1. 4. Tax Due Diligence (KPMG) – Main concerns
1
Area Concern Remedies
Disallowance of
expenses prior to set-up
of business
• Target entities have claimed deduction of expenses incurred prior to set-up of business
• Consequently, it has carried forward unabsorbed business losses to subsequent years in
their return of income
• However, the view adopted by the management is litigative, the tax authorities may disallow
such expenses on the premise that the company was not ready to commence its essential
activity until COD was achieved
• Therefore, such carried forward business loss should not be allowed to be set-off in
subsequent years. KPMG estimated that the cumulative amount of INR 123.7m should be
disallowed on account of expenses incurred prior to set-up of business
The INR 123.7m losses estimated by KPMG
had been ignored in the financial model
Impact
Low
Unabsorbed depreciation
• Regarding the law, if shares are issued by a company to a resident shareholder at a price
higher than its face value, then an amount excess of Fair Market Value ('FMV') of such
shares shall be considered as income of the issuing company
• On an SPV (VSEPL), the company had issued shares at a value exceeding the FMV as
determined by the valuer in their report by an amount of INR 63.7m
• In relation to the tax exposure, losses of VSEPL should be reduced by an amount of INR
63.7m and there should not be a tax outgo, since the company has adequate unabsorbed
depreciation
The INR 63.7m losses had not been
considered for the purpose of carry forward
(and set off accordingly), and had been ignored
in the financial model
Low
Claim of depreciation on
a blanket rate
• The Target entities have claimed depreciation on plant and machinery at a single blanket
rate of 40%. It may be noted that the Act provides for different rates of depreciation for
different blocks of assets
• Based on the discussions held with management, the said claim of depreciation at single
blanket rate of 40% has not been disputed by the income-tax authorities and no litigation in
relation to it is currently undergoing
Appropriate indemnities / warranties to be
obtained in this regard in the transaction
documents
Low
Receipt of loans /
deposits
• Under the law, no company shall accept any loan or deposit otherwise than by way of
account payee cheque or account payee bank draft or through other prescribed electronic
modes of payment
• The amount of penalty that could be imposed amounts to INR 422.3m on NSEPL and INR
33m on VSEPL in a situation where management is unable to provide bona fides of the
transaction to the satisfaction of the tax officer
Appropriate indemnities / warranties to be
obtained in this regard in the transaction
documents
Low
Note: Total Asset Value for Depreciation (including Unabsorbed depreciation & deduction suggested by KPMG) = 1,782m + 3,867m – 126M – 63.7M = INR 5459.3M
