Tax Implication Of Cross Border Mergers And Acquisitions Accounting Essay

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This project report aims at throwing light on the tax implications of Cross Border Mergers and Acquisitions. The rapid industrialisation in the past few decades has played a major role in international business and trade. Taxation of such transactions becomes a major issue as the tax laws of different country, are seldom in consensus. Hence a sincere attempt has been made by the author to reflect, analyse and draw an amicable conclusion related to the same.


Corporate restructuring through the way of Mergers and Acquisitions materialises globalisation; it can be evident from the M&A of many corporate honchos like Mittal Steel the steel tycoon with the Arcleor and Tata acquiring Corus. Therefore, cross-border reorganization presently has turned into the easiest way of achieving the objectives such as cost reduction, business expansion, technology transfer and others. The primary Indian legislation administrating company affairs i.e Companies Act, 1956 [2] provision Section 391 to 396 [3] deals with the mergers and amalgamation. Section 394 (4) (b) [4] of the aforesaid act provides for the definition for "Transferor Company" by which a foreign identity can be amalgamated with the Indian company and provides gateway to the Indian Companies to enter in the foreign market.

The above scope of cross boarder reorganization has been enlarged under the Clauses 201 to 205 of the Companies Bill, 2012 [5] which correspond to Sections 391 to 394 of the Companies Act, 1956 [6] . The abovementioned clauses contain: (i) Compromises or arrangements with creditors and members including take-over offers and the scheme of debt restructuring together with valuation of shares and other properties of the company, (ii) Merger and amalgamation of companies including merger by absorption or merger by formation of a new company, (iii) Amalgamation by mutual consent of companies incorporated in the jurisdictions of such countries as may be notified by the Central Government. [7] The new provision provides an improvement over the existing provision in the Act and facilitates much needed flexibility to operate the scheme quickly [8] .

Apart from aforesaid entirely domestic legislation on corporate reorganization, there are only few tax laws at this point, and almost nil globally accepted norms. On the contrary to the legislation, the market for these transactions has lengthened beyond the current domestic regulatory jurisdiction. Globally many countries provide certain benefits to M&A transactions under the shield of domestic tax laws. For instance, they may grant some deferral of the tax liability that otherwise would have to be paid by the participating parties due to occurrence of such transactions. Although the situation changes vastly once transactions cross borders and enter the international jurisdictional domain. On the whole, Countries are also observed to be less fervent to grant tax concession to the involved parties, understanding that, in some cases, relief of current taxation could practically turn out to be exemption and after that occurs, such countries may completely lose jurisdiction to tax the transaction. Therefore, Tax laws should better lodge cross- border M&A's as a natural incident in the process of international trade, than take a narrow view of the same.

A Cross-border M&A, involves numerous issues that resemble with domestic reorganization deals. However, they may be more multifaceted and endemic with surprises and other pitfalls, with the rise in number of geographies and jurisdictions involved in the transaction. Hence, the range of concerns has lengthened with the increase in speed and volume of such international transactions. 

The existing quakes and quirks with cross-border M&A's have created a new exigency to be sympathetic and recognise the multifaceted tax issues of globalistic extension. The legislative structure for business consolidations in India involves a variety of legal provisions for tax concessions and tax detachment for certain kinds of reorganizations and consolidations. Tax is and was always being an imperative business cost to be accounted while taking any decision, particularly by Indian corporates, when competing with other global honchos. The Government of India is coming with new direct tax code to replace the current Income Tax Act, 1961 (hereinafter referred as IT Act), is expected to accentuate on transparency and taxpayer affability.

Structuring the Transaction

A cross-border M&A structuring transaction involve several decisions by transferor and transferee companies to make sure that their tax liabilities and costs stay minimised. The initial step is to explore leveraging domestic country operations for cash management and repatriation benefits. Moreover, the companies should look at the abundance of asset-basis set up formations for taxation avenues and keeping a sharp lookout over valuable tax attributes in M&A targets, such as net operating losses and profits, foreign tax credits and tax breaks.

According to the Income Tax Act of 1961, capital gains tax shall be levied on such transactions whenever capital assets are transferred. The definition of 'transfer' [9] evidently made it clear that if merger, amalgamation, demerger or any sort of restructuring activity leads to a transfer of any capital asset, the incidence shall be held taxable.


Merger or amalgamation: With the intention to encourage restructuring, merger and demerger have been provided with a special treatment under the legislation i.e. the Income Tax Act, since its enactment. The Finance Act, 1999 clarified many issues regarding Business Reorganizations thereby facilitate the making of business restructuring tax-neutral.

Certain provisions applicable to mergers/demergers are as under:

Section 2(1B) of IT Act [10] defines Amalgamation/Merger: "Amalgamation means merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that: All the properties and liabilities of the transferor company/companies become the properties and liabilities of transferee company. Shareholders holding not less than 90% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company.

To qualify for the tax neutral treatment as per the provisions of Income-tax Act, the conditions as laid down in Section 2(1B) of IT Act [11] relating to merger and Section 2(19AA) of IT Act [12] , relating to demerger needs to be fulfilled. If the abovementioned conditions are not fulfilled, then merger/demerger would not be considered as tax exempt although they may have qualify as an amalgamation/demerger as per the provisions of Company Law.

Capital gains tax implication for the amalgamating (transferor) company: Under provision of Section 47(vi) of the IT Act [13] specifically [14] exemption has been provided for the transfer of a capital asset in the scheme of amalgamation by the amalgamating company to the amalgamated company, subjected the amalgamated company is an Indian company. It is essential that the merger falls within the definition of 'amalgamation' as given under Section 2(1B) [15] , if the exemption hereunder is to be availed of. Profits or gains on transfers of liabilities are subject to tax as business income in the hands of the transferor [16] .

Exemption from capital gains tax to a foreign amalgamating company for transfer of capital asset, being shares in an Indian company [17] : In a case of cross border reorganization, where a foreign holding company transfers its shareholding in an Indian company to another foreign company as a result of a scheme of amalgamation, such a transfer of the capital asset, i.e., shares in the Indian company would also be exempt from capital gains tax in India for the foreign amalgamating company only when it satisfies the following two conditions :

At least 25 per cent of the shareholders of the amalgamating foreign company continue to be the shareholders of the amalgamated foreign company.

Such transfer does not attract capital gains tax in the country where the amalgamating company is incorporated.

In the case, where the whole business undertaking is subjected to sale on a slump sale basis, consideration in the excess to the whole net worth of the undertaking will amount to be capital gains and will be subject to tax.

The transaction involving transfer of shares other than securities those in dematerialized form are subject to transfer taxes it implies stamp duty.

The tax implications regarding transfer of capital assets which involves net current assets other than stock-in-trade depend on there eligibility for depreciation under the IT Act or not. Firstly, where assets on which no depreciation is allowed, consideration is in excess of the cost of acquisition and improvement is taxable as capital gains. Secondly, where assets on which depreciation has been allowed, the consideration is to be deducted from the tax WDV of the block of assets, which resulting in a lesser claim for tax depreciation subsequently.

Capital gains tax liability on the shareholders of the amalgamating company: In the case of a merger, the shareholders of amalgamating company would be allotted shares in amalgamated company as a result of the amalgamation. This process presupposes the relinquishment of shares in amalgamating company held by shareholders thereof. It is important to determine whether this constitutes a transfer under Section 2(47) of the IT Act [18] , which would be liable to capital gains tax. As per the judicial pronouncements with this regard, including decisions of the Supreme Court till recently, the present transaction did not result in a 'transfer' as envisaged by section 2(47) [19] . In the case of CIT v. Mrs. Grace Collis [20] , the Hon'ble Supreme Court held that "extinguishment of any rights in any capital asset under the definition of 'transfer' would include the extinguishment of the right of a holder of shares in an amalgamating company, which would be distinct from and independent of the transfer of the capital asset itself". Therefore, the rights of shareholder of the amalgamating company in the capital asset, i.e., the shares stand extinguished upon the amalgamation of the amalgamating company with the amalgamated company and this constitutes a transfer under section 2(47) [21] .

The transfer or sale of shares under the provision of IT Act, subject to capital gains tax. In addition to this, the sale of shares shall also involve the payment of Securities Transaction Tax (STT) condition the sale transaction for equity shares is through a recognized stock exchange in India. The purchaser/seller of securities is subject to payment of STT. In situation that shares detained for a period of exceeding 12 months period than the gains are considered as long term capital gains or otherwise as short-term capital gains in case shares held for less than 12 months period.

However, a transfer by the shareholders of the amalgamating company is specifically exempt from capital gains tax liability, provided the following conditions are satisfied: a. The transfer is made in consideration of allotment to the shareholder of shares in the amalgamated company. b. The amalgamated company is an Indian company.

The issue addressed by Mrs. Grace Collis' case would arise in situations where the amalgamation does not satisfy all the conditions under section 47(vii) and section 2(1B) [22] and is, therefore, not exempt from the capital gains tax. In view of this decision, the present position of law seems to be that such a merger would result in capital gains tax to the shareholders of the amalgamating company.

Computation of capital gains tax on disposal of the shares of amalgamated company: This section contemplates a situation in which shareholders of the amalgamating company, having acquired the shares in the amalgamated company as a result of the amalgamation, now elect to sell off such amalgamated company's shares. Accordingly, when these shareholders sell their shares in the amalgamated company, for computing the capital gains that would accrue to them as a result of the sale, the cost of acquisition would be the cost of their shares in the amalgamating company. Also the period of holding for determining long term or short term gains would begin from the date the shares were acquired by the shareholders in the amalgamating company.

Availability for set-off of unabsorbed losses and other tax benefits: In a situation where amalgamation of a company owning an industrial undertaking, the amalgamated company would be able to get the benefit of carry forward of losses and depreciation to set off against its future profits, provided some conditions are fulfilled. In case of any gains or losses on the transfer of stock in trade are to be considered as business income or loss [23] .

Availability of carry-forward and set-off of losses by certain companies: In case there is a change in the shareholding of a company in which public are substantially interested, such a company would not be allowed the carry forward or set-off of accumulated losses. if shareholders carrying 51 per cent of voting power of the company on the last day of the year in which the loss is sought to be set off are not the same as the shareholders carrying 51 per cent of voting power on the last day of the year in which the loss was incurred [24] .

The impact of Direct Tax Code on Capital Gains: The major changes proposed in this area may be set out as follows: a. Capital gains will be changeable only on investment assets as in the earlier draft of the DTC. b. Where the capital assets are listed securities, a rebate of a specified percentage will be allowable on the capital gains without any indexation, to be added to the income, if they are held for a period of more than a year from the end of the assessment year in which they were acquired. The Securities Transaction Tax (STT) would be suitably calibrated. What is not clear is whether listed securities sold "off stock exchange" would also qualify for this treatment since they will not be subject to STT. c. In case of other capital assets, long term capital gains for assets held for a period of more than one year from the end of the assessment year in which they were acquired computed with indexation from a base year of 1-4-2000, will be taken and the gains will be added to the income. d. For short-term capital gains, the tax rate will be the normal tax rate [25] .


For the Kind information, all the states have been replaced Sales Tax by VAT. Therefore, specific provision has been made to deal with interse transfer between amalgamating companies. Section 47 of Maharashtra Vat, 2002 provides for Amalgamation or demerger of Companies and Section 46 of the Rajasthan Vat provides for the liabilities in case of amalgamation of Companies. Section 33C which was inserted by Maharashtra Tax Laws (Levy and Amendment) Act, 2002 [26] provides that the transferor and the transferee companies would be treated as separate entities form the appointment date under the scheme up to the date of approval of the scheme of amalgamation by the court and to tax the transactions between the two during the said period as sale transaction [27] .

Transfer of Going Concerns: The prevalence of Sales Tax Law arises only on sale of goods. The word 'Business' is not covered under the scope of 'goods' definition. In the case of merger and demerger transaction will be of transfer of going concern. Therefore, it does not involve sale of goods. Hence, no sales tax burden is attracted, but, the aforesaid view is not free from doubt.

Transactions between the Transferor and Transferee Company: During the period between the appointed and the effective date, sales tax will have to be collected and paid in respect of transactions between the transferor and transferee company. However it is possible to take a view that during the intervening period between Transferor and Transferee Company since the transferor company is deemed to carry on the business for and on behalf of the transferee company no sales tax is leviable as there is no sale but branch transfers between the companies.

Sales Tax Incentive Scheme (Exemption/Deferral): Sales tax Incentives are basically for the units, thereby on merger/demerger these incentives will get transferred to the transferee company for the balance period or remaining period.


Central Exercise duty is an indirect tax levied on the goods manufactured. The taxable event under the Central Excise Law is manufacture and the liability of the Central Excise duty arises as soon as the goods are manufactured. This is presently called as "Central Value Added Tax (CENVAT)". As it is very clear that there is a transfer of business in case of merger therefore, the transferee has to inform the Excise department as there is change in ownership and requirement to obtain a fresh registration certificate, if needed.

The Rule 2(c) of Central Excise Rules, 2002 [28] provides for the 'assessee' and Rule 9(1) Central Excise Credit rules provided compulsory registration in case of excisable goods manufacturer. As per Rule 8(1) of the Cenvat Credit Rules, 2002 [29] the unutilized CENVAT credit balance of the transferor company can be transferred to the transferee company only when the stock of inputs, work in process, or the capital goods is transferred along with the factory to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise.


The Rate of duty is differ State to State. Except Maharashtra, Gujarat, Rajasthan, Karnataka and Kerala where there exits separate Stamp Act, the Indian Stamp act would apply subject to modification. The Stamp Act exception States provides that an order of the High Court under section 394 [30] of the Companies Act in respect of amalgamation or reconstruction of companies is considered as "conveyance" [31] and is chargeable to stamp duty.

As per the precedents set by Hon'ble Judiciary, the market value of shares of Transferee Company will be the value of shares on stock exchange on the "appointed day" mentioned in the scheme or where the appointed day is not so fixed the date of the court's order. On the other side, where shares of Transferee Company are not listed or not quoted, the market value of shares means market value of shares issued or allotted with reference to the market value of shares of the transferor company or the value determined by the Collector.

The Hon'ble High Court of Calcutta in the case of Madhu Intra Ltd. vs. Registrar of Companies [32] held that transfer of assets and liabilities from Transferor Company to Transferee Company under Section 394(1) of Companies Act is purely by operation of law and, therefore, does not cover the provisions relating to transfer under the Transfer of Property Act, 1882. Hence, no stamp duty is leviable on the same. Recently, the Hon'ble Delhi High Court considered issue of whether stamp duty is payable on an order sanctioning a scheme of amalgamation between two or more companies in the case of Delhi Towers Ltd. v. G.N.C.T. of Delhi [33] . The court held that an order of the High Court sanctioning a scheme of amalgamation would fall within the definition of "conveyance" [34] under the Indian Stamp Act, 1899 thereby requiring payment of stamp duty. That is so even where the definition does not expressly include such order of the High Court [35] .

ravenous India desires More Taxes From Cross Border M&A

Mergers and acquisitions clearly generate a substantial benefit; however shareholders will have to bear the brunt of the taxman. The revenue authorities are exploring the options of generating tax from cross-border M&A resulting in the transfer of beneficial interest of the Indian company. This is on the basis of the substance theory that the country has a right to claim tax on the profit generated from the business carried out in India, which itself is a debatable subject. The current tax legislation does not provide for the concept of levy of tax on transfer of beneficial ownership in a cross-border transfer. The Hutch-Vodafone and a rise in of other overseas deals involve taxability of transfer of shares of a holding company (having an Indian operating subsidiary company) outside India.

AT Present Legislature Position: The present law provides for tax on gains arising out of transfer of the legal ownership of the capital asset in the form of sale, exchange, relinquishment or extinguishment of any rights therein or compulsory acquisition under any law. Section 9 of the IT Act [36] deems gains arising from transfer of a capital asset situated in India to accrue or arise in India. In a cross-border transfer involving transfer of shares, normally the status of the capital asset provides the safe guide to decide as to which of the contracting states has the power to tax such income subject to the relevant tax treaty. The concept of levy of tax on the transfer of beneficial ownership in a cross-border transfer is not provided for in the current tax legislation, but the revenue authorities are of the view that in a cross-border transaction the valuation of the transaction includes valuation for the Indian entity as well and, accordingly, the overseas entity which has a business connection in India [37] .

In the further too above approach, the revenue department issued notices to some 400 companies who were engaged in cross-border M&A deals in the recent past. The some of major cases are:

   (i) Hutch-Vodafone case [38] : Hutchison International, a non-resident seller sold its stake in the foreign investment company CGP Investments Holdings Ltd., registered in the Cayman Islands to Vodafone, a Dutch non-resident buyer. The whole debate in the case of Vodafone is about the taxability of transfer of share capital of the Indian entity. Generally, the transfer of shares of a non-resident company to another non-resident is not subject to tax in India. But the revenue department is of the view that this transfer represents transfer of beneficial interest of the shares of the Indian company and, hence, it will be subject to tax.

On the divergent, Vodafone's argument is that there is no sale of shares of the Indian company and what it had acquired is a company incorporated in Cayman Islands. Hence, the transaction is not subject to tax in India. However, the revenue authorities argue that as Vodafone has also approached the Foreign Investment Promotion Board (FIPB) for its approval for the deal, Vodafone has a business connection in India and, therefore, the transaction is subject to capital gains tax in India [39] . The Bombay High Court in its decision rejected the Vodafone petition and order him to reply the show cause notice of revenue authorities and same has been upheld by Apex Court of India i.e. Hon'ble Supreme Court.

  (ii) The Genpact deal [40] : Genpact a captive subsidiary of GE Capital in December 2004, invested 60 per cent of the firm to US based private equity investors for $ 500 million dollars. GE did not pay any capital gains tax on such sale. Notices have been sent to the company following the deal. This matter is also pending before the Court.

In this connection, the recent decision by the Authority for Advance Rulings in Star TV v. Director of International Taxation, Mumbai [41] , the authority held that "A design to avoid the tax within the meaning of clause (iii) of the proviso to Section 245 R (2) apparently covers such of the transactions which are sham or nominal or which would lead to the inescapable inference of a contrived device solely with a view to avoid the tax. The corollary thereto is that there is no real and genuine business purpose other than tax avoidance behind such transaction".

The Impact of Direct Tax Code: The DTC proposes to codify the tax Department's position in the Vodafone case. Under DTC, any income from the direct or indirect transfer of a capital asset located in India would be deemed to arise in India. With respect to a transfer of shares in a non resident company, income would be deemed to arise in India if the ratio of the fair market value of the Indian assets owned directly or indirectly by the target to the fair market value of all of the target's assets exceeds 50%. In that case, the proportionate share of the capital gain deemed to arise in India would be subject to Indian tax.

Similarly, in the Vodafone case [42] , Section 112, 113 & 114, the assessing officer will be able to disregard the Cayman Island, the Mauritius and the Dutch companies. On disregarding these companies, the impact would be - Hutchison, the Hong Kong Company has sold shares in the Indian Company to Vodafone, the British Company. Tax consequences would follow: DTC Section 5 (1) (d) provides as under as under: "Income deemed to accrue in India: the income shall be deemed to accrue in India, if it accurse, whether directly or indirectly through or from: d. the transfer, directly or indirectly of a capital asset situate in India"

It has been a view of the Income tax Commissioners that in Vodafone's case, the share in Mauritius and Cayman Island Companies were merely title documents: like warehouse receipts. What are really transferred were the shares in the Indian company. Such a stand would now be strengthened under this new deeming provision. Now, The RDP now provides that the DTAA will not prevail over DTC, but a taxpayer will have the option of being governed by the more beneficial provision between the two [43] . Now DTC proposes to bring in anti-avoidance provisions and avoid treaty shopping. GAAR under section 112, 113 & 114 now give the power to the Assessing Officer to disallow treaty shopping [44] .


Tax legislatures in majority nations tend to be complex, but when the question is of India a developing nation, the benchmark for comparison has to be changed. So, there is a requirement of domestic legislature to strengthen administration of tax laws by providing transparent and affirmable mechanism to taxpayers regarding dispute resolution. The result of flaws in the domestic legislation are saddled with ever increasing number of tax audits and prolonged tax litigation on account of failure of our tax authorities to apply tax treaties or follow internationally accepted standards in treaty interpretation and transfer pricing.

Hence, in concluding sentences it can be said that there is an urgency to speed up the litigation procedure. There should be a limitation period on disposal of appeals too. Two years ago, the National Tax Tribunal (NTT) was set up, but, unfortunately, yet not been functional [45] . The new direct tax code that the Government is planning to introduce, to replace the current Income-tax Act, is expected to emphasize on transparency and taxpayer-friendliness.

The Amendments brought about by the Finance Act, 2008 would have a major impact on transfer of shares overseas, especially in a case where the seller of the shares is a tax resident of a country with which India does not have a Double Taxation Avoidance Agreement (DTAA). Currently, a large chunk of Foreign Direct Investments into India is coming from favorable offshore jurisdictions. The tax laws shall face the challenge of balancing the interest of the investors and the revenue authorities. Therefore, affords should be made in balancing and accepting the international taxation norms with the domestic legislature to protect the interest of both domestic and international investors and revenue authorities.

AND If the above suggestion are not done, then, the abbreviation for the tax policy and legislation department in the north block which drafts the DTC may well take on a new meaning, i.e. "To Promote Litigation."