The document discusses the implications of the Finance Act 2012 and Finance Bill 2013 on business restructuring, emphasizing its necessity for survival and growth in changing markets. It outlines various types of restructuring, the features and circumstances necessitating it, and the related tax issues arising from mergers and acquisitions, particularly regarding indirect transfers. Additionally, the document highlights recommendations from the Shome Committee addressing the complexities and uncertainties introduced by new tax regulations.

1. Impact on
Business Restructuring
with respect to Finance Act 2012 & Finance Bill 2013
By: D.S.Vivek
Partner, Suresh & Co.

2. THAT WHICH DOES NOT CHANGE, DOES NOT GROW

3. THAT WHICH DOES NOT
GROW, DIES

4. Business Restructuring – A Primer
Why Business Restructure?
- Only thing constant is CHANGE
- Business Restructuring enables coping with change
- Business Restructuring required for survival
- Buisness Restructuring required for growth
- Essential Strategy – Core and Non Core
- Global Customers
- Wide Spread Technology
- Increasing Fixed Costs
- Value Capture and Value Creation
- Acquiring Resources

5. Business Restructuring – A Primer
What is Business Restructure?
- Restructure means to organize differently
Restructuring is the corporate management term for the act of
reorganizing the legal, ownership, operational, or other structures of a
company for the purpose of making it more profitable, or better organized
for its present needs.
Restructuring includes a change of ownership or ownership
structure, demerger, or a response to a crisis or major change in the
business such as bankruptcy, repositioning, or buyout.
Restructuring may also be described as corporate restructuring, debt
restructuring and financial restructuring.

6. Business Restructuring – A Primer
Types of Restructuring
Debt Restructuring
Portfolio & Asset Capital Investment Pattern
Restructuring Restructuring
FDI Participation
Mergers &
Acquisitions Joint Ventures Divestitures
Amalgamations
Management Buyouts Spin Offs
Horizontal
Cogeneric
Negotiated /Hostile
Takeover
Splits
Vertical Takeovers Leverage Buyout Equity Carve Outs
Asset Buyout
Disinvestment
Conglomerate

7. Business Restructuring – A Primer
Features of Business Restructuring
• Reorganistaion of ownership structure
• Sale of Non Core / underutilized assets, such as patents or brands
• Reorganization of functions such as sales, marketing, and distribution
• Moving of operations such as manufacturing to lower-cost locations
• Refinancing of corporate debt to reduce interest payments
• Outsourcing of operations such as payroll and technical support
• Renegotiation of labour contracts to reduce overhead
• Forfeiture of all or part of the ownership share by pre restructuring stock
holders

8. Business Restructuring – A Primer
Need of Restructuring
In the following circumstances Business Restructuring would required.
• Lack of economies of scale
• Absence in growth segments of the market.
• Changes in business structures . both domestic and global.
• Poor efficiency in operations.
• Declining competitiveness of the product, technology and value creation process.
• Lack of funds to support brand and distribution network.
• Changes in environment in areas like technology, competition, regulations etc.
• It may entail less risk and even less cost
• High cost structure and high cost of capital & Mismanagement of fixed and
working capital.

9. Business Restructuring – A Primer
Benefits of Business Restructuring
• Combination benefits
• Operational Resource Sharing – Functional Skills & General management
• Domain strengthening / Domain Extension/Domain Exploring
• Acquiring Capability / Acquiring Platform/ Acquiring Business Position
• Restructuring results in more efficient economic activity.
• Restructuring results in a great deal of competition for business assets.
• Creates value for shareholders
• Helps in capturing new opportunities in the evolving economies

10. Tax Issues in Business Restructuring
The Income Tax Act contemplates and recognizes the following types of mergers and acquisitions activities.
• Amalgamation (i.e. a merger which satisfies the conditions specified)
• Slump sale/asset sale.
• Transfer of shares
• Demerger or spin-off.
Tax Related Issues is Business Restructuring
- Carry Forward of Losses
- Capital Gains on Corporates and Shareholders
- Expenditure / Income Allocation
- Valuation related issues
- Tax Allocation / Credits in MNE
- Stamp Duty
- Indirect Taxes and Carry forward of Credits

11. Finance Act 2012
Impacts

12. Taxability of Indirect Transfer
The Background – Vodafone Issue
HTIL Transfer of shares of CGP Vodafone NV
Hongkong Netherlands
100%
100%
CGP Investments
Cayman Islands
100% 3GSPL.
100% India
Indian Holding Co.
Mauritius 51.96% HEL.
India
•HTIL held the controlling stake in HEL, Vodafone acquired shares of CGP from HTIL
•Agreement entered into by HTIL and Vodafone for acquiring business in India.
•Income Tax Authorities treated transfer of shares as transfer of capital assets in
India, hence liable to deduct tax on payment made to HTIL.
•Supreme Court held that the transaction not taxable in India.

13. Taxability of Indirect Transfer
Retrospective amendment by the Government to neutralize the impact of
the landmark Supreme Court decision.
Major amendments in this regard are as follows
• The Finance Act, 2012 introduced Explanation 5 to Section 9(1)(i) of the
Income Tax Act, 1961, “clarifying” that an offshore capital asset would be
considered to have a situs in India if it substantially derived its value
(directly or indirectly) from assets situated in India. The amendment is
currently retroactively applicable from 1961.
• Amend section 2(14) to clarify that ‘property’ includes and shall be
deemed to have always included any rights in or in relation to an Indian
company, including rights of management or control or any other rights
whatsoever.

14. Taxability of Indirect Transfer
• Amend section 2(47) by adding Explanation 2 to clarify that ‘transfer’ includes and
shall be deemed to have always included disposing of or parting with an asset or
any interest therein, or creating any interest in any asset in any manner
whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or
involuntarily by way of an agreement (whether entered into in India or outside
India) or otherwise, notwithstanding that such transfer of rights has been
characterized as being effected or dependent upon or flowing from the transfer of
a share or shares of a company registered or incorporated outside India.
• Amend section 195(1) by adding Explanation 2 to clarify that obligation to comply
with sub-section (1) and to make deduction there under applies and shall be
deemed to have always applied and extends and shall be deemed to have always
extended to all persons, resident or non-resident, whether or not the non resident
has:-
(a) a residence or place of business or business connection in India; or
(b) any other presence in any manner whatsoever in India.

15. Taxability of Indirect Transfer-Shome
Committee
Shome Committee Recommendations
Despite of amendment of the act the government had missed out important issues
including questions relating to the applicability of indirect transfer provisions to listed
companies, issues on the attribution of value, adjustment of cost of
acquisition, availability of treaty benefits and foreign tax credits, etc.
The Prime Minister set up the Committee (Shome Committee) to engage with
stakeholders and examine the implications of the new rule to tax indirect share
transfers.
Key Draft Recommendations
• The Committee has stated that retrospective amendments should not be
made to expand the tax base as that would affect certainty and rule of law. It
should only be in rarest of rare cases only
• the withholding tax obligation should not be retrospectively applied for
payments that have already been made

16. Taxability of Indirect Transfer-Shome
Committee
• For threshold test on Substantiality and valuation at least 50% of the total value
should be derived from assets located in India. Further, to this extent, the value of
the Indian assets should be more than 50% of the global assets to determine
whether the 50% test has been met.
• Attribution of value: The Committee has recommended that a proportional basis
of taxation should be adopted for the purpose of calculation of the tax liability of
the transfer of shares of a foreign company (covered by the amendment) in India.
Thus, in this regard the Committee recommended that only that portion of the
gains should be taxable in India which is proportional to the total gains which
the Indian assets bear to the global assets. Eg; US Holding Company with 51%
Value from India, 34% for Australia and 15% from UK. Then only 51% of Capital
Gain to be taxed in India
Under DTC, indirect transfer of shares of Indian company taxable if FMV of Indian assets exceeds
50% of FMV of all assets of foreign company, whose shares are transferred.

17. Taxability of Indirect Transfer-Shome
Committee
• Minority Shareholders concern : To be made applicable only where the share
holding is more than 26% in the holding company
• Listed companies: Exemptio to be provided to listed companies as they would not
be sham / paper companies
• Exemption in case of Business Restructuring if such restructuring exempt from tax
in home country
• Conflicts with Indian Tax Treaties : Should be exempt unless the treaty gives right
to tax as per domestic law or gives India right to tax transfer of shares of foreign
company

18. Proposed Transaction
Group Company
USA
Indian Co. US operation Co Europe Africa
Considered Substantial on
basis of assets (30% value)
Buyer
Propose Transfer of Group Co.
In the above hypothetical transaction if the proposed transaction happens on transfer
of group company shares to the buyer then the tax implication of such transaction will
attract Indian Tax Law, since Indian company having substantial assets when compared
to the group. The Full value received by Group Co shareholders will be liable for tax in
India

19. How to avoid Indirect Transfer
Group Company
USA
Indian Co. US operation Co Europe Africa
Considered Substantial on
basis of assets
Phase 1 of Transaction
Phase 2 of Transaction
Buyer
.
1. To avoid Indirect transfer the buyer can structure the transaction in such a way, where in the first phase of
the transaction Indian company will be acquired and shares will be transferred to the buyer based on
valuation done according to section 56 (2) (viia).
• In the second phase of the transaction the buyer can propose the transaction with group company
which will not have tax impact in India.
2. Break up of Valuation by Country wise, which would help to distribute the value through all segments over
the group.

20. How To Determine Value
US Co India Co
Which has more value ?
What if IP / Architects with India?
What if CEO/Promoter is located in India?
Substance over Form

21. Sanofi Case – Treaty is unaffected by IT Amendment on Indirect
Transfers
In August, 2009 M/s Sanofi Pasteur Holding SA, France acquired the entire share capital of M/s Shanh Parteur
Holding SA, France from M/s Merius Alliance, France and M/s Groupe Industriel Marcel Dassault. On the date of
acquisition Shan H held about 80% for the shares in Shanta Biotechnics Ltd, Hyderabad.
The Income Tax Authorities after the recent explanation added to Income Tax regarding capital gain on sale of Indian
Companies due to takeover / sale of foreign holding company, issued tax demand notices to Sanofi.
In this case the Honourable Andhra Pradesh High Court has held that the capital gain on sale of Shan H to Sanofi
would not be taxable in India, even though it held 80% shares of SBL, India due to the following reasons.
• Shan H is an independent Corporate Entity registered and resident in France and is conducting business
independently.
• Shan H is not a mere nominee or holding company for MA and/or MA/GIMD.
• Shan H is not a device for tax avoidance.
• There is no reason to lift corporate veil of Shan H as there is no material to conclude that there is any intention or
design to avoid tax
• The capital gain arising from the transaction is chargeable to tax in France as per the provisions of DTAA
• The retrospective amendments in Income Tax have no impact on DTAA and the transaction falls within Article 14(5)
of DTAA and the resulting tax is allocated exclusively to France

22. Sanofi vs. Vodafone
The question arises why Sanofi was not liable to tax as compared to Vodafone. This is basically due to
the intention of the transaction as well as the taxability of the transaction.
Vodafone Sanofi
Intention The Mauritius subsidiary was In this case there was no intention
created with the only intention to to avoid taxes.
avoid tax
Tax on Capital Gains No capital gain tax was levied In Sanofi case the capital gain is
either in Mauritius or in India liable for tax in France.(Treaty
Provision)
Importance of Commercial The Mauritius company may be ShanH is a genuine business entity
Substance treated as a sham company and not a company created to
created to save tax and may be a avoid taxes.
case fit for lifting the corporate veil

23. Anti Treaty Shopping Provisions
• Tax Residency Certificate (TRC)( Sec 90(4)): In order to claim tax treaty
benefit, TRC containing prescribed particulars would be required to be
obtained by the non-resident
FB 2013 : TRC by itself may not be sufficient for availing tax treaty benefits.
• Withholding of taxes by non-resident (Explanation 2 to Sec 195 (1)) : It is
clarified that payment by one NR to another NR are also liable to withhold
tax as per the domestic laws whether or not they have presence in India.
• Application for determining TDS rate (195(7)): CBDT to specify a class of
persons or cases who shall make an Application u/s 195(1) to AO to
determine the appropriate proportion of sum chargeable even if the
payment to non-resident is not chargeable to tax

24. Impact of GAAR –Chapter X-A
• Any Tax planning even with in the law with an objective to save tax , can
now be challenged
• GAAR over rides Tax Treaties
• Transaction undertaken based on settled law can now be challenged
under GAAR.
• GAAR to create significant uncertainty and litigation on taxation
• No objective criteria to determine genuine transaction - very widely
worded and subjective.
• No limit prescribed for coverage of transactions under GAAR.
• Scope of ‘Advance Ruling’ widened to include impermissible arrangement
under GAAR
• Substance over Form takes more importance

25. Example -1
Subsidiary A Subsidiary B
Non Tax Jurisdiction Holding Co.
India
Indian Co.
In the above case, when dividend are accumulated in Hold Co. and not repatriated to India for a number of years
and subsequently, Hold co is merged into Indian Co. through a cross border merger. Can GAAR be invoked on the
ground that the merger route has been adopted to avoid payment of tax on dividend in India?
It is true that if Hold co declares dividends to Indian co before merger, then, such dividend would have been taxable in India. But the
timing or sequencing of an activity is a business choice available to the taxpayer.
Moreover, section 47 of the Act specifically exempts capital gains on cross border merger of a foreign company into an Indian
company. Hence, GAAR cannot be invoked when taxpayer makes a choice about timing or sequencing of an activity to deny a tax
benefit granted by the statute.

26. Example -2
Profit Making Co. Loss Making Co.
Merged Co.
Lower Profit &
Low Tax
The merger of a loss making company into a profit making one results in losses setting off profits, a lower
net profit and lower tax liability for the merged company. Would the losses be disallowed under GAAR?
As regards setting off of losses, the provisions relating to merger and amalgamation already
contain specific anti-avoidance safeguards. Therefore, GAAR would not be invoked when SAAR is
applicable.

27. Example -3
G Ltd H ltd
Non Tax Jurisdiction A Ltd
Country (C1)
India
V Ltd X ltd
• V ltd an asset owning Indian company held by another Indian Co. X Ltd.
• X Ltd was held by two companies G Ltd & H Ltd incorporated in C1
• The India – C1 tax treaty provides for non – taxation of cap. Gains in the source country & C1 charges no tax on
capital gains under domestic laws.
• Later X ltd. Was liquidated by consent. This resulted in transfer of the assets/shares from X ltd to G ltd & H ltd
• Subsequently G Ltd & H ltd sold the shares of V ltd to A ltd of C1
• The companies G ltd & H ltd claimed benefit of tax treaty.
Can GAAR be invoked to deny treaty benefit?

28. The alternative courses available to taxpayer to achieve the same result (with or without the tax
benefit) are:
• (i) Option 1 (as mentioned in facts) : X Ltd. liquidated, G Ltd. and H Ltd. become shareholders
of V Ltd.; A Ltd. acquires shares from G Ltd. and H Ltd.; and becomes shareholder of V Ltd.
• (ii) Option 2: A Ltd. acquires shares of X Ltd. from G Ltd. and H Ltd.; X Ltd. is liquidated; and A
Ltd. becomes shareholder of V Ltd.
• (iii) Option 3: X Ltd. sells its entire shareholding in V Ltd. to A Ltd. and subsequently, X Ltd is
liquidated.
• In Options 1 & 2, there is no tax liability in India except the deemed dividend taxation to the
extent reserves are available in X Ltd. This is because of the treaty between India and country
F1. In option 3, tax liability arises to X Ltd., an Indian company, on sale of shares of V Ltd.
Subsequently, when X Ltd. is liquidated, tax liability arises on account of deemed dividend to
the extent reserves are available in X Ltd.
• The taxpayer exercises the most tax efficient manner in disposal of its assets through proper
sequencing of transactions.
• The Revenue cannot invoke GAAR as regards this arrangement.

29. Example -4
Company X borrowed money from Company Y and used it to buy shares in three 100%
subsidiary companies of X. Though the fair market value per share was Rs.100, X paid Rs. 600.
The amount received by the said subsidiary companies was transferred back to another
company connected to Y. The said shares were sold by X for Rs. 100/5 each and a short-term
capital loss was claimed. This was set off against short-term capital gains from other sources.
All the companies are Indian companies. Can GAAR be invoked?
By the above arrangement, the tax payer has obtained a tax benefit and created rights or
obligations which are not ordinarily created between persons dealing at arm‘s length. Since
transactions of purchase and sale of shares of a closely held company at a price other than
the fair market value are covered under section 56 of the Act, GAAR may not be invoked as
section 56, being SAAR, is applicable. However, if SAAR is not applicable considering the
limited scope of section 56 to the shares of closely held companies only, then GAAR may be
invoked.

30. Tax on Excessive Share Premium – Sec 56(2)(viib)
The Amendment as ‘a measure to deter the generation and use of unaccounted money, Positioned as a weapon
to curb money laundering and tax evasion.
Section 56 (2) (viib) states that
Where a closely held company receives in any previous year from any person being a resident any
consideration for issue of shares that exceed the face value of such shares, the aggregate consideration
received for such shares as exceeds the fair market value of the shares shall be chargeable to tax.
This provision shall not apply to funds received from
• Venture Capital Company/Fund.
• Persons to be notified by the Central Govt.
• Non – Resident.
FMV for the purpose of 56 (2) (viib)
• The fair market value of the shares will be considered as the higher of the following values –
• (i) as may be determined in accordance with the method as may be prescribed
( NAV or DCF at option of the assessee );
or
• (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of
its assets.

31. Comparison of 56(2) (viia) & (viib)
56 (2) (viia) 56 (2) (viib)
Transfer of Shares Issue of Shares
Applicable where a closely held company receives Applicable where a closely held company receives
shares, of another closely held company from any any consideration for issue of shares that exceed the
person, either without consideration or for inadequate face value.
consideration
Aggregate Value of sum of money received exceed There is no such limit prescribed.
Rs.50,000 is the limit to attract chargeability.
FMV of Equity shares which are unquoted in stock FMV of Equity shares which are unquoted in stock
exchange , in accordance with rule 11UA(1)(c)(b) (Net exchange , in accordance with rule 11UA(2) at the
Asset Value Method) option of the assessee.
FMV = (A-L) x (PV) / (PE) Net Asset Value Method or
Discounted Cash Flow method

32. Instances of 56(2) (viib)
Face Value Rs .10 Fair Market Value Fair Market Value Fair Market Value
Issue Price Rs.8 Rs.10 Rs.15
Rs. 10 Nil Nil Nil
Rs.12 Rs.4 Rs.2 Nil
Rs.18 Rs.10 Rs.8 Rs.3
Income = Issue price – FMV
Where, Issue price must be more than Face Value
FMV must be greater than Issue price

33. Issues & Challenges – Sec 56(viib)
• The Amendment poses significant challenges for the domestic M&A or PE deals,
especially in acquisitions through a competitive bidding process, where the
transaction price is over and above the fair market value.
• This issue is more pertinent to the start-up companies which generally do not have
substantial assets. For a start-up company Section 56(viib) may result in a situation
where the company will be liable to pay tax not only on the premium received by
it, but also on the amount contributed towards paid up capital of the company.
Aggregate amount is taxable if issue price exceeds FMV.
• Where the prescribed method for computing the fair market value of the shares is
not followed, could result in a state of uncertainty regarding the valuation of
shares done by the Company. This is because the Company will not be able to
determine till the assessment stage whether it’s computation of Fair Market Value
of the shares, on which the taxability of the excess consideration depends, is
correct and acceptable to the Assessing Officer.
• Discrimination would arise in between Resident Investors and Foreign investors.

34. Issues & Challenges
• Valuation methods to determine FMV prescribed ( apart from DCF ) are historical
and rely on net assets of the company and does not take into consideration of
future earning prospect of the company and also for start up companies there will
be no considerable assets. The investment is made by investors keeping in mind
long term prospects of the company.
• The promoters would normally issue shares to Investors at a premium to control
the dilution of the ownership in the company, since this section has impact on
taxability of the premium, the company will be in dilemma on Tax outflow and
Dilution of ownership.
• Non prescribed method : Based on value on date of issue of shares . Based on
assets ,including intangible assets being goodwill, know –how, patents. Copy rights
or any other business or commercial rights of similar nature .
• Can DCF or Future Earnings (Royalty based ) be used for valuing the intangibles .

35. Issues & Challenges in JV
• Issues in Joint venture. Consider the following case
JV for New Emerging Business
The JV agreement would provide 50:50 with No Investment by Foreign Partner
(only brand , business capability and networking ) , hence Indian company may
have to go in for premium in this structure with no options.
• Can Indian company invest through a Foreign JV instead of Indian JV ( Round
Tripping issues) (Substance over form )
• Can it invest in Indian company through Compulsory Convertible Debentures (CCD)
Indian Company UK Company
Strategic Investor Business Capability & Brand-
Nominal investment
Joint Venture to do Business in India
50:50

36. Issues & Challenges-U/s 56(viib)
• When CCD is converted to equity . FMV comparison to be made The issue is when
the valuation to be done, On issue of original instruments or on the date of conversion.
? (Refer Valuation date as per Rule 11U)
• Date of valuation when loan is converted into equity?
• Will provisions of Sec 56(viib) applicable to issue of preference shares / convertible
preference shares ?
( Definition of Share specified sec 2(47) Of The companies act : A share includes
equity as well as preference. Hence preference shares also covered in this section.)
• What is the valuation method for preference shares?
As specified in 11 UA of IT rules any securities other than equity shares in a company
which are not listed shall be estimated to be the price it would fetch if sold in the open
market on the valuation date.

37. What is Open Market Value?
- Market Value is defined as follows
Market Value is the estimated amount for which a property should exchange on
the date of valuation between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently, and without compulsion.
- Market based valuation Vs DCF valuation
- Valuation of Prefernce shares , Compulsorily Convertible , Optional Convertible
etc.

38. Issues & Challenges-56(viib)
Issues When Shares are issued at Differential Rights?
When Shares Issued Normally
Share Holders Amount Face Value Issue Price No of shares Holding Premium FMV Income Voting
X 100000 10 10 10000 75% 0 20 0 75%
Y 300000 10 90 3333 25% 80 20 233333 25%
When Shares Issued FMV
Share Holders Amount Face Value Issue Price No of shares Holding
X 100000 10 10 10000 40%
Y 300000 10 20 15000 60%
When Shares at Differential Rights
Share Holders Voting No. of Shares Holding Voting %
X 1 share 4.5 Vote 45000 75% 75%
Y 1 share 1 vote 15000 25% 25%
Similar rights can be given in terms of Dividend Distribution and Capital Distribution

39. Other Issues -56(2) (viib)
• Can DCF value be accepted to the satisfaction of Assessing Officer?
• DCF related valuation issues :
- Existence of Different Future Cash Flows
- Pre Money Value or Post Money Value
- Projections Vs History
• Set of off Carry forward Loss for income u/s 56(2) (viib) : Business Loss Vs
Depreciation Loss
• MAT vis a vis Sec 56(viib) Income
• Can it be routed through alternative investment fund?
• Valuation under FEMA for Non Resident Investment Vs Valuation u/s
56(2)(viib) for Residents

40. Structures using 56(2)(viib)
• Issue of shares instead of writing of loan
payable-MAT, Capital Loss etc.
• Change in Control to Defacto Promoter and
issue of shares to investors at Premium
(56(2)(viib) and (viia)

41. Amendments - Venture Capital
• Section 10(23FB) provides that income of venture capital fund (VCF) and venture capital company
(VCC) is exempt from tax, provided the venture capital undertaking (VCU) is engaged in the following
specified businesses: -
– Nanotechnology;
– Information technology relating to hardware and software development;
– seed research and development;
– bio-technology;
– research and development of new chemical entities in the pharmaceutical sector;
– production of bio-fuels;
– building and operating composite hotel-cum-convention centre with seating capacity of more than three
thousand;
– developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as
defined in the Explanation to clause (i) of sub-section (4) of section 80-IA;
– dairy or poultry industry.
• We can see below a total of $762 Million across 206 deals in 2012, the major investment happened in
IT/ITES (50%) sector and healthcare, since IT sector and health sectors were included in the exempt
list, these sectors are boosted with the funds.
VC Investments
IT/ITES
Health Care
Other

42. Impact on Venture Capital
• It is amended by Finance Act 2012, section 10 (23FB) by removing the sectorial restriction in which
VCU is required to carry on its business.
• Therefore, it is amended that income of eligible VCU’s carrying on activities other than the ones earlier
specified under section 10 (23FB) will not be taxable.
• The amendment in section 10 (23FB) seeks to do away with restrictions on the activities which a VCU
can carry out and instead all activities permitted by the relevant SEBI guidelines.
• Doing away with restrictions on areas of business of VCU would help in attracting the VC investments
in various sectors which are in the need of funding.
– This is a good movement to encourage the venture capital funds to invest across the industries with no
restriction for exempt from tax.
• In Finance bill 2013 this exemption has been extended even to category 1 alternative
Investment fund registered Venture capital fund. This is applicable
where it is not listed, 2/3rd of its investible funds are invested in unlisted
securities and where their directors or related parties do not hold more than 10% equity i
n companies where they invest.

43. Impact on Venture Capital
It is also amended that to section 115U to provide that :
• Income accruing to VCF/VCC shall be taxable in the hands of investor on accrual basis with no
deferral. Earlier the income was taxed in the hands of the investor on receipt basis and not
on accrual basis.
• The exemption from applicability of TDS provisions on income credited or paid by VCF/VCC to
investor continues.
• Amendments in section 115U are aimed at preventing deferral of tax by taxing the income in
the hands of investor on accruals basis which will now be subject to TDS as may be
applicable.
Impact of the Amendment
Before Amendment After Amendment
The VC’s were taxed on receipt basis, hence Now due to introduction of accrual taxation
the funds were rotated and tax was deferred. rotation of funds would be stopped since the
VC would withdrawn the funds.

44. Alternative Investment Fund Regulations
• A group of angel investors or high net worth individuals would form a
VCC/VCF, and this should be registered with the SEBI.
• The SEBI AIF Regulations 2012 even make it difficult for angel investors to register
as VC Funds with it.
• The minimum fund size increased from INR 5 Crores to INR 20 Crores .
• The minimum amount that can be accepted from an investor from increased from
INR 5 lakh to INR 1 crore.
• Can the issue of 56 (2) (viib) be solved through the AIF ?.

45. Dividends – 115BBD
• As a result of diversification the Investors invested abroad through creating
subsidiary companies abroad, and the investors continue to remain invest in
abroad with accumulated funds instead of repatriation which would result full rate
of tax.
• This provision was introduced as an incentive for attracting repatriation of income
earned by residents from investments made abroad.
• Section 115BBD of Income Tax Act provides for taxation of gross dividends
received by an Indian company from a foreign subsidiary ( shareholding of 26% or
more) at the rate of 15% .
• In Finance Act 2012 the above section was amended to extend the benefit for one
more year.
• And as well in Finance Bill 2013 it is proposes to continue the benefit for one more
year and will apply in relation to the AY 2014-15.

46. Dividends - Removal of Cascading Effect - 115 O
• As each company has to pay DDT on distribution of dividend, there can be a cascading tax effect
on essentially the same income in a multi-layered corporate structure.
• To remove the cascading effect the law was amended from July 1st 2012 in the hands of multi
layered corporate structure. Under this provision was not extended to holding cum subsidiary
companies.Thus there still remained a cascading effect of tax, though to a lesser extent.
• To remove this cascading effect an amendment is brought into by the Government. As per the
amendment even if the company is a subsidiary of any other company, it can still get the benefit
of deduction of dividend received from its own subsidiary. This removes the cascading effect of
DDT
H Ltd S1 Ltd S2 Ltd
Dividend Rs.150 Dividend Rs.120 Dividend Rs.100
H is the main holding company. S1 is the subsidiary of H & S2 is a subsidiary of S1.
Sl.No. Particulars After Amendment Before Amendment
1 DDT to be paid by S1 ltd. 15 15
(Rs. 100 * 15/100)
2 DDT to be paid by S2 ltd. 3 18
New - (Rs. 120 - Rs. 100) * 15/100
Old - (Rs. 120 * 15/100)
3 DDT to be paid by H ltd. 4.5 4.5
(Rs. 150 - Rs. 120) * 15/100
Total DDT paid by group companies 22.5 37.5

47. Lower Tax rate for Non Residents –Sec
112(1)(c ) (iii)
• s. 112(1) Where the total income of an assessee includes any income,
arising from transfer of a long-term capital asset, which is chargeable
under the head ‘Capital gains’, the tax payable by the assessee on the total
income shall be aggregate of :
a) …….
b)…..
C) in the case of a non-resident (not being a company) or a foreign
company
(i)…
(ii)…
(iii) the amount of income-tax on long-term capital gains arising from
transfer of a capital asset, being unlisted securities, calculated at the rate of
ten per cent on the capital gains in respect of such asset as computed without
giving effect to the first and second proviso to section 48.

48. Lower Tax rate for Non Residents –Sec
112(1)(c ) (iii)
• The intention behind this amendment is clearly to provide the benefit of 10 per
cent tax rate to all non-resident investors, specifically including private equity (‘PE’)
investors. This intention has been clearly spelt out in the opening remarks made by
the then Finance Minister Shri Pranab Mukherjee at the beginning of the
discussion on the Finance Bill 2012
• The expression “securities” has been defined as under:
“Explanation – the expression ‘Securities’ shall have the meaning assigned to it in
clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956 (32 of 1956)”
• In SCRA:
Section 2(h) - Securities include –
shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
corporate;
• ……………” (emphasis supplied)

49. Expansion in scope of Transfer Pricing applicability
[Section 92B]
Section 92B : An explanation is inserted with retrospective effect from 01.04.2002 to clarify the
meaning of the expression “ International Transaction “.
The Expression “ International Transaction” shall include –
• A transaction of Business restructuring or reorganization, entered into by an enterprise with an
associated enterprise, irrespective of the fact that it has bearing on the profit, income ,losses or
assets of such enterprises at the time of the transaction or at any future date.
This has been done in light of recent judicial precedents in
Goodyear Tire and Rubber Company [2011] 11 taxmann.com 43 (AAR)
Dana Corporation [2010] 186 Taxman 187 (AAR)
Amiantit International Holding Ltd [2010] 189 Taxman 149 (AAR)
Facts :
1.Transfer of shares from Indian company to foreign company is without consideration
2. As the full value consideration received on transfer of shares of Indian co. is Nil the
mechanism to charge the capital gains to tax, as provided under Section 48 of the Act fails.
3. Since there is no income chargeable under the ITA, the transfer pricing provisions also cannot be
made applicable.
• Capital Financing, including any type of long term or short term borrowing, lending or
guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred
payment or receivable or any other debt arising during the course of business.

50. Transfer Pricing
Section 92BA – Specified Domestic Transaction
“specified Domestic transaction in case of an assessee means any of the following
transaction, not being an international transaction,
• Any expenditure in respect of which payment has been made or is to be made to a person
referred to in section 40(2) (b).
• Any transaction referred to in section 80A.
• Any transfer of goods or services referred to in sub – section 8 of 80 –IA.
• Any business transaction between the assessee and other person as referred to in sub
section 10 of 80 – IA.
• Any transaction, referred to in any other section under chapter VI-A or section 10AA to which
provisions of sub section 8 & 10 of 80 –IA are applicable
• Any other transaction as may be prescribed
And where the aggregate of such transaction entered into by the assessee in the previous year
exceeds a sum of 5 crore rupees.

51. Transfer Pricing
Intent of Indian TP Regulations… (Domestic transactions)
India Shifting of expenses/losses India
Indian Co. Related Enterprise in
Tax Holiday Domestic Tariff Area
undertaking (DTA)
Tax Exemption Tax @32.45%
Shifting of income/profits
Tax Saving for the Group – Loss to Indian revenue

52. Transfer Pricing
Intent of Indian TP Regulations…(Domestic transactions)
Particulars (Ordinary Situation) Co. X (SEZ) Co. Y (DTA)
Income 500 1000
Income from related party 100 -
Expenses 300 800
Expense to related party - 100
Profit/ Loss 300 100
Tax rate applicable 0% 32.45%
Tax - 32.45 (100*32.45%)
Particulars (Planned Situation) Co. X (SEZ) Co. Y (DTA)
Income 500 1000
Income from related party 200 -
Expenses 300 800
Expense to related party - 200
Profit/ Loss 400 -
Tax rate applicable 0% 32.45%
Tax - NIL – Loss to Revenue Tax
saving to the group

53. Transfer Pricing
Intent of TP Regulations… (Domestic transactions)
India Shifting of expenses India
Indian Co. Related Enterprise
Loss making Profit making
Tax @ 32.45%
Tax @ 32.45% Reduced tax due to
No tax or reduced tax due to loss shifting of profits
Shifting of income
Tax Saving for the Group – Loss to Indian revenue

54. Transfer Pricing
Intent of TP Regulations… (Domestic transactions)
Particulars (Ordinary Situation) Co. X (DTA) Co. Y (DTA)
Income 500 1000
Income from related party 100 -
Expenses 700 800
Expense to related party - 100
Profit/ Loss (100) 100
Tax rate applicable 32.45% 32.45%
Tax - 32.45 (100*32.45%)
Particulars (Planned Situation) Co. X (DTA) Co. Y (DTA)
Income 500 1000
Loss to Revenue &
Income from related party 150 - tax saving to the
Expenses 700 800 group
Expense to related party - 150
Profit/ Loss (50) 50
Tax rate applicable 32.45% 32.45%
Tax - 16.23 (50*32.45%)
* By shifting of income from a profit making company to a loss making company, the group could reduce its tax liability by 16.23 for the
current year, though the impact will be reversed in future years given carry forward of losses.

55. Transfer Pricing
Overview of Provisions of Section 92BA
Inter unit transfer of goods & services by
undertakings to which profit-linked deductions
apply
Expenditure
incurred Any other
between related transaction that
SDT
parties defined may be
under section specified
40A
Transactions between undertakings, to which profit-
linked deductions apply, having close connection

56. Transfer Pricing
Sec. 92 C – Computation of ALP
The words “specified domestic transaction” has been inserted appropriately in various sub-sec.
(1) Any of the following methods, being most appropriate method :
(a) Comparable uncontrolled price method;
(b) Resale price method;
(c) Cost plus method; refer rule 10B
(d) Profit split method;
(e) Transactional net margin method;
(f) other method of determination of arm’s length price
(any method that takes in to account the price which has been charged or paid or would have been
charged or paid for same or similar uncontrolled transaction with or between non – associated
enterprises)
(2) Most appropriate method as per criteria laid down in rule 10C considering FAR analysis also.
FAR : Functions performed, Assets employed, Risks assumed [Rule 10C(2)]

57. Transfer Pricing
Tax Payers covered under Specified Domestic Transaction
Any taxpayer incurring any expenditure with specified domestic related parties are
required to comply with the regulations.
Which other tax payers are covered under Specified Domestic Transactions?
Location based Undertakings having a unit in a Special Economic Zone – Sec 10AA
tax
holiday
Undertakings located in industrial backward district (Jaisalmer in Rajasthan, Bhojpur in Bihar, etc) – Sec 80-IB
Undertakings located in Himachal Pradesh, Uttaranchal, or notified areas in North Eastern States (Assam,
Tripura, etc) – Sec 80-IC
Undertakings engaged in business of hotel/ convention centre in specified areas/ districts – Sec 80-ID
Sector based tax Generation/ transmission or distribution of power or developing, operating, maintaining of infrastructure
holiday facilities, etc – Sec 80-IA
Company/companies engaged in refining oil, undertakings engaged in developing and building housing
projects, etc – Sec 80-IB

58. Service Tax
Finance Act 2012 introduced Negative List by which many transactions that may not
have been under ambit of Service Tax has also come under Service Tax
Service tax may arise in the following cases:
• On contingent payouts ( Payments to be made on achieving benchmark levels)
• For non - compete fee
• Domain Name of the Business
• Assignments of contracts
• Any other settlements

59. Finance Bill 2013
Provisions & Impacts

60. Section 43CA – Immovable property held as Stock in Trade
Investors
Builder
Land as Transfer As Sale of asset through SPV
stock SPV Buyer
stock
• The provisions contained in Sec. 50C could not have been applied to transfer of land or
building or both which are stock in trade.
• It is proposed to provide by inserting a new section 43CA that where the consideration for
the transfer of an asset (other than capital asset), being land or building or both, is less than
the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be
the full value of the consideration for the purposes of computing income under the head
“Profits and gains of business of profession”.
• Date of agreement to fixing the value of consideration for transfer of the assets & the date of
registration of the transfer of the asset are not same, the stamp duty value may be taken as
on the date of the agreement for transfer and not as on the date of registration for
such transfer. ( This part is applicable only when consideration(in part or full) received in
other than cash)
• As affect of this, the projects which are already started before this amendment but not
completed, would go under this section without any option.

61. Section 43ca – Immovable property held as Stock in Trade
Key Issues
• Can difference between fictional value and consideration be treated as
business loss ?
• Whether 43CA can apply to slump sale?
• Whether applicable in cases of transfer of business undertakings?
• Whether 43CA can apply to transfer of Stock in Trade to Partnership firm?
• 43CA value vis a vis Percentage completion method?

62. Higher Rate of TDS on Royalties & FTS for Non-Residents
• Section 195 of the Income Tax Act, 1961 states that: The income earned
by non-residents in the form of royalties, technical fees etc. is subjected
to TDS by the person who is responsible to make such payment to the
non-resident Assessee.
• For the rate we refer to the section prescribed for the same i.e. Section
115A.
• It is proposed to increase the TDS rates of payments made to non
residents in the nature of “Royalties” and “Fees for Technical Services”
from 10% to 25%.
• However where there is a tax treaty and the rates as specified in the treaty
is lower the beneficial rate can be adopted.
• TRC avilability more important now
• TDS rate till FA bill 2013 gets assent of President?

63. Lower Rate of Tax on Foreign Company Dividends
Foreign Dividends
Indian Distribution No DDT u/s
Company Company 115 O
Tax @ 15 %
The Finance Bill, 2013 proposes to extend the concessional tax rate of
15% (plus surcharge of 10% and education cess of 3%) on dividend
received from specified foreign company for one more year i.e. for the
financial year ending 31 March 2014. Further, it is to be noted that any
dividend distributed by the Indian company in the same year, to the extent
of dividends received from the foreign company, shall not be subject to
Dividend Distribution Tax.

64. Tax on Buy Back of shares by unlisted domestic company
Why Buy Back is more favorable than Dividend ? (for non resident investors)
Indian Company
Profits
DDT by Dividend Capital Gain Tax by
Indian Co.
Buy Back Non Resident
Distribution
Tax Credit on Buyback
No Tax Credit on DDT
is Available in Resident
in Resident Country
Country
Nil or nominal tax
Results Tax outflow
outflow

65. Tax on Buy Back of shares by unlisted domestic company
• Under the existing provisions of the income tax buy back of shares would
result into capital gains in India, however in case of a non –resident
shareholder the tax treaty provisions would apply to the extent they are
more favorable.
• Typically, under the tax treaties entered into with Mauritius, Cyprus and
Singapore capital gains is not taxable in India, and these countries do not
levy capital gains under their domestic laws.
• Consequently, buy back of shares may not be subject to tax in India or in the
foreign country . This route has been commonly used by non-residents to
mitigate the dividend distribution tax.
• In Finance Bill 2013-14, a new chapter titled Chapter XII-DA special
provisions relating to tax on distributed income of domestic company for
buyback shares is proposed to be inserted.

66. Tax on Buy Back of shares by unlisted domestic company
• Accordingly, besides the standard corporate income tax will be charged on
any amount of distributed income of unlisted companies. The company
implementing the buy back scheme shall be liable to pay the taxes at the
rate of 20% on the difference between consideration received by the
shareholder on buyback as reduced by the amount received by the
company for issue of such shares.
• With this new proposal the shareholder is exempt from tax on such
capital gains [Section 10(34A)].
• Hence the non –resident shareholders shall be liable to get taxed in India.

67. Tax on Buy Back of shares by unlisted domestic company
Section 115QA defines distributed income “the consideration paid by the
company on buy back of shares as reduced by the amount which received by
the company for issue of such shares”.
Case 1 - Determination of Distributed Income When shares issued at par
Face Value Issue Price Buy Back Distributed Income Tax @ 22.66%
Rs. 100 Rs.100 Rs.1000 Rs.900 Rs.204
Case 2 - Determination of Distributed Income When shares issued at premium
Face Value Issue Price Buy Back Distributed Income Tax @ 22.66%
Rs.100 Rs.250 Rs.1000 Rs.750 Rs.170

68. Tax on Buy Back of shares by unlisted domestic company
Case 3 - Determination of Distributed Income When shares are transferred
Issue Price Transferred at Buy Back Distributed Income Tax @ 22.66%
Rs.100 Rs.500 Rs.1000 Rs.900 Rs.204
( In the above case we can observe that the distributed income will be calculated using the
original issue price and not the transferred price since the original issue price was received by
the company for issue of such shares.)
Case 4 - Determination of Distributed Income When shares issued through
conversion of other instruments
Issue Price of
Conversion Price Buy Back Distributed Income Tax @ 22.66%
Original Instrument
Rs. 100 Rs.300 Rs.1000
The issue in the above case – 4 whether to consider original issue price or conversion price?

69. Tax on Buy Back of shares by unlisted domestic company
1. Will Non – Resident shareholders get tax credit in foreign country ?
A mechanism to claim in the foreign country may be explored. This could
be evaluated either in terms of provisions of underlying tax credit under
certain tax treaties or depending on the domestic tax laws of the non –
residents.
2. Where the issue price is high will Buy Back Tax be better than DDT
3. BBT does not consider Basic exemption, carry forward loss, specified
exemptions like 54EC, 54F etc

70. Tax on Buy Back of shares by unlisted domestic company
Will Buy Back Tax be better than DDT?
Case -1
Issue Price Rs. 10
Available Surplus Rs. 50
When Dividend is Paid When Buy Back
Dividend Paid Tax @ 16.22% Distributed Income Tax @ 22.66%
50 8.11 40 9.1
In the above case Dividend is better as tax outflow is lower.
Case -2
Issue Price Rs. 35
Available Surplus Rs. 50
When Dividend is Paid When Buy Back
Dividend Paid Tax @ 16.22% Distributed Income Tax @ 22.66%
50 8.11 15 3.4
In the above case Buyback is better option as low tax outflow

71. Tax on Buy Back of shares by unlisted domestic company
1. Impact on investment by Realty Fund in Projects
2. Any Alternates :
- Capital Reduction ( Deemed Dividend & Capital Gains)
- Third Party buy out
- Promoter buy out ( funding issue?)

72. • QUESTIONS?

73. Thank
You
Assurance – Tax – Advisory
#43/61, Surveyors Street
Basavanagudi, Bangalore – 04
www.sureshandco.com