Ronak Doshi Bansi S.Mehta & Co Direct Tax Aspects of Corporate Restructuring and Fastrack Mergers under the Companies Act, 2013 Ronak Doshi Bansi S.Mehta & Co

Background Purpose/ Intention Sale of Entire Company – Sale of shares/ Amalgamation Sale of company/Division – Slump Sale/Demerger/Slump Exchange Tax implication different for buyer and seller Indirect tax/ Stamp duty implications required to be analyzed before finalizing the mode of restructuring December 20, 2014

Background Time period for carrying out arrangement (Private Sale/Court Scheme) Clear transfer of title in case of court approved scheme. Ease of transfer of existing contracts, etc. Now in Court scheme- Tax Department NOC required – General Circular 1/2014 December 20, 2014

Various Modes of Restructuring Amalgamation of a company by way of a court approved scheme Tax neutral on fulfilment on conditions in section 2(1B) Court Approved Process, hence time consuming Amalgamation/Merger Hive off of an undertaking by way of court approved scheme Tax neutral on fulfilment on conditions in section 2(19AA) Demerger December 20, 2014

Various Modes of Restructuring Transfer of undertaking as a whole for lump sum consideration Slump Sale Sale of individual assets for specific consideration Itemised Sale Transfer of shares to the buyer Outright Sale December 20, 2014

Section 2(1B) – Amalgamation All the property of the amalgamating company(ies) becomes the property of the amalgamated company; All the liabilities of the amalgamating company(ies) become the liabilities of the amalgamated company and Shareholders holding not less than 75% of the value of the shares of the amalgamating company become shareholders of the amalgamated company. December 20, 2014

Section 2(19AA) – Demerger All the properties/ liabilities of the undertaking immediately before the demerger becomes the properties/ liabilities of the resulting company; The property & the liabilities of the undertaking/s are transferred at values appearing in its books of account immediately before the demerger; The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; December 20, 2014

Section 2(19AA) – Demerger The shareholders holding not less than 75% of the value of the shares in the demerged company become shareholders of the resulting company(ies) by virtue of demerger; The transfer of the undertaking is on a “going concern basis” and The demerger is in accordance with the conditions, if any, notified u/s. 72A(5) by the Central Government. December 20, 2014

Section 2(42C) and 50B – Slump Sale Slump Sale means transfer of one or more undertakings as a result of sale for a lump sum consideration without assigning values to individual assets and liabilities; The term “undertaking” includes any part of the undertaking, or a unit or a division of an undertaking, constituting a business activity; “Net Worth” of the undertaking shall be deemed to be the cost of acquisition – no indexation benefit; December 20, 2014

Section 2(42C) and 50B – Slump Sale Net Worth = Aggregate Value of Total Assets - Aggregate Value of Total Liabilities Computation of Aggregate Value of Total Assets Depreciable Assets - WDV as per Section 43(6)(c)(i)(C) Assets wherein whole expenditure is allowed/ allowable as a deduction u/s. 35AD – NIL Other Assets – Book Value Report of an accountant in Form No. 3CEA certifying the Net Worth of the undertaking, to be furnished along with the Return of Income. December 20, 2014

Written Down Value in case of Slump Sale Reduction in WDV of Block as per Section 43(6)(c)(i)(C) WDV Decreased cannot Exceed written down value Particulars Amount Actual Cost of Asset XXX (-) Depreciation actually allowed upto AY 87-88 (X) Depreciation that would have been allowable since AY 88-89 if asset was only asset in block of assets WDV to be Decreased by XX December 20, 2014

Itemised Sale Sale of individual assets for specific consideration Capital gains in the hands of the seller Indexation Benefit Available Less time consuming as no court approval required December 20, 2014

Outright Sale Sale of shares by the shareholders to the buyer Capital Gains in the hands of shareholder Indexation Benefit Available Less time consuming as no court approval required December 20, 2014

Tax Implications – Shareholders of Amalgamating Company Receipt of new shares in the amalgamated company in lieu of shares held in the amalgamating company Extinguishment of rights in equity shares of the amalgamating company Section 47(vii) – Extinguishment of rights in equity shares not regarded as “Transfer”, subject to the conditions as prescribed. Hence, such extinguishment of rights not taxable in the hands of shareholders. December 20, 2014

Tax Implications – Shareholders of Amalgamating Company (Contd.) Section 2(42A) – Period of Holding Shall include the period for which the shares were held by the shareholders in the amalgamating company Section 49(2) – Cost of Acquisition Shall be deemed to be the cost of acquisition of the shares in the amalgamating company subject to indexation determined as per the period of holding December 20, 2014

Tax Implications – Amalgamating Company Section 47(vi) – Transfer of a capital asset in a scheme of amalgamation to an Indian company – not regarded as “Transfer” - not taxable in the hands of amalgamating company. Section 47(via) – Transfer of a capital asset being shares held in an Indian company, by Amalgamating Foreign Company to Amalgamated Foreign Company - not regarded as transfer, if following conditions fulfilled: 25 % or more of the shareholders of amalgamating foreign company continue to remain shareholders of amalgamated foreign company Such transfer does not attract capital gain tax in country in which amalgamating company is incorporated December 20, 2014

Tax Implications – Amalgamated Company Section 49(1)(iii)(e) – Cost of Acquisition shall be deemed to be the “cost” for which the previous owner of the property acquired it plus the cost of improvements Explanation 7 to Section 43(1) - Actual Cost of transferred capital asset to be the same as it would have been if the amalgamating company had continued to hold the capital asset. Explanation 2(b) to Section 43(6) - Block of Assets – Actual Cost of block shall be WDV as in the case of the amalgamating company for immediately preceding PY as reduced by the amount of depreciation actually allowed in the said preceding PY. December 20, 2014

Tax Implications – Shareholders of Demerged Company Receipt of new shares in the Resulting company in lieu of shares held in the Demerged company Section 47(vid) – Transfer/issue of shares by resulting company in demerger to shareholders of demerged company, if transfer is in consideration of undertaking Hence, no income in the hands of shareholders. December 20, 2014

Tax Implications – Shareholders of Demerged Company Section 2(42A) – Period of Holding Shall include the period for which the shares were held by the shareholders in the demerged company Section 49(2C) – Cost of Acquisition Shall be deemed to be amount which bears to the cost of acquisition of the shares in the demerged the same proportion as the net book value of assets transferred in demerger bears to net worth of demerged company immediately before demerger December 20, 2014

Tax Implications – Demerged Company Section 47(vib) – Transfer of a capital asset in a scheme of demerger to an Indian company – not regarded as “Transfer” - not taxable in the hands of demerged company. Explanation 2A to Section 43(6) - Block of Assets –WDV to be reduced by WDV of assets transferred to resulting company pursuant to demerger December 20, 2014

Tax Implications – Resulting Company Section 49(1)(iii)(e) – Cost of Acquisition shall be deemed to be the “cost” for which the previous owner of the property acquired it plus the cost of improvements Explanation 7A to Section 43(1) - Actual Cost of transferred capital asset to be the same as it would have been if the demerged company had continued to hold the capital asset. Explanation 2B to Section 43(6) - Block of Assets – WDV of the transferred assets immediately before the demerger December 20, 2014

Section 32 - Depreciation Fifth proviso to Section 32(1) The aggregate deduction of depreciation shall not exceed the depreciation as per prescribed rates Also applicable in case of slump sale, as business transferred as a whole Depreciation in the year of transfer to be computed as if transfer had not taken place Depreciation to be apportioned between transferor and transferee on the basis of number of days for which assets were used by them In case of non qualifying merger/demerger – depreciation on actual cost i.e on actual purchase price based on Purchase Price Allocation 1. Applicability of Section 170 and fifth proviso to Section 32(1) - following the decision of SC in CIT v. K.H. Chambers (55 ITR 674) December 20, 2014

Section 72A – Carry Forward and Set Off of Accumulated Loss and Unabsorbed Depreciation Applicability: A company owning an industrial undertaking or a ship or a hotel Banking Company Public Sector Companies having a business of operation of aircrafts Accumulated loss and unabsorbed depreciation of Amalgamating Company deemed to be loss / unabsorbed depreciation of Amalgamated Company for PY in which amalgamation effected. December 20, 2014

Section 72A (Contd.) Conditions to be fulfilled Amalgamating Company Amalgamated Company Engaged in the business for 3 or more years; Continues the same business for a minimum period of five years from the date of amalgamation; Has continuously held till the date of amalgamation and also held by it 2 years prior to the date, atleast 75% of the book value of the fixed assets. Holds continuously for a period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets acquired; Other conditions – Rule 9C. December 20, 2014

Section 72A – Implications of Violation of Conditions The set off of loss or allowance of depreciation made in any PY in hands of Amalgamated Company deemed to be income of Amalgamated Company Such deemed income shall be chargeable in year in which conditions not complied with December 20, 2014

Section 72A – Carry Forward and Set Off of Accumulated Loss and Unabsorbed Depreciation Accumulated loss and unabsorbed depreciation of Demerged Company shall Where directly relatable to undertakings transferred – be allowed to be carried forward and set off in the hands of resulting company Where not directly relatable to undertakings transferred – be apportioned between demerged company and resulting company in the proportion in which assets have been retained by demerged company and transferred to resulting company December 20, 2014

Taxation Issues arising out of Restructuring

“Shares” and “Shareholders” in section 2(1B)/ 2(19AA) In both cases, shares needs to be issued to existing shareholders The shares by transferee company needs not be only ‘equity’ can be ‘preference too’ December 20, 2014

Difference between Appointed Date and Effective Date Date on which the assets and liabilities vest in and stand transferred to the transferee company; Books of Accounts on the this date form the basis for valuation of shares and determination of share exchange ratio and Is relevant for the purpose of assessment of income of the transferor and transferee company. Effective Date Date on which certified copy of the High Court Order is filed with the Registrar and Transferor company stands dissolved December 20, 2014

How will the Return of Income be filed where Appointed Date does not coincide with the FY end (i.e. March 31)? Upon Scheme becoming effective, Transferee Company is vested with all income, assets, etc. of the Transferor from the Appointed Date [Marshall Sons & Co. India Ltd. v/s ITO (223 ITR 809) – SC] Therefore, Transferee Company to file return of income in respect of income of Transferor Company for period starting from the Appointed Date The assessment of such return will be in the hands of the Transferee Company December 20, 2014

Whether profits for period between appointed date and effective date to be assessed in hands of transferor or transferee? Dalmia Cement Limited v. CIT(237 ITR 617) As transferor assessee could not retain profits in its own hands after sale agreement, profit post date of agreement cannot be assessed in hands of assessee, and ought to be assessed in hands of transferee Marshall Sons & Co. India Ltd. v/s ITO (223 ITR 809) – SC] December 20, 2014

Whether Accounts of the Companies to be redrawn where Effective Date falls after FY ends? If the accounts for the FY end are approved and adopted in AGM before the Effective Date – cannot be reopened or revised following the Circular No. 12/77 [1/1/77-CL-V and 2/331/75-CL-II], dated 21/11/77 Effect of the scheme to be given in the next FY end Accounts, disclosing results from the Appointed Date till the next FY end If the accounts for the FY end are not approved – effect of the scheme to be given from the Appointed Date till the FY end following the ratio laid down by SC in Marshall Sons & Co. (India) Ltd. V. ITO (223 ITR 809) December 20, 2014

Book profits as per Section 115JB and MAT related Issues Whether carry forward and set off of unabsorbed book depreciation/ book losses will be available for adjustment against book profits of the amalgamated company? VST Tillers & Tractors Ltd v. CIT (2009 TIOL 26) (Bang. ITAT) Whether the MAT credit of the amalgamating company will be available to the amalgamated company? SKOL breweries Ltd. V. ACIT (2008 TIOL 741) (Mum. ITAT) VST Tillers & Tractors Ltd v. CIT - Where the amalgamation is approved by the High Court and as per the provisions of section 72, carried forward unabsorbed losses and depreciation of the transferor company will be the losses of the transferee company and can be set off against the book profits of the transferee company. SKOL breweries Ltd. V. ACIT (2008 TIOL 741) (Mum. ITAT) - If the transferor company had paid taxes under section 115JA in earlier AYs then the benefit u/s. 115JA cannot be denied to the transferee company on the reason that the transferor company is not in existence December 20, 2014

Whether section 56(2)(viia) triggered in case of amalgamation “Receipt” of unlisted shares Section 56(2)(viia) provisions not triggered Amalgamation/Demerger at fair value – valuation report obtained PNB Finance Ltd v. CIT (337 ITR 75) – Business sold as a whole, cannot be split into parts December 20, 2014

Whether Goodwill arising on amalgamation is eligible for depreciation? “Section 32(1)(ii) defines intangible assets as “know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature”. Goodwill on amalgamation – falls within “any other business or commercial rights of similar nature”. Smifs Securities (348 ITR 302)(SC) December 20, 2014

Can tax liability of Transferor Company be assessed in the hand of Transferee Company? CIT v. K.H. Chambers (55 ITR 674) - ‘succession’ under section 170 involves change of ownership, that is, the transferor goes out and the transferee comes in; it connotes that the whole business is transferred Post amalgamation, amalgamating company is not in existence Business of amalgamating company succeeded by Amalgamated Company Assessment to be made in the hands of amalgamated company December 20, 2014

Can tax liability of Transferor Company be assessed in the hand of Transferee Company? In case of demerger/ slump sale, only an undertaking is transferred Not complete succession, but ‘partial’ succession Assessment to be continued in the hands of Demerged Company December 20, 2014

Whether value can be assigned to individual assets in case of slump sale? CIT v. Artex Manufacturing Co.(227 ITR 260) (SC) Identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale . Contra CIT V. Electric Control Gear (227 ITR 278) Separate value is assigned to land/building under the relevant stamp duty legislation, the slump sale will not be adversely affected - Explanation 2 to S. 2(42C) Zuari Industries Ltd. v. ACIT – held that if the Net Worth of the undertaking is negative, the same should be considered as zero for the purpose of computing CG u/s 50B. December 20, 2014

Whether transfer of assets without liabilities is slump sale? Mahindra Sintered Products Ltd. v. DCIT, [95 ITD 380 (Mum.) No liability was transferred to the buyer - transfer of undertaking would not be regarded as a slump sale Weikfield Products Co. (I) (P.) Ltd. v. DCIT, [71 TTJ 518 (Pune) Sale of chemical unit was not regarded as slump sale, because there was transfer of assets without transfer of liabilities Zuari Industries Ltd. v. ACIT – held that if the Net Worth of the undertaking is negative, the same should be considered as zero for the purpose of computing CG u/s 50B. December 20, 2014

Whether a sale of an undertaking will be considered as a Slump Sale when certain assets and liabilities pertaining to such undertaking are retained? Rohan Software Pvt. Ltd. v. ITO (117 TTJ 490) (Mum) All business assets were transferred except for certain assets such as building, motor cars an assets and liabilities relating to income-tax matters. ACIT v. J.L. Builders (P) Ltd. (ITA No. 714) (Mds) All the assets were transferred except for certain deposits and liabilities Applying the principles as laid down in the aforesaid decisions, it can be inferred that even in case a particular asset or liability is not transferred, the transaction would be regarded as a Slump Sale provided that the new undertaking would be in a position to carry on the business independently without taking over certain assets and liabilities. December 20, 2014

Whether Negative Net Worth to be ignored for the purpose of computing Capital Gains? DCIT v. Summit Securities ltd. (Mum-Trib) (SB) – Negative figure of Net Worth not to be ignored for computing CG in case of a slump sale. Zuari Industries Ltd. v. ACIT (105 ITD 569) (Mum) – Reversed after the ruling laid down by SB as aforesaid. Zuari Industries Ltd. v. ACIT – held that if the Net Worth of the undertaking is negative, the same should be considered as zero for the purpose of computing CG u/s 50B. December 20, 2014

Whether transfer of an undertaking for non-monetary consideration would be regarded as Slump Sale or Exchange? Where assets are transferred for a consideration of another asset other than money – Considered as exchange and not sale CIT v. R.R. Ramkrishna Pillai (66 ITR 725) (SC) CIT v. Motors & General Stores (P.) Ltd. (66 ITR 692) (SC) December 20, 2014

Slump Exchange? CIT v. Bharat Bijlee Limited (Bom) (364 ITR 581)- Transfer of a business undertaking as a going concern against issuance of bonds/ preference shares was not a sale, but an exchange SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission (207 Taxman 74) - transfer of business in exchange of another asset is sale – element of monetary consideration involved Contrary view was taken by Delhi HC in the case of SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission (207 Taxman 74) wherein it was held that transfer of business in exchange of another asset indeed involves an element of monetary consideration which is discharged in the form of shares. The Bombay HC in the case of Bharat Bijlee (supra) distinguished the ruling of the Delhi HC on the grounds that in case of SREI the consideration for transfer was both in form of cash and shares. Since an element of monetary consideration was involved, it could not be said that there is no sale. December 20, 2014

Whether transfer pursuant to Court Order will be regarded as Sale? Avaya Global Connect Ltd. V. ACIT (26 SOT 397) Sadanand S. Varde and Others v. State of Maharashtra and Others (247 ITR 609) (Bom.) Oudh Sugar Mills Ltd. v. ITO (35 ITD 76) (Mum.) On the basis of the rulings laid down by the aforesaid decisions, it is clear that transfer pursuant to a Court’s Order and/or by operation of law is not ‘Sale’. Therefore, if an undertaking is transferred pursuant to an order u/s. 391 of the Companies Act, 1956 on slump basis then same cannot be treated as ‘Sale’ and hence provisions of section 2(42C) would not apply. December 20, 2014

Conversion of Private Limited Company into LLP LLP Agreement to be prepared Application to be made in Form 18 to ROC for registration of LLP Section 56 of LLP Act and Third Schedule to LLP Act to be complied with No security interest in assets at the time of application Partners of LLP should be shareholders of company and no one else As per Third Schedule, upon registration, all property, rights, interest, liabilities etc and whole of the undertaking of the company vested in the LLP December 20, 2014

Tax Implications of Conversion of Company into LLP Not transfer if conditions of 47(xiiib) satisfied Turnover from PGBP < 60 lakhs for last 3 years All assets and liabilities of firm to become assets and liabilities of company Shareholders to be partners in LLP No other amount paid to partner Absence of consideration, no capital gains Statutory Vesting of Properties -Texspin Engg. & Mfg. Works [129 Taxmann 1] and ACIT Vs. Unity Care & Health Service Aravali Polymers LLP (65 SOT 11) (Kolkata) Contention Arguable – prone to litigation December 20, 2014

Fastrack Mergers under the Companies Act, 2013

Fast track mergers – Companies Act 2013 Section 233 of Companies Act 2013 Merger of 2 or more small companies Small company is a private company that meets either of the following requirements: Paid-up capital does not exceed Rs 50 lakhs(or higher amount, as may be prescribed, and should not be more than Rs 5 crore). Its turnover (according to its last profit and loss account) does not exceed Rs 2 crore(or a higher amount, as may be prescribed, which will not be more than 20 crore). December 20, 2014

Fast track mergers – Companies Act 2013 Merger between holding company and its wholly owned subsidiary Such other classes of companies as may be prescribed Merger u/s 233 to be approved by CG and there will be no requirement to approach NCLT. December 20, 2014

Fast track mergers – Companies Act 2013 Schemes approved by the BoD to be sent to ROC and the Official Liquidator (OL) for their suggestions or objections within 30 days Scheme to be considered in the meetings of shareholders or creditors, with their suggestions or objections, and to be approved by the following classes of persons: Shareholders holding 90% of the total number of shares at a general meeting Majority creditors (representing nine-tenth in value) in a meeting convened with 21 days notice December 20, 2014

Fast track mergers – Companies Act 2013 After approval, scheme will have to be filed with the OL, RoC and the Central Government. No objection, would be deemed as approved In case of objections, the scheme may be referred by the Central Government to the NCLT for it to consider the scheme under the normal process of a merger December 20, 2014

Fast track mergers – Companies Act 2013 NCLT can either mandate that the scheme is to be considered a normal merger or it may confirm the scheme Transferor and transferee companies will need to file a declaration of solvency with the RoC. December 20, 2014

Fast track mergers – Companies Act 2013 Under the 1956 Act, the criterion of “present and voting” is essential for the conduct of shareholders’ and creditors’ meetings. However, the similar concept of “present and voting” has not been included in the 2013 Act, and there is no clarity is required from the Ministry December 20, 2014

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