TAXATION ASPECTS OF M&A Carry forward and set off of accumulated loss and unabsorbed depreciation Under the

Income-tax Act 1961, a special provision is made which governs the provisions relating to carry forward and set off of accumulated business loss and unabsorbed depreciation allowance in certain cases of amalgamations and demergers. It is to be noted that as unabsorbed losses of the amalgamating company are deemed to be the losses for the previous year in which the amalgamation was effected, the amalgamated company (subject to fulfillment of certain conditions) will have the right to carry forward the loss for a period of eight assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was effected. If any of the conditions for allow ability of right to carry forward of loss, is violated in any year, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which the conditions are violated. Capital gains Capital gains tax is leviable if there arises capital gain due to transfer of capital assets. The term transfer is defined in the Income-tax Act in an inclusive manner. Under the Income-tax Act, transfer does not include any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the later is an Indian company. From assessment year 1993-94, any transfer of shares of an Indian company held by a foreign company to another foreign company in a scheme of amalgamation between the two foreign companies will not be regarded as transfer for the purpose of levying capital gains tax, subject to fulfilment of certain conditions. Further, the term transfer also does not include any transfer by a shareholder in a scheme of amalgamation of a capital asset being a share or the shares held by him in the amalgamating

company if the transfer is made in consideration of the allotment to him of any share or the shares in the amalgamated company and the amalgamated company is an Indian company. Similar exemptions have been provided to a demerger under the Income-tax Act, 1961. Expenditure of amalgamation or demerger The Income-tax Act, 1961 provides that where an assessee being an Indian company incurs any expenditure on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction u/s of an amount equal to of one-fifth of such expenditure for each of the successive previous years beginning with the previous year in which the amalgamation or demerger takes place. Deductibility of certain expenditure incurred by amalgamating or demerged companies The Income-tax Act, 1961 provides for continuance of deduction of certain expenditure incurred by the amalgamating company or demerged company as the case may be in the hands of the amalgamated company or resulting company, post amalgamation or demerger viz. capital expenditure on scientific research (only in case of amalgamation), expenditure on acquisition of patents or copyrights, expenditure on knowhow, expenditure for obtaining license to operate telecommunication services. Tax characterization of sale of business/slump sale For a sale of business to be considered as a slump sale the following conditions need to be fulfilled: There is a sale of an undertaking; The sale is for a lump sum consideration; and No separate values being assigned to individual assets and liabilities. If separate values are assigned to assets, the sale will be regarded as an itemized sale.

Indian tax laws have specifically clarified that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities In a slump sale, the profits arising from a sale of an undertaking would be treated as a capital gain arising from a single transaction. Where the undertaking being transferred was held for at least 36 months prior to the date of the slump sale, the income from such a sale would qualify as long-term capital gains at rate of 20% (plus surcharge and cess). If the undertaking has been held for less than 36 months prior to the date of slump sale, then the income would be taxable as short-term capital gains at the rate of 30% (plus surcharge and cess). Whereas an itemized sale of individual assets takes place, profit arising from the sale of each asset is taxed separately. Accordingly, income from the sale of assets in the form of stockin-trade will be taxed as business income, and the sale of capital assets is taxable as capital gains. Significantly, the tax rates on such capital gains would depend on the period that each asset (and not the business as a whole) has been held by the seller entity prior to such sale. Proposed tax treatment under Direct Tax Code ( the Code) It is to be noted that recently, the Finance Minister has released the new Direct Tax Code which seeks to bring about a structural change in the tax system currently governed by the Income- tax Act, 1961. Summarized below are the key proposed provisions that are likely to have an impact on the mergers and acquisitions in India:

Currently, the definition of amalgamation covers only amalgamation between companies. It is now proposed to include, subject to fulfillment of certain conditions, even amalgamation amongst co-operative societies and amalgamation of sole proprietary concern and unincorporated bodies (firm, association of persons and body of individuals) into a company in this definition.

For amalgamation of companies to be tax neutral, in addition to existing conditions the Code proposes that amalgamation should be in accordance with the provisions of the Companies Act, 1956.

In case of demerger, resulting company can issue only equity shares (as against both equity and preference shares as per existing provisions) as consideration to the shareholders of demerged company, for the demerger to qualify as tax neutral demerger.

Irrespective of sectors (ie manufacturing or service), the benefit of carry forward and set off of losses of predecessor in the hands of successor Company is proposed to be available to all the companies. As per existing provisions in view of definition of industrial undertaking certain companies were not able to utilize the benefit of losses as a result of amalgamation. Further, the Code provides for indefinite carry forward of business losses as against restrictive limit of 8 years under existing provisions.

Profit from the slump sale of any undertaking is proposed to be taxed as a business income as against capital gains income.

Code seeks to eliminate the distinction between long term and short term capital asset.

Introduction of General Anti Avoidance Rule (GAAR) which empowers the Commissioner of Income-tax (CIT) to declare an arrangement as impermissible if the same has been entered into with the objective of obtaining tax benefit and which lacks commercial substance.

Stamp duty aspects of M&A Stamp duty is payable on the value of immovable property transferred by the demerged/ amalgamating/ transferor company or value of shares issued/consideration paid by the resulting/ amalgamated/ transferee company. In certain States there are specific provisions for levy of stamp duty on amalgamation/ demerger order viz. Maharashtra, Gujarat, Rajasthan etc. However in other States these provisions are still to be introduced. Thus in respect of States where there is no specific provision, there exists an ambiguity as to whether the stamp duty is payable as per the conveyance entry or the market value of immovable property. The High Court order is regarded as a conveyance deed for mutation of ownership of the transferred property. Stamp duty is payable in the States where the registered office of the transferor and transferred companies is situated. In addition to the same, stamp duty may also be payable in the States in which the immovable properties of the transferred business are situated. Normally, set off for stamp duty paid in a particular State is available against stamp duty payable in the other State. However, the same depends upon the stamp laws under the various States. In addition to the stamp duty on transfer of business, additional stamp duty on issue of shares is also payable based on the rates prevailing in the State in which shares are issued.