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Taxation of Business Restructuring - Anup P. Shah Chartered Accountant 13 th July 2012 JB Nagar CPESC & WIRC of ICAI
Scope Restructuring Acquisition Merger Takeover Sale Demerger Slump/ Asset Sale Conversion Part IX S.47(xiii) Return of Capital Reduction Others © PRAVIN P. SHAH & CO. 2
Merger © PRAVIN P. SHAH & CO. 4
Definition of Merger - S.2(1B) (A)Only of Companies: Not for LLPs / Firms © PRAVIN P. SHAH & CO. 5 A BA BAB C
S.2(1B) – Definition (B)Three Conditions: All properties All liabilities At least 75% shareholders (Valuewise) of T or Co. should become shareholders of T ee Co. The above conditions are cumulative © PRAVIN P. SHAH & CO. 6
7 Forward Merger X Ltd. Loss Making Co. A Ltd. Profitable Merger Reverse Merger X Ltd. Loss Making Co. MERGER A Ltd. Profitable
© PRAVIN P. SHAH & CO. 8 Forward v. Reverse Merger - Comparison Advisable?Required?Capital Reduction Unlisted can be listed? Continues?Listing Available?MAT Credit of Loss making Co. Available? C/f Unabs. Dep Available? C/f Bus. Loss Reverse MergerForward Merger
Forward Merger – S.72A Available to companies owning a few selected industrial undertakings : Mfg. / IT/ Shipping / Telecom/ Hotel / Bank / Mining Q. Loss-making companies in trading, finance, real estate, stock broking, etc? Q. Hospital - Whether an “Industrial Undertaking”? Apollo Hospitals Enterprises Ltd., 300 ITR 167 (Mad) © PRAVIN P. SHAH & CO. 9
Forward Merger – S.72A Conditions u/s. 72A & Rule 9C Tor engaged in Bus. For 3 years or more Tor held 75% of BV of FA for 2 yrs prior to Merger Tee continues to hold 75% of BV of FA for 5 years Q. Meaning of BV – Purchase Price or Book WDV? Tee carries on Business for 5 years Tee achieves production level of 50% of Installed Capacity before 4 yrs from merger and continues for 5 yrs from Merger CA’s Certificate for the same - Form 62 From year of Capacity utilisation till 5 years from Merger © PRAVIN P. SHAH & CO. 10
Forward Merger – S.72A Would a company which has an eligible undertaking and a non-eligible undertaking (e.g., industrial undertaking and trading or financing business) be covered? B/f Bus. loss of T or Co becomes Current Year’s Loss of T ee Co Can be set off against CG of T ee Co Q. If 8 th year of B/f Business loss – Any solution? © PRAVIN P. SHAH & CO. 11
Reverse Merger & Taxation Merger of a healthy co. with a loss-making co. Better than Forward Merger All losses and UAD will be allowed to be carried forward and set off. Any conditions to be fulfilled? © PRAVIN P. SHAH & CO. 12
Appointed Date Of Merger Merger with retrospective date – valid? Marshall Sons & Co. (SC) Appointed Date: Effective Date: Effective Date relevant for Taxation? Scheme must provide for Appointed Date Q. GAAR for Retrospective AD? © PRAVIN P. SHAH & CO. 13
Appointed Date Of Merger Merger with retrospective date – valid? Scheme of merger modified to take effect from an earlier date to enable transferee Co. to take advantage of losses of transferor co - Merger otherwise in public interest Q. Can sanction be refused? Ambalal Sarabai Enterprises (Guj) © PRAVIN P. SHAH & CO. 14
Appointed Date & Assessment … Transferee Co. can file Revised Return after Merger Beyond Due Date u/s. 139(5)? Assessment on Transferor after Merger Even for periods prior to amalgamation for which assessment was not completed. © PRAVIN P. SHAH & CO. 15
Tax Implication For T ee Co. Benefit of substitution of FMV on available? Depreciation In year of transfer–pro rata to Transferor & Transferee On what value To Transferee? Merger Exp.– Equal Dedn. to Transferee in 5 Years Period of Capital asset held by Transferor included for determining Holding Period of Transferee © PRAVIN P. SHAH & CO. 16
Tax Implication For T ee Co. Cessation of Transferor liability’s - Taxable to Transferee u/s. 41(1) Debtors of Transferor – Turn Bad in Transferee’s Hands Allowable? Gratuity / Bonus to Transferor’s Employees Allowable? SIT of Tor which becomes SIT of Tee Co. Sold as SIT by Tee Co. © PRAVIN P. SHAH & CO. 17
Depn. on Goodwill Goodwill arising on Merger? Can Transferee claim Depreciation on Goodwill? Is It a Mere Accounting Entry required under AS- 14? What if Brand Acquired under Merger? Depreciation Allowed? Same as Goodwill? © PRAVIN P. SHAH & CO. 18
© PRAVIN P. SHAH & CO. 19 Taxation of Shareholder of T or Co. Any transfer by SH of Transferor – Not a Transfer (s.47(vii)) Period of holding for shares in Transferee = Transferor Co. CoA of shares in Transferee = that in Transferor Co. If not a tax-neutral Amalgamation Exemption u/s. 47 for Trader? Q. Whether Taxable?
© PRAVIN P. SHAH & CO. 20 Taxation of Shareholder of T or Co. Q. If SHs of T or Co. receive Debentures/Cash, would CGT exemption be available? Gujarat High Court
Taxation of Shareholder of T or Co. on Sale of New Shares Q. Benefit of substitution of FMV on available?: Q. Indexation available from which date – Holding in Transferor Co. or Transferee Co.? Manjula Shah (Mum SB) Kotak Bank (Mum) © PRAVIN P. SHAH & CO. 21
Merger – Tax Avoidance Can you do merger for tax avoidance? Wood Polymer (Guj) Indo Continental Hotels (Raj) Konark Investments, 97 Comp. Cas 52 (SC) © PRAVIN P. SHAH & CO. 22
Merger – Tax Avoidance … Cont Star Television (AAR) - Merger of Foreign Co. into Indian Co. Vodafone Essar (Del) - Demerger without consideration Vodafone Essar (Guj) - Demerger without consideration GAAR? © PRAVIN P. SHAH & CO. 23
Merger of WOS with HoldCo Q.Whether it would be exempt u/s.47(vi) because no shares issued? Whether Deemed Dividend by WOS to Holdco? Does Transferor have to pay DDT? © PRAVIN P. SHAH & CO. 24
© PRAVIN P. SHAH & CO. 25 Merger & s.47A Holding Co. Wholly-owned Sub Transfer of Capital Asset No CGT – s.47(iv) Subsidiary merged into Holding Co. Year 1Year 4 S.47A(1): Parent should own 100% of Sub for 8 years: Is it possible to apply this section? Is provision frustrated?
© PRAVIN P. SHAH & CO. 26 Foreign Co Merger With Indian Co Q. Can you merge Foreign Co. with an Indian Co.? Tax Implications? CGT by Fco. For Business in India?
© PRAVIN P. SHAH & CO. 27 Merger / Sale wef Prior Date Q. In whose hands is profit after Appointed Date taxable? Transferor Transferee?
© PRAVIN P. SHAH & CO. 28 Merger Q. Is Capital Reserve (Excess of NA over Shares issued) arising on merger not taken to Capital Reserve but Credited to General Reserve taxable? Is it Merely an Accounting Entry? Is it Business Income u/s. 28(iv)?
Acquisition of Shares
Tax on CGT (Domestic Sellers) LTCGSTCG Period of HoldingMore than 12 months – even for Unlisted Cos. Less than 12 months On-market & STT paidNil15% Off-market (Listed)10% or 20% with Indexation Normal Tax Rates / 30% Unlisted Shares20% with IndexationNormal Tax Rates / 30% MAT for Company SHYes © PRAVIN P. SHAH & CO. 30
Sale of Shares Sale at below FMV Notional CGT on Seller? GAAR? S.56(2)(vii) / (viia) for Buyer FMV = Book Value u/R. 11UA Purchase price at or above FMV Appreciation in underlying assets irrelevant © PRAVIN P. SHAH & CO. 31
© PRAVIN P. SHAH & CO. 32 Tax on Sale of Listed Shares by FCo. Thru Market & LTCG : No Tax Thru Market & STCG: 15% Off-market Sale of shares With Indexation – 20% Without Indexation – 10% Q. Concessional rate of 10% available to FCo? (s.112) Judicial Controversy?
Sale of Unlisted Shares by FCo. LTCG 10% 42% No Tax if DTAA provides tax in Country of Residence Mauritius Cyprus Singapore Vodafone Amdt. does not attack Treaty Benefits © PRAVIN P. SHAH & CO. 33
Tax on Sale of Unlisted Shares To claim DTAA benefits PO Box Office & Professional Directors with TRC sufficient ? Substantial Presence necessary? What if DTAA does not contain a LOB Clause? Treaty override by GAAR? Singapore better than Mauritius? © PRAVIN P. SHAH & CO. 34
© PRAVIN P. SHAH & CO. 35 Sale of Unlisted Shares by F Co. Capital Gains Tax on sale of shares by FCo. Buyer & Seller located in USA Shares of ICo. Sold / Purchased Payment received in USA Q. Whether taxable in India? Under DTAA ? U/s. 9(1)(i) & u/s.163?
Ardex Investments © PRAVIN P. SHAH & CO. 36 Ardex Invst Mauritius Ardex Invst Mauritius I Co. Ardex GmBH (Germany) Ardex GmBH (Germany) India Abroad Trf of I Co. shares
Ardex Investments Whether Trf of I Co. shares is taxable in India? Held: As per Indo-Mauritius Treaty? Is Treaty Shopping valid? Now GAAR? If shares are held for a long period of time can an enquiry be made Return to be filed? © PRAVIN P. SHAH & CO. 37
Goodyear – Transfer Pricing © PRAVIN P. SHAH & CO. 38 GTRC GOCPL Singapore GIL USA Singapore India Gift of Shares of GIL India
Goodyear – Transfer Pricing Gift of Indian Sub’s shares by Foreign Holdco to Foreign Sub Capital Gains Tax applicable? S.56(2)(viia) Applicable? Whether Donee required to deduct tax u/s. 195? Transfer Pricing applicable? Even if no tax payable? Amendment by FA 2012 © PRAVIN P. SHAH & CO. 39
Transfer of CCDs Z Ltd (AAR) Transfer of CCDs by a Mauritius Co. AAR held CCDs are nothing but Debt till converted into Shares Indo-Mauritius DTAA exempts Capital Gains Income arising on CCDs is Interest Income which is not Exempt Correctness? © PRAVIN P. SHAH & CO. 40
© PRAVIN P. SHAH & CO 41 SITUATION : Unlisted Co. Unabsorbed Depn. & B/f Business Loss Existing SHs want to sell 100% stake Buyer wants benefit of Depn. & Loss PROBLEM S.79 - Can’t Transfer > 49% stake till b/f loss set off S Sale of Shares Unlisted Co.
© PRAVIN P. SHAH & CO. 42 Whether S.79 applies to UAD or only to Business Loss? What about business loss? S Sale of Shares Unlisted Co.
Merger of 98% HCo. with its SCo. - no change in management of SCo. : Q. Carry forward of loss allowable? Q. S.79 requires 51% voting power or shares? Q. Would transfer by Sub Co. to HoldCo trigger s.79? © PRAVIN P. SHAH & CO. 43
© PRAVIN P. SHAH & CO. 44 S Sale of Shares Unlisted Co. Transfer of shares by HoldCo. to Director Can it be said that s.79 N.A. since Transfer within Group? S.79 N/A if Indian unlisted Co. is Sub Co. of Listed Indian H Co. Q. Whether S.79 applicable if ICo is a subsidiary of Listed Fco?
© PRAVIN P. SHAH & CO. 45 S Sale of Shares Unlisted Co. Would s.79 override a Merger which is eligible u/s. 72A? In case of unlisted companies Would c/f of losses of Transferor be disallowed since change of Shareholding takes place? Express Provisions? Would s.79 nullify the provisions of S.72A?
© PRAVIN P. SHAH & CO. 46 TOR & CG for Inter Se Transfers For acquisition & merger it may be necessary to make internal transfer of shares Under TOR, ‘inter se promoter transfer’ and ‘inter se Relatives transfer’ exempt Necessary that shares which are acquired are those sold by Seller Else, Open Offer may be required if Limits breached Under I.T. Act, LTCG is exempt if sold through SE & STT paid
© PRAVIN P. SHAH & CO. 47 TOR & CG for Inter Se Transfers Issues: Identification of shares not possible when shares held in demat How to sell shares through SE & ensure Sale to Promoters / Relatives?
© PRAVIN P. SHAH & CO. 48 Land in Co.- Substantial appreciation – Less than 3 years Shares in Co. owned for more than 12 months No Other Businesses Substantial Stamp duty on sale of Land- Sale of Shares of Co. ST / LT Land Sale by Co.
© PRAVIN P. SHAH & CO. 49 SALE
Demerger-s.2(19AA) Demerger of Undertaking A&L of Demerged Co. that of Resulting Co. Specific Loans /Debentures that of RCo. Apportion Other Loans – Assets Trfd./Total Assets Book Values only Revaluation to be Ignored SH of 3/4 th in value of DCo. - SH in RCo. RCo. Issues shares to SH of DCo. Proportionately © PRAVIN P. SHAH & CO. 51
Demerger-s.2(19AA) Can Resulting Co. issue to SH of D Co.: Any other Instruments Transfer on a going concern basis Business must be carried on As per Conditions by CG Nothing prescribed like for Mergers © PRAVIN P. SHAH & CO. 52
Tax Consequences Any trf. of a Capital Asset – not a Taxable Trf. Issue of Shs. By RCo. to SH of DCo. – not a Taxable Trf. CoA of shares in Rco. = CoA in DCo. * Net Book Value of Assets Trf. Net Worth of DCo. CoA of Shares in DCo.= Cost – Cost of RCo. Period of Holding of Shs in RCo.= that in DCo. © PRAVIN P. SHAH & CO. 53
Tax Consequences Total Depn. to be allocated between DCo. & RCo. Based on No. of Days used Actual Cost to DCo.= that of Rco. WDV to DCo.= that of Rco. WDV for DCo. = Total WDV (-) Assets Trfd. Would have to work out WDV separately for each Unit © PRAVIN P. SHAH & CO. 54
© PRAVIN P. SHAH & CO. 55 Undertaking Undertaking includes: any part of 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 a combination thereof not constituting a business activity Q. X Ltd. has a business of BPO & Investment in Shares: Demerger of Shares into a New Entity Is it an Undertaking as per Expln. 1 to s. 2 (19AA)? Does it constitute a Business Activity?
© PRAVIN P. SHAH & CO. 56 Demerger of all Assets A Ltd. has one activity – software business Q. Can entire Software business be demerged into a New Co.? No assets / liabilities left behind in A Ltd. Only nominal capital & cash / bank left behind Is such a Demerger possible?
Slump / Itemised Sale
© PRAVIN P. SHAH & CO. 58 Slump / Itemised Sale Seller Buyer Slump / Asset Sale of Bus.
Slump vs Itemised Sale FactorsSlump SaleItemised Sale What is soldBusiness as a Going concernIndividual A & L ValuationDCF / ECM / Ad-hoc without assigning separate Values Separate Values to each A & L UndertakingMust constitute a Business Activity No such condition Must all A&L be sold Generally yes, unless facts permit otherwise No Sale onlySlump Sale – not ExchangeCan be an Exchange also TaxationS.45(1) r.w. s.50BS.45 / s.50 / s.50C © PRAVIN P. SHAH & CO. 59
© PRAVIN P. SHAH & CO. 60 Tax Consequences Slump Sale Lump sum consideration – No itemised break-up Excess of SC over Networth = LTCG / STCG Revaluation to be ignored Gains Taxable u/s. 45 r.w. s.50B S.50C applicable? Itemised Sale Itemised Break-up over A&L Gains Taxable: S.50C applicable even to S.50?
Slump Sale Negative Networth Should it be Ignored or Considered u/s. 50B Slump Exchange Issue of shares against Transfer as Going Concern Sale v Exchange ~ Difference? Is it Taxable © PRAVIN P. SHAH & CO. 61
Slump Sale v Demerger Avaya Global (Mum) Loss-making Unit hived-off by Court Scheme No consideration paid by Transferee Is it a Demerger since no shares issued? Alternatively is it a Slump Sale? Final Decision © PRAVIN P. SHAH & CO. 62
Slump or Asset Sale? Retention of Some Assets by Seller Is a Slump Sale if going concern not disturbed Tech. K-how sold later on Building for IT Co. Doubtful Loans & Contingent Liabilities Treated as Itemised Sale (on Facts) Factory not sold Land because of ULCR Act Liabilities not sold © PRAVIN P. SHAH & CO. 63
Slump or Asset Sale? Q. of Fact and Not Documentation Sale of IPR, Assets & Goodwill by 9 separate Agr. Assigning separate Values Held, to be a Slump Sale not Itemised Sale Substance over form prevails. Totality of Agreements to be seen A/c. Treatment + Agr. Not conclusive Dir. Report / Absorption of Employees on Continuity / Non-Compete / Clauses showed it as a Slump Sale Just because land not sold irrelevant fact For this Biz., IPR was important not land Mahindra Mainers Eng. (Mum) © PRAVIN P. SHAH & CO. 64
Slump Acquisition Buyer acquired a Going Concern by Slump Acquisition Excess Payment over NAV was termed by Buyer as Goodwill Depreciation claimed on Goodwill Depreciation allowed? © PRAVIN P. SHAH & CO. 65
Exempt Sales CG on transfer of Capital Asset to WOS Exempt u/s. 47(iv) Is Capital Loss on such Transfer allowable? Exemption for transfers between Holdco-WOS Necessary that 100% shares must be in name of Holdco? © PRAVIN P. SHAH & CO. 66
Exempt Sales Can Holdco claim exemption for sale to Sub of Sub? Sub of Sub is a Subsidiary under Company Law Exemption available u/s. 47(iv) / (v)? © PRAVIN P. SHAH & CO. 67
© PRAVIN P. SHAH & CO. 68 CONVERSION
© PRAVIN P. SHAH & CO. 69 Part IX Conversion Firm Co. u/s. 565 of Cos. Act (“Part IX”) Q. Any liability for SD or I.T? No Transfer of Undertaking from Firm to Co. Statutory provision – ROC must Incorporate Co. No separate Conveyance reqd. Statutory vesting of property SD payable on such Conversion?
© PRAVIN P. SHAH & CO. 70 Part IX Conversion Any Transfer of Undertaking from Firm to Co. Capital Gains payable on such Conversion S.45(4), applicable? Ch.VI-A Deductions of Firm continue?
© PRAVIN P. SHAH & CO. 71 Part IX Conversion No Capital Gains payable on Conversion Even if Revaluation of Assets done prior to conversion? Can s.45(1) or 45(4) apply in such a case? C/f of Losses of Firm – allowed to Co? S.72A(6) provides for c/f in case of s.47(xiiii) case?
© PRAVIN P. SHAH & CO. 72 Part IX Conversion Conditions Registered Firm 7 or more Members of Co. On Conversion Co. only has Partners as Members Do conditions of s.47(xiii) need to be satisfied?
© PRAVIN P. SHAH & CO. 73 Sale by Firm to Co. & Exemption Slump / Itemised Sale by Firm / LLP for to Buyer Co.: Exemption u/s.47(xiii): All A / L of Firm / AOP become that of Co. All Partners become SHs in same proportion Partners do not receive any other consideration SH of all Partners is at least 50% of Voting Power 50% SH of Partners continues for 5 years Exemption N.A. if Sale to LLP
© PRAVIN P. SHAH & CO. 74 Analysis of s. 47(xiii): Can it be a New Co.? Firm can trf. 2 Businesses to 2 Cos.? Only Business A/L to be trf.? Can RPS be issued to partners? Shares can be issued at a Premium? Transfer inter se Partners permissible in 5 years? If conditions violated Sale by Firm to Co. & Exemption
© PRAVIN P. SHAH & CO. 75 RETURN OF CAPITAL
© PRAVIN P. SHAH & CO. 76 Court Process u/s. 100 of Companies Act Capital in Excess paid back to Shareholders Capital Gains: Amount Received (-) Cost of Shares Receipt on Reduction : Accumulated profits taxed as Deemed Dividend Who pays Tax on Deemed Dividend? Any Exemption? Excess over Dividend Reduction of Capital
© PRAVIN P. SHAH & CO. 77 Does Distribution of cash & immovable properties on Reduction amount to transfer? Reduction by reducing FV of Shares of Shareholders No. of shares not changed – remain same Is it a Transfer? Capital Gain or Loss on such a Reduction? Reduction of Capital
Buyback by Co. Deemed Dividend by Co. on Buyback? Capital Gains on Shareholder Gains = SC – Cost of Acquisition Indexation also available Buyback through Tender Offer: Buyback through Open Market Operations: © PRAVIN P. SHAH & CO. 78
Buyback by Co. Capital Gains exempt if DTAA provides A Ltd (AAR) Buyback offered only by Mauritian Co. AAR ~ Device to evade DDT Exemption denied and Income recharecterized as Dividend Spirit of GAAR applied Correctness? © PRAVIN P. SHAH & CO. 79
© PRAVIN P. SHAH & CO. 80 Redemption at par Redemption = Transfer, results in Capital Gains Redemption at Premium Premium on redemption Deemed Dividend Issue of RPS within the Group Redemption a Sham? Indexation available? Redemption of RPS - Tax Issues
© PRAVIN P. SHAH & CO. 81
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