transverse boundary line acquisition. No issues of measure up costs or VAT arise in such an acquisition. The sale of portions may be taxed either as capital additions in the custodies of the marketer or capable to Securities Transaction Tax ( STT ) depending on the agencies of sale of portions. The levy of capital additions has been discussed earlier in this chapter which are applicable without any alteration. Therefore in this Section merely the levy of STT is discussed. STT is collectible merely when the sale of portions is through a recognized stock exchange in India. It is levied on the purchases and gross revenues of listed equity portions at the rate of 0.125 per centum in instance of bringing based sale and in instance of non-delivery based minutess, it is levied at 0.025 per centum and is collectible by the marketer merely Transfer of portions which are non in de-materialized signifier taking topographic point outside the stock exchange are capable to stomp responsibility on footing ofthe market value of the portions transferred.
B.4. Choice of acquisition vehicle
Several possible acquisition vehicles are available to a foreign buyer. revenue enhancement and regulative factors frequently influence the pick of vehicle. It can be in the signifier of local keeping company, foreign parent company, local subdivision or joint ventures. The same is decided on the footing and demand construction of the acquisition and the benefit available through a DTAA.
2.2. Tax benefits originating through amalgamations and acquisitions
The general revenue enhancement benefits originating under the Income Tax, Act have been discussed above. In this subdivision the benefits which a company derives through the structuring of a trade are discussed. These include both those originating during the clip of reorganisation or those which are available post the amalgamation and acquisition.
In a cross boundary line M & A ; A pacts play an of import function in finding the benefits available to acquirer company. A DTAA through it ‘s assorted clauses provides that in instance of dual revenue enhancement, which state has the taxing rights. Then an income being dual taxed will be capable to the jurisprudence and rates as of the State as specified by the DTAA. This leaves range for revenue enhancement planning as the withholding revenue enhancement rates which are applicable to Capital Gains, Dividend, Interest etc vary from province and in fact some states do non impose revenue enhancement on certain incomes. E.g. In Mauritius capital additions are exempt from revenue enhancement, in Australia there is no revenue enhancement on dividend income.
In such scenario trades are frequently structured in a mode so as to minimise the revenue enhancement collectible by puting in the coveted finish through low revenue enhancement legal powers which allows lesser revenue enhancement rates on histories of DTAA benefits. Such structuring is called revenue enhancement planning and the same had been held legal. In the Azadi Bachao[ 32 ]the Court was of the sentiment that revenue enhancement benefits originating from an bing corporate construction do non amount to invasion nevertheless if the construction is a fake and created merely to avoid paying revenue enhancements so there is revenue enhancement equivocation which is non allowable. This position has been upheld by Supreme Court in the landmark instance of Vodafone International Holdings B.V. v Union of India.[ 33 ]
Therefore, there exists a really line of difference between revenue enhancement planning and revenue enhancement equivocation which has been foremost discussed by the Westminster Principle as upheld by in the Vodafone Case. Tax planning is legitimate nevertheless revenue enhancement equivocation is non.
The benefits which arise out of revenue enhancement planning in a cross-border M & A ; A are lower revenue enhancement withholding revenue enhancement rates. In instance of acquisition of fabricating units the benefits of revenue enhancement vacations available to them.
However if these cross boundary line M & A ; As are designed merely for the intent of revenue enhancement equivocation so they are illicit constructions non recognized by taxing governments. In many instances cross boundary line M & A ; As are employed specifically for revenue enhancement equivocation intents. The issue of equivocation is dealt with in the following chapter.