#TaxmannPPT | Taxation in Mergers & Acquisition by Taxmann

Decoding M&A Tax CA Gaurav Sukhija Partner Registered Valuer Kirtane and Pandit LLP M. Com, B. Com (Hons) ex – Deloitte

+91-99118 14171 Gaurav.sukhija@kirtanepandit.com

CA Gaurav Sukhija Experience • Gaurav is Partner – National leader with the Valuations and Transaction advisory practice of Kirtane & Pandit and is based out of New Delhi. Gaurav is a registered valuer under IBBI. • Gaurav has work experience spread across providing valuation advisory, Due Diligence, M&A tax.

CA Gaurav Sukhija Partner Registered Valuer Kirtane and Pandit LLP M. Com, B. Com (Hons) ex – Deloitte +91-99118 14171 Gaurav.sukhija@kirtanep andit.com

• As a valuation professional, Gaurav has undertaken valuations of businesses (equity & enterprise); tangible assets & intangible assets like brands, patents and customer relationships; financial instruments and loan assets to assist clients in their strategic (M&A, litigation support, fund raising, corporate restructuring) etc. • Gaurav has worked with Deloitte in the Financial Advisory Services divisions and with SS Kothari Mehta & Company in the Mergers and Acquisition division. • Gaurav has performed several roles ranging from audits, compliances to advisory during the course of his career, which gives him a view and understanding of the overall operations of the company. His clients include multi-national corporations, multi-lateral institutions, and Indian companies in the private and public sector and government agencies. • Gaurav has done valuation for industries such as IT, ITes, Startups, fund houses, Manufacturing entities, Automobile company, Trading entities and block chain based companies.

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Key objectives of M&A

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Key objectives of M&A

Value Unlocking

Simplification of Group Structure

Tax Optimization

Growth

EXTERNAL DRIVERS

INTERNAL DRIVERS

Cash trap/ balancing

Eliminate competition

Deploy capital

Enter new markets

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Key objectives of M&A

Structure Rationalization • Overall efficiency through Business Consolidation • Segregation of different sets of business • Value Unlocking • To create optimum holding structures

Funding and repatriation • Pre-IPO Structuring • Attracting Overseas Investments • Ease of repatriation of Funds

Diversification • Growth- new technology • Competence capability or market space Entering into new segment • Acquisition of new business 5

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M&A Landscape

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M&A Landscape

M&A

Acquisitions/ Divestments

Business Purchase/Sale

Share Purchase/Sale

Slump Sale /Itemized Sale

Focus on core business/sell off non core business

Restructuring

Merger/ Demerger

Amalgamation

Focus on Inorganic growth/strategic or non strategic investments

Consolidation of businesses/ entities

Internal Restructuring

Demerger

Focus on core business/ hive-off of non core business/ monetize

Capital Reduction

Buyback

Financial restructuring/ enhancing stake/ repatriation

Enhancing stake/ Return of Capital

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Tax and regulatory

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Tax and regulatory aspects

FEMA

SEBI  Schemes involving listed entities  Other regulations such as takeover  Prescribed disclosures

 Inbound Investment  Outbound Investment  Cross Border M&A  LRS  Share Swap

SEBI

FEMA

Companies Act  Scheme of arrangements u/s 230 – 234  Shareholder/ creditor approval  Related party transactions  Approvals from regulatory authorities such as RD, RoC  Prescribed compliances

Other Aspects  Valuation  Competition Act  NBFC/ CIC guidelines  Sectoral regulators

Companies Act

Tax & Regulatory Considerations

Other Aspects

Stamp Duty

Tax Tax

 Income tax  Tax attributes  Tax neutrality  GST

Stamp Duty  State specific entry  Planning avenues  Adjudication process

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M&A Tax landscape – Income tax act

Merger/Amalgamation

Sec 2 (1B), Expl 7 to 43 (1), Expl 2 to 43(6), 47 (vi), (vii), 72A, 35DD

Demerger

2 (19AA), 2(22) (v) 47 (vib), (vic), (vid)

Takeover of shares

Normal capital gains

Reduction of capital

2 (22) (d),

Buy back of shares

Sec 46A, Sec 115QA

Slump Sale

Sec 2(42C); 50B

Others

Conversion of firm into company, company into LLP, etc

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Merger – tax landscape

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Types of mergers

Horizontal

Vertical

Between cos. dealing in similar products or competing directly with each other

Between cos. operating in the same industry but at a different stage of production or distribution system

Eg.Vodafone-Idea

Eg.Uptron Colour with BPL

Conglomerate

Reverse

Between cos. in unrelated business, no competition

Between profit and loss making, listed and unlisted

Eg ITC Hotels with ITC Ltd

Eg. KB Mall with Future Networks

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Merger – Definition

Shareholders of transferor Company

Transferor Company

Assets

Transferee Company

Liabilities

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Merger – Definition

 Merger as a result of acquisition of property by one company shall not

tentamount to merger u/s 2 (1B)  Merger as a result of distribution of property of one company to the other

company after the winding up of the first mentioned company shall not tantamount to merger u/s 2 (1B)  W.r.t. the shareholding condition- Shares already held by the TRee co. or its

nominees, in the TRoR shall not be included;  The definition is only applicable in case of merger of companies;  The shares allotted to shareholders of TRoR Co. is not subject to any lock-in;  A share-swap agreement either pursuant to the Scheme, or otherwise is a

common transaction;  It is not mandatory that the shareholders of TRoR constitute the same % of

holding in the TRee- For eg: if shareholders holding 80% in TRoR become shareholders of TRee- it is not mandatory that they constitute 80% in TRee also.

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Taxation in Amalgamation- Key Aspects

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Tax Neutrality in case of Amalgamation (1/2)

Transfer of any capital asset is subject to capital gains tax in India; However, amalgamation enjoys tax-neutrality with respect to tax on transfer.

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Tax Neutrality in case of Amalgamation (2/2)

Taxability in the hands of shareholder – Sec 47 (vii) – not regarded as transfer ◾ any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share

or shares held by him in the amalgamating company, if— (a) the transfer is made in consideration of the allotment to him of any share or shares in the

amalgamated company except where the shareholder itself is the amalgamated company, an (b) the amalgamated company is an Indian company

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Carry Forward of Losses and Unabsorbed Depreciation (1/3) 1) Where there has been an amalgamation of— (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or 38[(c) one or more public sector company or companies with one or more public sector company or companies; or

Industrial undertaking means any undertaking which is engaged in—  the manufacture or processing of goods; or  the manufacture of computer software; or  the business of generation or distribution of electricity or any other form of power; or

 the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or  mining; or  the construction of ships, aircrafts or rail systems;

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Carry Forward of Losses and Unabsorbed Depreciation (2/3)

Nature of loss

Accumulated business loss & unabsorbed depreciation

• Amalgamation of company owning industrial undertaking Conditions for Transferor

• Company engaged in business for 3 or more years • At least 75% of BV of fixed assets held continuously for 2 years prior to the date of amalgamation

• Continue to hold at least 75% of BV of fixed assets of transferor for a minimum 5 years Conditions for Transferee

• Continue the business for a minimum period of 5 years • Achieve at least 50% of installed capacity before end of 4 years and continue to maintain the same till year 5

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Carry Forward of Losses and Unabsorbed Depreciation (2/3)

Conditions for set-off, under Rule 9C [pursuant to sec 72A (2) (b) (iii)]

The TRee (owning an industrial co.) shall: achieve >= 50% of the installed capacity before the end of 4 years; and maintain till end of 5 years

The TRee shall: furnish to the Assessing Officer a certificate in Form No. 62, duly verified by an accountant, to establish that production levels have been achieved

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Carry Forward of Losses and Unabsorbed Depreciation (3/3)

Points to note

All conditions (u/s 72A (2)(a) and (b)) must be fulfilled.



Where such conditions are fulfilled, 

Accumulated loss of the TRoR will be allowed to carried forward for a fresh period of 8 years; 



Supreme Industries Ltd.v. Dy. CIT :[2007] 17 SOT 476 /[2008] 115 ITD 225 (Mum.-Trib.)

Unabsorbed depreciation an be carried forward indefinitely



If the conditions mentioned in the previous slide are not fulfilled- [Sec. 72A (3)] ◾ The set off of loss or allowance of depreciation made in

any previous year in the hands of theTRee Co. ◾ Shall be deemed to be the income of the TRee Co.

chargeable to tax ◾ For the year in which such conditions are not complied

with. ◾ Accumulated loss means loss of the TRoR under the

head “Profit and Gains of business or profession” (not being a loss due to speculation business) ◾ Accumulated losses

b/f under the head “house property” or “capital gain” will get lost, and neither co. will be able to avail c/f benefit

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Apportionment of Depreciation

For apportionment of depreciation b/w theTRoR andTRee, following steps should be followed [proviso to S.32(5)]  Assume that there has been no amalgamation;and compute depreciation for theTRoR;  Once computed,the depreciation amount shall be: 

Apportioned b/w the TRoR andTRee



In the ratio of the number of days for which the assets were used by them

Amalgamation Expenses and Bad Debts Amortisation of amalgamation expenses [sec. 35DD]

Treatment of Bad-debts [sec. 36 (1) (vii)



Where an Indian Co.;



Incurs any expenditure wholly or exclusively for the purpose of amalgamation;

Where the debts of the TRoR, transferred to the TRee becomes bad;



Such bad debts will be allowed as a deduction to the TRee



Deduction = 1/5th of such expenditure 

For each of the 5 successive years



Beginning in the prev. year in which amalgamation was done

[CIT v.T.Veerabhadra Rao,K.Koteswara Roa & Co.[1985] 22 Taxman 45 (SC)/ (1985) 155 ITR 152 (SC)]

Shall be given to theTRee

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Other tax aspects in merger

◾ As per Section 2(42A) of the Act, Period of Holding of

the shareholders for the amalgamated company shall include period for which the shares were held in the amalgamating company. ◾ As per section 49(1) of the Act, the cost of acquisition of

the said asset to the amalgamated company shall be cost for which the amalgamating company acquired it ◾ As per Section 49(2) of the Act, the cost of acquisition

◾ If capital asset was acquired by the amalgamating

company before 01.04.2001 then COA may be taken as the cost or F.M.V. as on 01.04.2001, whichever is higher – sec 55 (2) ◾ The cost of improvement incurred by the amalgamating

company shall be deemed to be the cost of improvement incurred by the amalgamated company.

of the shares for the shareholders in the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.

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Demerger – tax landscape

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Demerger - Definition

◾ As per Section 2(19AA) of the Income Tax Act, 1961 “demerger", in relation to companies, means the transfer by a

demerged company of its one or more undertakings to any resulting company Demerger in such a manner that

All property of the undertaking being transferred is transferred to the Resulting Co.

All the liabilities relatable to the Undertaking is transferred to the Resulting Co.

All properties and liabilities of the Undertaking are transferred at Book Value

Resulting co. issues shares to the shareholders of the Demerged Company

Shareholders >= 3/4th of the Demerged Co. become shareholders of the Resulting Co.

Transfer of undertaking is on Goingconcern basis

 Demerged Co. [Sec. 2(19AAA)]- company whose undertaking is transferred, pursuant to a demerger, to a resulting company  Resulting Co. [Sec. 2(41A)]- company (including a WoS) to which the undertaking of the Demerged Co. is transferred in a demerger and, the Resulting Co. in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company

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Demerger - Definition

Points to note The definition is only applicable in case of de-

merger of companies;  Revaluation, if any, of the properties and

liabilities being transferred, shall be ignored;  Shares to be allotted to the shareholders of the

Demerged Co., must be on proportional basis;  W.r.t. the shareholding condition- Shares already

held by the Resulting Co. or its nominees, in the Demerged Co. shall not be included;

 The shares allotted to shareholders of Demerged

Co. is not subject to any lock-in; A share-swap agreement either pursuant to the Scheme, or otherwise is a common transaction;  It is not mandatory that the shareholders of

Demerged Co. constitute the same % of holding in the Resulting Co.  For eg: if shareholders holding 80% in

Demerged Co. become shareholders of Resulting Co.- it is not mandatory that they constitute 80% in Resulting Co. also.  Conditions u/s 2(19AA) are only to ascertain tax

neutrality  non-compliance of the same does not in any

manner result in the arrangement not being regarded as a 'demerger’ under Cos. Act.

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Meaning of “Undertaking” ◾ Explanation 1- Meaning of “Undertaking”- It

includes ◾ any part of an undertaking; or ◾ a unit or division of an undertaking; or

◾ Key Considerations ◾ Can assets and liabilities be cherry picked? ◾ What does “going-concern” mean? ◾ What is business activity?

◾ a business activity taken as a whole

◾ But does not include ◾ Individual assets or liabilities ◾ Or any combination thereof ◾ Not constituting a business activity.

Cherry-picking of Assets & Liabilities

◾ The Delhi High Court further held that-

◾ The Hon’ble Delhi High Court vide its judgement in

◾ To ensure that the undertaking has been transferred

Indo Rama Textile Ltd, In re [2012] 23 taxmann.com 390 / [2013] 212 Taxman 462 (Delhi) , held that-

as a going concern or not, while sanctioning a scheme of arrangement, the Court can examine whether essential and integral assets like plant, machinery and manpower without which it would not be able to run as an independent unit have been transferred to the resulting company

“in a demerger, transfer of all common assets and/or liabilities relatable to undertaking being demerged is not required so long as the assets and liabilities transferred, by themselves, constitutes a running business and the business can be carried on uninterruptedly with such assets and liabilities alone”

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Meaning of “Liabilities”

◾ Explanation 2- Meaning of Liabilities- it shall include◾ the liabilities which arise out of the activities or operations of the undertaking (identifiable to an Undertaking) ◾ the specific loans or borrowings (including debentures)- w.r.t.the Undertaking ◾ Other than above, general liabilities & borrowings in the same proportion to assets being

transferred.

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Decoding – Demerger tax landscape

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Tax Neutrality in case of Demerger (1/2)

Transfer of any capital asset is subject to capital gains tax in India; However, de-merger enjoys tax-neutrality with respect to tax on transfer.

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Tax Neutrality in case of Demerger (2/2)

Taxability in the hands of shareholder – Sec 47 (vid) ◾ any transfer or issue of shares by RC, to

the shareholders of the DC if the transfer or issue is made in consideration of demerger of the undertaking ◾ In case of a demerger, the existing

shareholders of the DC will hold: (a) Shares in the resulting Co.; and (b) Shares in the demerged co.

◾ Cost of acquisition will be computed as

underBy virtue of Section 49(2D) the COA of shares in the Demerged Company shall be: • COA of original shares in the demerged company Less: COA of shares in the resulting company as calculated in section 49(2C)  Cost u/s 49 (2C)= CoA of the shares held, in the same proportion as the Net Book Value : Net Worth of the DC

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Carry Forward of Losses and Unabsorbed DepreciationSec 72 (A)(4)

◾ Losses and unabsorbed depreciation of the Demerged Co, shall be carried forward◾ where such loss or unabsorbed depreciation ◾ is directly relatable to the undertakings transferred to the resulting company, for the

remaining period only ◾ be allowed to be carried forward and set off in the hands of the resulting company ◾ where such loss or unabsorbed depreciation ◾ is not directly relatable to the undertakings transferred to the resulting company, ◾ be apportioned between the demerged company and the resulting company in the

same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, ◾ and be allowed to be carried forward and set off in the hands of the demerged

company or the resulting company, as the case may be

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Apportionment of Depreciation

For apportionment of depreciation b/w the Demerged Co. and Resulting Co., following steps should be followed [proviso to S. 32(5)]  Assume that there has been no amalgamation; and compute depreciation for the Demerged Co.  Once computed, the depreciation amount shall be:  Apportioned b/w the Demerged Co. and Resulting Co.

 In the ratio of the number of days for which the assets were used by them

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Demerger Expenses and Bad Debts

Amortisation of demerger expenses [sec. 35DD]  Where an Indian Co.;  Incurs any expenditure wholly or

exclusively for the purpose of amalgamation;  Deduction = 1/5th of such expenditure  For each of the 5 successive years  Beginning in the prev. year in which

Treatment of Bad-debts [sec. 36 (1) (vii)  Where the debts of the Demerged Co.

transferred to the Resulting Co. becomes bad;  Such bad debts will be allowed as a

deduction to the Resulting Co.

[CIT v.T.Veerabhadra Rao, K. Koteswara Roa & Co. [1985] 22 Taxman 45 (SC)/ (1985) 155 ITR 152 (SC)]]

amalgamation was done  Shall be given to the Resulting Co.  If any proportion of such expense has been

considered by the Demerged Co.; the Resulting Co. shall amortize the remaining portion only.

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Other Aspects

◾ By virtue of Section 2(22)(v) there will be no dividend in the hands of shareholders on

distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company. ◾ By virtue of amendment in section 2(42A), for calculating the period for which the shares are

received upon demerger are held, the period for which shares were held in the demerged company shall also be considered. ◾ The Resulting Company must record the cost of assets transferred pursuant to the demerger,

as equal to the cost that would have been recorded in the books of the Demerged Co., i.e. the actual cost: ◾ However, exception made for companies which have adopted IndAS

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Few other restructuring

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SUCCESSION OF SOLE PROPRIETORSHIP BY COMPANY

• Issue of shares

Tax neutral subject to conditions: •

concern become the assets and liabilities of the

>50%

Sole proprietorship

Transfer of all business assets & liabilities

All assets and liabilities of the sole proprietary company

•

Company

Sole proprietor to hold 50% or more of voting power in the company and such holding to

continue for a period of 5 years •

•

Consideration in the form of shares only

Other Aspects: •

Cost & period of holding of proprietorship concern

available in the hands of Company •

Carry forward of accumulated loss & unabsorbed depreciation available in the hands of Co

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SUCCESSION OF PARTNERSHIP FIRM BY COMPANY

Partners

• Issue of shares

Tax neutral subject to conditions:

•

become the assets and liabilities of the company

>50%

Partnership firm

Transfer of all assets & liabilities

All assets and liabilities of the firm concern

• Company

All partners becomes shareholders in proportion of capital accounts of firm on the date of the succession

• •

Aggregate shareholding of partners: 50% or more of voting power in the company and such holding to

Prescribed process under Companies Act

continue for a period of 5 years

•

Requires consent of all the creditors

•

Requires DIN of proposed directors & name approval

•

Draft AOA & MOA

•

File conversion form (URC-1)

•

Post approval, obtain certificate of incorporation

•

Consideration in the form of shares only

Other Aspects:

•

Cost & period of holding of proprietorship concern available in the hands of Company

•

Carry forward of accumulated loss & unabsorbed depreciation available in the hands of Co- Fresh life

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About K&P

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CA Gaurav Sukhija Experience • Gaurav is partner with the Valuations and Transaction advisory practice of Kirtane & Pandit and is based out of New Delhi. Gaurav is a registered valuer under IBBI. • Gaurav has work experience spread across providing valuation advisory, Due Diligence, M&A tax. • As a valuation professional, Gaurav has undertaken valuations of businesses (equity & enterprise); tangible assets & intangible assets like brands, patents and customer relationships; financial instruments and loan assets to assist clients in their strategic (M&A, litigation support, fund raising, corporate restructuring) etc. CA Gaurav Sukhija Partner Registered Valuer Kirtane and Pandit LLP M. Com, B. Com (Hons) ex – Deloitte +91-99118 14171 Gaurav.sukhija@kirtanep andit.com

• Gaurav has worked with Deloitte in the Financial Advisory Services divisions and with SS Kothari Mehta & Company in the Mergers and Acquisition division. • Gaurav has performed several roles ranging from audits, compliances to advisory during the course of his career, which gives him a view and understanding of the overall operations of the company. His clients include multi-national corporations, multi-lateral institutions, and Indian companies in the private and public sector and government agencies. • Gaurav has done valuation for industries such as IT, ITes, Startups, fund houses, Manufacturing entities, Automobile company, Trading entities and block chain based companies.

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