Arbitration : Important Aspects of Certain Laws
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Transcript Arbitration : Important Aspects of Certain Laws
Taxation of
Business Restructuring
- Anup P. Shah
Chartered Accountant
13th July 2012
JB Nagar CPESC & WIRC of ICAI
Scope
Restructuring
Acquisition
Sale
Conversion
Return of
Capital
Merger
Demerger
Part IX
Reduction
Takeover
Slump/
Asset Sale
S.47(xiii)
Others
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ACQUISITION
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Merger
4
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Definition of Merger - S.2(1B)
(A)
Only of Companies: Not for LLPs / Firms
A
B
B
A
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A
B
C
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S.2(1B) – Definition
(B)
Three Conditions:
All properties
All liabilities
At least 75% shareholders (Valuewise) of Tor Co. should
become shareholders of Tee Co.
The above conditions are cumulative
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Forward Merger
X Ltd.
Loss Making Co.
Merger
A Ltd.
Profitable
Reverse Merger
X Ltd.
Loss Making Co.
MERGER
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A Ltd.
Profitable
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Forward v. Reverse Merger
- Comparison
Forward Merger
Reverse Merger
C/f Bus. Loss
Available?
Available?
C/f Unabs. Dep
Available?
Available?
MAT Credit of
Loss making Co.
Listing
Available?
Continues?
Unlisted
listed?
Capital Reduction
Required?
Advisable?
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can
be
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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)
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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
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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 Tor Co becomes Current Year’s Loss
of Tee Co
Can be set off against CG of Tee Co
Q. If 8th year of B/f Business loss – Any solution?
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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?
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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?
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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)
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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.
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Tax Implication For Tee Co.
Benefit of substitution of FMV on 1.4.1981 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
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Tax Implication For Tee 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.
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Depn. on Goodwill
Goodwill arising on Merger?
Can Transferee claim Depreciation on Goodwill?
Is It a Mere Accounting Entry required under AS14?
What if Brand Acquired under Merger?
Depreciation Allowed?
Same as Goodwill?
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Taxation of Shareholder of Tor 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?
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Taxation of Shareholder of Tor Co.
Q. If SHs of Tor Co. receive Debentures/Cash,
would CGT exemption be available?
Gujarat High Court
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Taxation of Shareholder of Tor Co. on
Sale of New Shares
Q. Benefit of substitution of FMV on 1.4.1981 available?:
Q. Indexation available from which date – Holding in
Transferor Co. or Transferee Co.?
Manjula Shah (Mum SB)
Kotak Bank (Mum)
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Merger – Tax Avoidance
Can you do merger for tax avoidance?
Wood Polymer (Guj)
Indo Continental Hotels (Raj)
Konark Investments, 97 Comp. Cas 52 (SC)
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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?
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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?
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Merger & s.47A
Year 1
Year 4
Holding Co.
Subsidiary merged
into Holding Co.
Transfer of
Capital Asset
Wholly-owned
Sub
No CGT –
s.47(iv)
S.47A(1):
• Parent should own 100%
of Sub for 8 years:
• Is it possible to apply
this section?
• Is provision frustrated?
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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?
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Merger / Sale wef Prior Date
Q. In whose hands is profit after Appointed Date
taxable?
Transferor
Transferee?
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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)?
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Acquisition of Shares
Tax on CGT (Domestic Sellers)
Period of Holding
On-market & STT paid
Off-market (Listed)
Unlisted Shares
MAT for Company SH
LTCG
STCG
More than 12 months
– even for Unlisted
Cos.
Less than 12 months
Nil
15%
10% or 20% with
Indexation
Normal Tax Rates /
30%
20% with Indexation
Normal Tax Rates /
30%
Yes
Yes
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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
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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?
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Sale of Unlisted Shares by FCo.
LTCG taxable @ 10%
STCG @ 42%
No Tax if DTAA provides tax in Country of
Residence
Mauritius
Cyprus
Singapore
Vodafone
Benefits
Amdt.
does
not
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attack
Treaty
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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?
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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?
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Ardex Investments
Ardex Invst
Mauritius
Trf of I Co.
shares
Ardex GmBH
(Germany)
Abroad
India
I Co.
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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?
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Goodyear – Transfer Pricing
GTRC
USA
Gift of Shares
of GIL India
GOCPL
Singapore
Singapore
India
GIL
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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
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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?
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S. 79 - Sale of Shares Unlisted Co.
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
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S. 79 - Sale of Shares Unlisted Co.
Whether
S.79 applies to UAD or only to
Business Loss?
What
about business loss?
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S. 79 - 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?
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S. 79 - 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?
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S. 79 - 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?
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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
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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?
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Land Sale by Co.
• 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
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SALE
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Demerger
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
Transfer @ Book Values only
Revaluation to be Ignored
SH of 3/4th in value of DCo. - SH in RCo.
RCo. Issues shares to SH of DCo. Proportionately
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Demerger-s.2(19AA)
Can Resulting Co. issue to SH of D Co.:
Transfer on a going concern basis
Any other Instruments
Business must be carried on
As per Conditions by CG
Nothing prescribed like for Mergers
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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.
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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
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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?
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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?
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Slump / Itemised Sale
Slump / Itemised Sale
Seller
Slump / Asset Sale of Bus.
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Buyer
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Slump vs Itemised Sale
Factors
Slump Sale
Itemised Sale
What is sold
Business as a Going concern
Individual A & L
Valuation
DCF / ECM / Ad-hoc without
assigning separate Values
Separate Values to
each A & L
Undertaking
Must constitute a Business
Activity
No such condition
Must all A&L be
sold
Generally yes, unless facts
permit otherwise
No
Sale only
Slump Sale – not Exchange
Can be an Exchange
also
Taxation
S.45(1) r.w. s.50B
S.45 / s.50 / s.50C
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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?
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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
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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
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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
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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)
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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?
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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?
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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)?
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CONVERSION
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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?
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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?
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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?
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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?
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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
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Sale by Firm to Co. & Exemption
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
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RETURN OF CAPITAL
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Reduction of Capital
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
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Reduction of Capital
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?
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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:
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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?
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Redemption of RPS - Tax Issues
Redemption at par
Redemption at Premium
Redemption = Transfer, results in Capital Gains
Premium on redemption Deemed Dividend
Issue of RPS within the Group
Redemption a Sham?
Indexation available?
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