This document discusses various tax issues that arise in mergers and acquisitions under Indian tax law. It covers topics like the meaning of amalgamation, capital gains tax exemptions for amalgamations, treatment of losses and depreciation for the amalgamated company, international tax issues like transfer pricing and thin capitalization. It provides an overview of the key domestic tax provisions around amalgamations, demergers and slump sales. It also gives a brief introduction to concepts of international taxation like offshore financial centers and their implications.

1. Tax Issues in MergersTax Issues in Mergers
and Acquisitionsand Acquisitions
PresenterPresenter
VIKRAM SINGH SANKHALA

2.  What the present income-tax form needsWhat the present income-tax form needs
is a section which would explain theis a section which would explain the
explanations.explanations.
 What do accountants suffer from thatWhat do accountants suffer from that
ordinary people don't?ordinary people don't?
Depreciation.Depreciation.
 Income tax is the fine you pay forIncome tax is the fine you pay for
thriving so fast.thriving so fast.
 Where there's a will there's a taxWhere there's a will there's a tax
shelter.shelter.
Tongue in cheekTongue in cheek

3. Structure of theStructure of the
PresentationPresentation
 Domestic Tax ProvisionsDomestic Tax Provisions
 Basics of InternationalBasics of International
TaxationTaxation

4. Types of Restructuring
 Organic
- Capital
- Business
 Inorganic – Change in corporate
entity
- Mergers & Amalgamations
- Demergers
- Acquisitions

5. TaxTax IssuesIssues

6. Meaning of
Amalgamation
 Property
 Liabilities
 Shareholders

7. "amalgamation", in relation to
companies, means
 "amalgamation", in relation to companies, means the
merger of one or more companies with another
company or the merger of two or more companies to
form one company (the company or companies which
so merge being referred to as the amalgamating
company or companies and the company with which
they merge or which is formed as a result of the
merger, as the amalgamated company) in such a
manner that

8. property
 (i) all the property of the amalgamating
company or companies immediately
before the amalgamation becomes the
property of the amalgamated company
by virtue of the amalgamation ;

9. liabilities
 (ii) all the liabilities of the amalgamating
company or companies immediately
before the amalgamation become the
liabilities of the amalgamated company
by virtue of the amalgamation ;

10. shareholders
 (iii) shareholders holding not less than [three-
fourths] in value of the shares in the
amalgamating company or companies (other
than shares already held therein immediately
before the amalgamation by, or by a nominee
for, the amalgamated company or its
subsidiary)
 become shareholders of the amalgamated
company by virtue of the amalgamation,

11. Exceptions
 Acquisition by Purchase
 Distribution as a result of
winding up

12. Amalgamation is a
merger

13. Deemed Dividend u/s
2(22)
 The Transfer by a subsidiary
company of its assets to its
parent company in a scheme of
amalgamation does not amount
to deemed dividend

14. Capital Gains –
Section 45
 Section 47 (vi)- Any
Transfer , in a scheme of
amalgamation of a capital
Asset by the amalgamating
company to the amalgamated
company if the Amalgamated
company is an Indian company

15. Subsequent Transfer
 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 ,as increased by the cost
of any improvement of the assets incurred or
borne by the previous owner or the assessee, as
the case may be. In case the asset became the
property of the previous owner before 1-4-1981 ,
then assessee has the option of either cost to
previous owner or fair market value on 1-4-1981.

16. Period for which the
asset is held
 Will include the period for
which it is held by the
previous owner
 Indexation will be from the
date of holding of share in
the resulting company

17. Admissibility of
certain
expenses/allowances
incurred by the
amalgamated company to
the amalgamating
company

18. Investment Allowance
s. 32A
 In case of acquisition of a
ship/machinery/plant specified u/s
32A(2) there a deduction of 25% of the
cost as investment allowance, subject to
the fulfillment of certain conditions.
This will pass through to the
amalgamated company as long as the
amalgamated company continues to
fulfill such conditions of allowance

19. Development Allowance
s. 33A(1)
 In respect to planting of Tea
Bushes
 Concession is transferred to
amalgamated company if it
continues to fulfill such
conditions

20. Expenditure on scientific
research s. 35
 Certain capital expenditure
under this head was allowable
 Provision shall apply to
amalgamated company if it
continues to fulfill such
conditions

21. Provision shall apply to
amalgamated company if it
continues to fulfill such
conditions in the following
cases also

22.  Expenditure on patents and copyrights 35A
 Expenditure on Know how 35AB
 Capital expenditure on License to operate
Telecom Services 35ABB
 Amortisation of Preliminary Expenses 35D
 Amortisation of expenditure in case of
Amalgamation
 35E – Mineral prospecting
 42- Prospecting , Extraction or production of
Mineral oils

23. Depreciation Allowance
 WDV for the amalgamated company
shall be the WDV of the block of
assets as in the case of the
amalgamating company for the
immediately preceding previous
year as reduced by the amount of
depreciation actually allowed in
relation to the said previous
year.

24. Benefits u/s 80IA , 10A , 10B
 Would continue to the resulting
company as if the amalgamation or
de merger had not taken place
 Would not be available to the
amalgamating or de merging
companies

25. Section 72A
 Accumulated losses and Unabsorbed depreciated
of the amalgamating company shall be deemed to
be loss or depreciation of the amalgamated
company and the provisions of the Act , relating
to set off and carry forward shall apply.
 However , to be eligible , both the amalgamating
and amalgamated companies must fulfill certain
conditions- 72A(2) a&b read with Rule 9C of the
Income Tax Rules.
 Benefit would be available for 8 years from the
first year after Amalgamation.

26. Credit for tax paid
 Case Law –Modipon Ltd. Vs DCIT [1995]
54ITD 433(Del)
 Benefit of any tax paid as Advance Tax
or Tax deducted at Source of the
amalgamating company would be available
for adjustment against the income of the
amalgamated company consequent
inclusion of such income of the
amalgamating company as income of the
amalgamated company after amalgamation.

27. Demerger
 Defined u/s 2(19AA) of the IT Act,
1961
 The companies Act allows as a part
of a scheme of arrangement under
sections 391 to 394 , or by
process of sale of an undertaking.
 The IT Act specifically excludes
sale of an undertaking. This is
covered under slump sale

28. Benefits under the IT
Act
 Not treated as transfer u/s 47
hence gains on such transfer not
chargeable under capital gains.
 Depreciation benefits
 Section 35DD- Amortisation of
expenditure incurred for demerger
–one fifth
 Amortisation of patents/copyrights
expenditure

29.  Expenditure on knowhow
 Expenditure on obtaining licence to
operate Telecommunications Services –
35ABB
 Amortisation of certain Preliminary
expenses
 Deduction of Expenditure on prospecting
etc.

30. Carry forward of losses and
unabsorbed depreciation
 Where directly relatable to
transferred undertakings – entire
amount
 Where not directly relatable –
apportioned based on proportion of
assets retained and transferred
 Demerged company will get the
benefit only for the balance years
unlike in the case of amalgamation

31. Any Transfer or issue of shares
by the resulting company, in a
scheme of demerger to the
shareholders of the demerged
company , will not be treated as a
transfer of capital Asset for the
determination of chargeable
capital gains u/s 45

32. Slump Sale s. 50B
 Inserted w.e.f 1-4-2000
 S.2(42C) Slump sale – sale for a
lump sum consideration without
values being assigned to
individual assets and liabilities.
 Taxed as capital gains
 Cost of acquisition and
improvement shall be the net worth
of the undertaking

33. International Taxation
 Transfer Pricing
 Thin Capitalization
 Offshore Financial Centres

34. Transfer Pricing
 India s.92
 USA Reg.482
 Concept of Arms Length Price
 Methods –Transactional Price based and
Transactional Profit based
 Advance Pricing agreements

35. Thin Capitalization
 Interest versus Dividend
payouts
 Excessive use of debt over
equity- Very high Leverage
 Arms Length basis
 Reclassify as constructive
Dividend

36. OFC’s or Tax Havens
 Account for half the world’s Financial
Transactions
 Low or Nil Rate of Tax
 Treaty Havens
 Ring Fenced Tax structure
 Bermuda, Cayman Islands, Mauritius etc.
 Around 70 to 80

37. The End
THANK YOU