Tax Issues in M&A Transactions PDF

Tax Issues in M&A Transactions 1. Introduction Mergers and acquisitions (“M&A”) are a permanent feature of markets globally, and India is no exception. The nature and scale of M&A are reflective of global economic conditions, and hence prevalent trends in M&A are indicators of underlying of economi...

Tax Issues in M&A Transactions 1. Introduction Mergers and acquisitions (“M&A”) are a permanent feature of markets globally, and India is no exception. The nature and scale of M&A are reflective of global economic conditions, and hence prevalent trends in M&A are indicators of underlying of economic causes. In India, regulatory and policy changes introduced by the government have spurred international as well as domestic M&A activity. In the post- Covid world, M&A prospects have undergone a transformation, and found a conducive environment in the form of positive government intervention, a visibly buyout stock market, and a relatively stable banking system.1 Statistically, 598 deals worth $112.8 billion were struck in India in 2021, with the highest ever record of 23 deals being valued above $1 billion.2 Of the aggregate, domestic M&A activity saw the highest annual volume record of 321 deals, as compared to 208 domestic deals in 2020. Inbound M&A peaked at $68.47 billion. While the UK was target nation for Indian companies for outbound M&A deals, with $2.18 billion, the US acquired up to $31.58 billion in India. The first quarter of 2022 saw M&A hitting a four-year high at $30.3 billion, with M&As involving domestic companies at $23.7 billion, domestic M&A at $12.1 billion and inbound M&As at $11.6 billion, with US acquiring 70% of the inbound M&As worth $8.2 billion.3 Tax has long been a key factor governing and guiding the shape of India-focused M&A. With global changes in tax law, and paradigm shifts in global and Indian tax policy, administration and adjudication, the role of tax as a strategic planning tool in M&A is only expected to increase. Our paper – Mergers and Acquisitions - addresses legal and regulatory considerations surrounding M&A in India.4 In this paper, we dive deep into tax considerations relevant for India-focused M&A, which is a complex subject in itself.5 The (Indian) Income tax Act, 1961 (“ITA”) contains several provisions that deal with the taxation of different categories of M&A. In the Indian context, M&A can be structured in different ways and the tax implications vary based on the structure that is adopted for a particular transaction. The ways in which M&A transactions can be undertaken are: i. Amalgamation or Merger: This entails a court-approved process whereby one or more companies merge with another company, or two or more companies merge, to form one company; ii. Demerger: This entails a court-approved process whereby the business or undertaking of one company is demerged out of that company, into a resulting company; iii. Share Purchase: This envisages the purchase of shares of a target company by an acquirer; iv. Slump Sale: This entails a sale of a business or undertaking by a seller as a going concern to an acquirer, without specific values being assigned to individual assets; and v. Asset Sale: An asset sale is another method of transfer of business, whereby individual assets or liabilities are cherry-picked by an acquirer. 1. https://economictimes.indiatimes.com/markets/stocks/news/how-covid-19-disruption-created-a-blue-sky-of-opportunities-for-mas/article- show/81690715.cms?from=mdr 2. https://mergers.whitecase.com/highlights/india-ma-sets-new-records-in-2021 3. https://economictimes.indiatimes.com/news/economy/finance/at-30-3-billion-mergers-and-acquisitions-hit-four-year-high-in-march-quarter/ articleshow/90782408.cms?from=mdr 4. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Mergers___Acquisitions_in_India.pdf 5. This paper does not examine modes of undertaking internal restructuring such as capital reduction, and buyback. All rates of tax mentioned in this paper are exclusive of applicable surcharge and cess, unless mentioned otherwise. © Nishith Desai Associates 2022 Provided upon request only 1  Tax Issues in M&A Transactions 1. Introduction In the sections that follow, we have provided further insights into each of these methods. I. Merger A merger of companies is typically conducted through a scheme of arrangement under Sections 230 to 232 of the (Indian) Companies Act, 2013 (“CA, 2013”), and requires approval of the National Company Law Tribunal (“NCLT”). By notification dated December 15, 2016, the Ministry of Corporate Affairs (“MCA”) notified Section 233 of the CA, 2013 which provides for Fast Track Mergers (“FTM”). FTM is a new concept which allows for mergers without the approval of the NCLT, in case of a merger between (i) two or more small companies, (ii) a holding company and its wholly-owned subsidiary, and (iii) such other class of companies as may be prescribed. An FTM only requires approval of the shareholders, creditors, liquidator and the Registrar of Companies (“ROC”) which takes substantially lesser time than obtaining approval from the NCLT. Having said that, at the time of registration of the merger approved under FTM with the Central Government, an FTM may be converted to a regular process merger requiring the NCLT’s approval if the Central Government finds that it is against public interest, against the creditors’ interests, or if anyone else files an objection with the NCLT. The ITA does not use the term “merger” but defines an “amalgamation” under Section 2(1B) as the merger of one or more companies with another company, or the merger of two or more companies to form a new company. For the purpose of the ITA, the merging company is referred to as the ‘amalgamating company’, and the company into which it merges, or which is formed as the result of the merger is referred to as the ‘amalgamated company’. Recently, the SC (“SC”) has held that the outer shell of a corporate entity ceases to exist after amalgamation. The SC differentiated amalgamation from winding up of a corporate entity, based on the fact that although the outer shell of the entity is destroyed, the corporate venture continues to exist in the form of a new or the existing transferee entity. 6 The ITA provides that an ‘amalgamation’ must satisfy both the following conditions: i. All the properties and liabilities of the amalgamating company immediately before the amalgamation must become the properties and liabilities of the amalgamated company by virtue of the amalgamation; and ii. Shareholders holding at least 3/4th in value of shares in the amalgamating company (not including shares held by a nominee or a subsidiary of the amalgamated company) become shareholders of the amalgamated company by virtue of the amalgamation. It is only when a merger satisfies all the above conditions, that the merger will be considered an ‘amalgamation’ for the purposes of the ITA. Where a merger qualifies as an amalgamation, subject to fulfilling certain additional conditions, the amalgamation may be regarded as tax-neutral and exempt from capital gains tax in the hands of the amalgamating company and in the hands of its shareholders (discussed below). In certain circumstances, the amalgamated company may also be permitted to carry forward and set off losses and unabsorbed depreciation of the amalgamating company against its own profits.7 In the context of a merger / amalgamation, Section 47 of the ITA specifically exempts the following transfers from capital gains tax: iii. Transfer of capital assets, in a scheme of amalgamation, by an amalgamating company to the amalgamated company, if the amalgamated company is an Indian company.8 6. PCIT vs Mahagun Realtors (P) Ltd. Special Leave Petition (C) No. 4063 of 2020. 7. Please refer to Part 6 for further details on carry forward of losses in the M&A context. 8. Section 47(vi) of the ITA. © Nishith Desai Associates 2022 Provided upon request only 2  Tax Issues in M&A Transactions 1. Introduction In such case, the cost of acquisition of the capital assets for the amalgamated company will be deemed to be the cost for which the amalgamating company had acquired such assets, increased by any cost of improvement incurred by the amalgamating company.9 Further, the period of holding of such assets by the amalgamated company (for determination of short term or long term nature of gains arising at the time of their alienation) would include the period for which the assets had been held by the amalgamating company.10 iv. Transfer by a shareholder, in a scheme of amalgamation, of shares of the amalgamating company if both the conditions below are satisfied: § The transfer is made in consideration for allotment of shares to the shareholder in the amalgamated company (except where the shareholder itself is the amalgamated company); and § The amalgamated company is an Indian company.11 For such shareholders, the cost of acquisition of shares of the amalgamated company will be deemed to be the cost at which the shares of the amalgamating company had been acquired by the shareholder;12 and the period of holding of the shares of the amalgamated company will include the period for which shares of the amalgamating company has been held by the shareholders.13 The SC of India in Grace Collis14 has held that a transfer of shares of the amalgamating company constitutes an “extinguishment of rights” in capital assets and hence falls within the definition of ‘transfer’ under Section 2(47) of the ITA but has been specifically exempted from capital gains tax by Section 47(vii) of the ITA. Consequently, if an amalgamation does not meet the conditions of the exemption under Section 47, the transfer of shares could be regarded as a taxable transfer under the ITA. v. Transfer of shares held in an Indian company by an amalgamating foreign company, in a scheme of amalgamation, to the amalgamated foreign company if both the conditions below are satisfied: § At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company. Hence, when read along with the definition of ‘amalgamation’ in Section 2(1B), shareholders of the amalgamating company holding 3/4th in value of shares who become shareholders of the amalgamated company must constitute at least 25% of the total number of shareholders of the amalgamated company. § Such transfer does not attract capital gains tax in the amalgamating company’s country of incorporation.15 vi. Transfer of shares in a foreign company in an amalgamation between two foreign companies, where such transfer results in an indirect transfer of Indian shares.16 The conditions to be satisfied to avail exemption from capital gains tax liability are the same as in point (iii) above.17 In both cases (iii) and (iv), the cost of acquisition of the shares for the amalgamated foreign company will be deemed to be the cost for which the amalgamating foreign company had acquired such shares,18 and the period of 9. Section 49(1)(iii)(e) of the ITA. 10. Section 2(42A), Explanation 1(b) of the ITA. 11. Section 47(vii) of the ITA. 12. Section 49(2) of the ITA. 13. Section 2(42A), Explanation 1(c) of the ITA. 14. CIT v. Grace Collis 248 ITR 323 (SC). 15. Section 47(via) of the ITA. 16. Please refer to Part 4 of this paper for more details on indirect transfers provisions. 17. Section 47(viab) of the ITA. 18. Section 49(1)(iii)(e) of the ITA. © Nishith Desai Associates 2022 Provided upon request only 3  Tax Issues in M&A Transactions 1. Introduction holding of such shares by the amalgamated foreign company would include the period for which the shares had been held by the amalgamating foreign company.19 However, there is no exemption for shareholders of the amalgamating foreign companies similar to the exemption for shareholders in case (ii) above. Based on this conspicuous absence of an exemption, read with the SC’s decision in Grace Collis, it appears that an amalgamation between foreign companies although can be tax neutral in India for the amalgamating foreign company, will result in Indian capital gains tax for the shareholders of the amalgamating foreign company. Other considerations: A. Indirect Taxes Since a business is transferred on a ‘going concern’ basis under an amalgamation, the Goods and Service Tax (“GST”) should not be applicable. Further, Section 18(3) of the Central Goods and Service Tax Act, 2017 (“CGST Act”) in relation to availability of input tax credit provides that where there is a change in the constitution of a registered person on account of an amalgamation, the registered person shall be allowed to transfer the unutilized input tax credit in his electronic credit ledger to such amalgamated company, subject to certain conditions being met. B. Stamp Duty The Constitution of India divides the power to levy stamp duty between the Central Government and the state governments.20 The Indian Stamp Act, 1899 (“ISA”) is a central enactment and states may adopt the ISA with amendments as they deem fit. For example, states like Punjab, Haryana, and the Union Territory of Delhi have adopted the ISA with or without modification, and states like Maharashtra, Kerala, Rajasthan have their own stamp acts. Stamp duty is a type of tax / levy which is paid to the government for transactions performed by way of a document or instrument under the ISA or provisions of respective state’s stamp acts. Stamp duty is payable on execution of a conveyance or deed. Applicability of stamp duty on NCLT orders sanctioning a scheme of amalgamation has been a contentious issue. While a few state acts like those of Maharashtra, Rajasthan, and Gujarat have specific entries for conveyance on merger, Delhi and some other states do not have such specific entries. The SC in Hindustan Lever21 held that a scheme of merger sanctioned by the court (as was then required) is an ‘instrument’ and that state legislatures have the authority to levy stamp duty on such orders. The Court has held that the undertaking of the transferor company stands transferred with all its movable, immovable and tangible assets to the transferee company without any further act or deed and accordingly, the scheme of arrangement would be an ‘instrument’ under the ISA. By the said ‘instrument’ the properties are transferred from the transferor company to the transferee company, the basis of which is the compromise or arrangement arrived at between the two companies. The Delhi High Court in Delhi Towers,22 upheld the levy of stamp duty on a merger order while relying on the aforesaid SC decision. However, the Court exempted the parties ultimately, in light of specific exemptions under certain pre- Constitution era notifications, discussed below. 19. Section 2(42A), Explanation 1(b) of the ITA. 20. See entries 91 of the Union List, 63 of the State List, and 44 of the Concurrent List, Seventh Schedule, read with Article 246, Constitution of India, 1950. 21. Hindustan Lever v. State of Maharashtra (2004) 9 SCC 438. 22. Delhi Towers Ltd. v. G.N.C.T. of Delhi (2009) 165 DLT 418. © Nishith Desai Associates 2022 Provided upon request only 4  Tax Issues in M&A Transactions 1. Introduction The Bombay High Court23 has held that a scheme of arrangement entails transfer of a going concern, and not of assets and liabilities separately. As a going concern, the value of the property transferred under a scheme of arrangement is reflected from the shares allotted to the shareholders of the transferor company under the scheme. Accordingly, under the Maharashtra Stamp Act, 1958, stamp duty payable on conveyance relating to amalgamation / demerger of companies is 10% of the aggregate market value of the shares issued or allotted in exchange or otherwise and the amount for consideration paid for such amalgamation / demerger, provided that it does not exceed (i) 5% of the total true market value of the immovable property located within the state of Maharashtra of the transferor company / transferred by the demerged company to the resulting company; or (ii) 0.7% of the aggregate of the market value of the shares issued or allotted and the amount of consideration paid for the amalgamation / demerger, whichever is higher, subject to maximum of INR 25 crores.24 In Haryana, the stamp duty payable on conveyances relating to amalgamation / demerger amounting to sale of immovable property is 1.5% on the market value of the property or the amount of consideration, whichever is higher, subject to a maximum of INR 7.5 crores.25 Notably, certain notifications issued in 1937, in pre-Constitution India, sought to provide relaxations on payment of stamp duty in case of certain transfers of property. Specifically, Notification No. 1 dated January 16, 1937 exempted stamp duty on transfer of property between companies limited by shares, on production of a certificate attesting to the following conditions being met: § At least 90% of the issued share capital of the transferee company is beneficially owned by the transferor company; § Transfer is between a parent and subsidiary company where the parent beneficially owns at least 90% of the issued share capital of the subsidiary; or § Transfer is between two subsidiaries, at least 90% share capital of each being beneficially held by a common parent. The aforesaid notification was superseded by Notification No. 13 dated December 25, 1937 which limited the exemption from stamp duty on instruments evidencing transfer of property in the situations enlisted above to the then Province of Delhi. The Delhi High Court, in Delhi Towers, considered the continuing validity of the 1937 pre-Constitution notifications. It held that in view of Article 372 of the Constitution of India, the notifications continued to remain in force even after the adoption of the Constitution, even without specific laws adopting the said notifications. Resultantly, the Delhi High Court allowed the stamp duty on the amalgamation to be remitted, subject to production of a certificate as required under the 1937 notifications. This decision was not challenged by the Government of Delhi.26 However, post the Delhi High Court decision, the Delhi Government in 2011 has revoked the Notification No. 13 dated December 25, 1937 providing remission from stamp duty on amalgamation in Delhi. C. Appointed date Provisions of the CA, 2013 require that every scheme of arrangement under Sections 230 to 232 shall clearly indicate an ‘appointed date’ from which it shall be effective and the scheme shall be deemed to be effective from 23. Li Taka Pharmaceuticals Ltd. v. State of Maharashtra and Ors. AIR 1997 Bom 7. 24. Clause 25(da) of Schedule 1, Maharashtra Stamp Act, 1958. 25. The Indian Stamp (Haryana Second Amendment) Act, 2017, dated November 22, 2017. 26. As observed by the Delhi High Court in Delhi High Court Bar Association v. Govt of NCT of Delhi (2013) 203 DLT 129. © Nishith Desai Associates 2022 Provided upon request only 5  Tax Issues in M&A Transactions 1. Introduction such date and not at a date subsequent to the appointed date.27 The MCA has clarified that the appointed date may be a specific calendar date or may be tied to the occurrence of an event which is relevant to the scheme. The MCA further clarified that where the ‘appointed date’ is chosen as a specific calendar date, it may precede the date of filing of the application for the scheme of amalgamation in the NCLT. However, if the ‘appointed date’ is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against public interest.28 The SC in Marshall Sons & Co India Ltd,29 recognized that every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation shall take place. It held that while it is open to the Court (now NCLT) sanctioning the scheme to modify such date, where there is no such modification, but the scheme presented is simply sanctioned, it would follow that the date of amalgamation / transfer is the date specified in the scheme as the transfer date. It further held that pursuant to the scheme of amalgamation, the assessment of the amalgamated / transferee company must take into account the income of both the amalgamating / transferor company and amalgamated / transferee company. Recently, the SC in Dalmia Power Ltd.,30 upheld the validity of filing revised returns by an amalgamated company beyond the time limit prescribed under the ITA. The SC held that Section 139(5) of the ITA was not applicable to the case at hand since the revised returns were not filed because of an omission or wrong statement contained therein, but on account of the time taken to obtain sanction of the scheme of arrangement from the NCLT. II. Demerger A demerger must also be conducted through a scheme of arrangement under the CA, 2013 with the approval of the NCLT. A demerger is a form of restructuring whereby one or more business ‘undertakings’31 of a company are transferred either to a newly formed company or to an existing company and the remainder of the company’s undertaking continues to be vested in the first company. The consideration for such transfer will flow to the shareholders of the demerged undertaking either through issue of shares by the resulting company or other instruments (for it to qualify as a tax neutral demerger) or by way of cash. The ITA defines a demerger under Section 2(19AA) as a transfer pursuant to a scheme of arrangement under the CA, 2013, by a ‘demerged company’,32 of one or more of its undertakings to a ‘resulting company’.33 The ITA provides that a demerger must satisfy all the following conditions: i. All the properties and liabilities of the undertaking being transferred by the demerged company, immediately before the demerger, become the property or liability of the resulting company by virtue of the demerger. 27. Section 232(6) of the CA, 2013. 28. Circular No. 9/2019 [F.NO. 7/12/2019/CL-I], dated August 21, 2019. 29. Marshall Sons & Co (India) Ltd v. ITO (1997) 2 SCC 302. 30. Dalmia Power Ltd. v. ACIT 420 ITR 339 (SC). 31. The ITA defines an ‘undertaking’ to include any part of an undertaking, or a unit or a division of an undertaking or business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity. 32. Section 2(19AAA) of the ITA defines demerged company to mean the company whose undertaking is transferred, pursuant to a demerger, to a resulting company. 33. Section 2(41A) of the ITA defines resulting company to mean one or more companies (including wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. © Nishith Desai Associates 2022 Provided upon request only 6  Tax Issues in M&A Transactions 1. Introduction ii. The properties and liabilities must be transferred at their book value immediately before the demerger (excluding increase in value due to revaluation). The Finance Act, 2019 relaxed this condition by providing that it would not apply where the resulting company records the assets and liabilities at values different from the values appearing in the books of account of the demerged company, immediately before the demerger, in compliance with the Indian Accounting Standards (“Ind AS”).34 iii. In consideration of the demerger, the resulting company must issue its shares to the shareholders of the demerged company on a proportionate basis (except where the resulting company itself is a shareholder of the demerged company). iv. Shareholders holding at least 3/4th in value of shares in the demerged company become shareholders of the resulting company by virtue of the demerger. Shares in the demerged company already held by the resulting company or its nominee or subsidiary are not considered in calculating 3/4th in value. v. The transfer of the undertaking must be on a ‘going concern’ basis. vi. The demerger must be in accordance with additional conditions, if any, as notified by the Central Government under Section 72A (5) of the ITA.35 It is only when a demerger satisfies all the above conditions, that it will be considered a ‘demerger’ for purposes of the ITA. Further, subject to fulfilling certain additional conditions, the demerger may be regarded as tax neutral and be exempt from capital gains tax in the hands of the demerged company, shareholders of the demerged company and the resulting company (discussed below). In certain circumstances, the resulting company may also be permitted to carry forward and set off the losses and unabsorbed depreciation of the demerged company against its own profits.36 In the context of a demerger, Section 47 of the ITA specifically exempts the following transfers from capital gains tax liability: i. Transfer of capital assets in a scheme of demerger from the demerged company to the resulting company, if the resulting company is an Indian company.37 The cost of acquisition of the capital assets for the resulting company will be deemed to be the cost for which the demerged company had acquired such assets, increased by any cost of improvement incurred by the demerged company,38 and the period of holding of such assets by the resulting company would include the period for which the assets had been held by the demerged company.39 ii. Transfer or issue of shares by the resulting company, in a scheme of demerger, to shareholders of the demerged company if the transfer or issue is made in consideration of the demerger.40 iii. Transfer of shares in an Indian company by a demerged foreign company to a resulting foreign company if both the conditions below are satisfied: 34. Ind AS 103 requires all business combinations within its scope to be accounted at fair value under the purchase method, excluding business combinations under common control, which are to be accounted at book value using pooling of interest method. 35. No conditions have been notified as on date. 36. Please refer to Part 6 for further details on carry forward of losses in the M&A context. 37. Section 47(vib) of the ITA. 38. Section 49(1)(iii)(e) of the ITA. 39. Section 2(42A), Explanation 1(b) of the ITA. 40. Section 47(vid) of the ITA. © Nishith Desai Associates 2022 Provided upon request only 7  Tax Issues in M&A Transactions 1. Introduction i. Shareholders holding at least 3/4th in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and ii. Such transfer does not attract capital gains tax in the country of incorporation of the demerged foreign company.41 iv. Transfer of a capital asset being shares in a foreign company by the demerged foreign company to the resulting foreign company, where such transfer results in an indirect transfer of Indian shares.42 The conditions to be satisfied to avail exemption from capital gains tax liability are the same as specified in point (iii) above.43 In both cases (iii) and (iv), the cost of acquisition of the shares for the resulting foreign company will be deemed to be the cost for which the demerged foreign company had acquired such shares,44 and the period of holding of such shares by the resulting foreign company would include the period for which the shares has been held by the demerged foreign company.45 Since there is no exemption for transfer or issue of shares by resulting foreign companies similar to the exemption in case (ii) above, a question arises as to whether such a transfer or issue would subject the resulting foreign companies to capital gains tax in India. Other considerations: i. Indirect Taxes: Same as for amalgamation. ii. Stamp Duty: Same as for amalgamation. iii. Appointed Date: Same as for amalgamation. III. Share Sale One of the most commonly resorted to methods of acquisition is share acquisition, which involves the acquisition of the shares of the company in which the target business is vested. The entire company is sold - lock, stock and barrel. The major tax implications of share acquisitions are: (i) liability to tax on capital gains, if any, and (ii) liability under Section 56(2)(x) of the ITA, if any. An existing shareholder may realize a gain or loss on a share transfer. The taxation of gains realized on share transfer would depend on whether such shares are held as capital assets or as stock-in-trade. In case shares are held as stock-in- trade, profits and gains from the transfer of shares will be chargeable to tax under head ‘profits and gains from business and profession’. Where the shares are held as capital assets, profits and gains arising from the transfer of the shares will be chargeable to tax under the head ‘capital gain’ according to section 45 of the ITA. Section 2(14) of the ITA defines the term ‘capital asset’ to include property of any kind held by the taxpayer, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. Determination of the character of investment, whether it is a capital asset or stock-in-trade has been the subject of a lot of litigation and uncertainty. The Central Board of Direct Taxes (“CBDT”) has, vide circulars and notifications, laid down the following principles in respect of characterization of income arising on sale of securities: 41. Section 47(vic) of the ITA. 42. Please refer to Part 4 of this paper for more details on indirect transfer provisions. 43. Section 47(vicc) of the ITA. 44. Section 49(1)(iii)(e) of the ITA. 45. Section 2(42A), Explanation 1(b) of the ITA. © Nishith Desai Associates 2022 Provided upon request only 8  Tax Issues in M&A Transactions 1. Introduction § In respect of income arising from sale of listed shares and securities which are held for more than 12 months, the taxpayer has a one-time option to treat the income as either business income or capital gains and the option once exercised, is irreversible.46 § Gains arising from sale of unlisted shares are characterized as capital gains, irrespective of the period of holding of such unlisted shares, except in cases where (i) the genuineness of the transaction is in question, (ii) the transfer is related to an issue pertaining to lifting of the corporate veil, or (iii) the transfer is made along with control and management of the underlying business. In such cases, the CBDT has stated that the Indian tax authorities would take an appropriate view based on the facts of the case.47 § The CBDT has clarified that the third exception i.e. where the transfer of unlisted shares is made along with control and management of the underlying business, will not be applicable in case of transfer of unlisted shares by Category-I and Category-II Alternative Investment Funds registered with the Securities and Exchange Board of India (“SEBI”).48 A. Capital Gains If the shares qualify as capital assets under Section 2(14) of the ITA, the gains arising upon transfer of the shares would attract capital gains tax liability. As per Section 45, capital gains tax must be assessed at the time of transfer of the capital asset, and not necessarily at the time when consideration is received by the transferor or on the date of the agreement to transfer. In other words, a taxpayer is required to pay capital gains tax with respect to the year his right to receive payment accrues, even if such payment is deferred in whole or in part. According to Section 48 of the ITA, capital gain is computed by deducting from the consideration received on account of transfer of capital asset: a. the amount of expenditure incurred wholly and exclusively in connection with such transfer; b. the cost of acquisition (“COA”) of the asset; and c. any cost of improvement of the capital asset. Section 50CA of the ITA provides that where the sales consideration on transfer of unlisted shares is less than their fair market value (“FMV”), computed as per Rule 11UA49 of the Income-tax Rules, 1962 (“ITR”), the sales consideration is deemed to be the FMV in the hands of the transferor. Section 48 of the ITA also provides that in case of long-term capital gains (“LTCG”), the COA is adjusted for inflation factors50 as declared by the CBDT (“indexation benefit”). The indexation benefit is not available in certain cases being inter alia LTCG arising to a non-resident on transfer of shares an Indian company. Section 49 of the ITA provides for specific provisions for determination of COA for certain modes of acquisition and Section 55 of the ITA provides the meaning of cost of improvement and COA. Further, the COA includes the entire amount paid for the asset regardless of whether such payment is made in installments over a period of time. However, the SC in B.C. Srinivasa Setty51 laid down the principle that the COA should be capable of being ascertained in order for the machinery provided in Section 48 of the ITA to apply. If such cost is not ascertainable, no capital gains tax would arise. 46. Circular No. 6 of 2016 dated February 29, 2016 47. Order F.No.225/12/2016/ITA.II dated May 2, 2016 48. Order F.No.225/12/2016.II dated January 24, 2017. 49. Rule 11UA prescribes primarily the net book value, where the value of immovable property is fair valued, and value of investment is computed as per Rule 11UA. 50. The base year for computing the indexation benefit is April 1, 2001. Accordingly, for capital assets that were acquired on or before April 1, 2001, the market value as on April 1, 2001 may be substituted for actual cost while calculating capital gains. 51. CIT v. B.C. Srinivasa Setty AIR 1981 SC 972. © Nishith Desai Associates 2022 Provided upon request only 9  Tax Issues in M&A Transactions 1. Introduction The rate of tax on capital gain in India would depend on (i) whether the capital gains are LTCG or short-term capital gains (“STCG”), (ii) whether the target company is a public listed company, public unlisted company or a private company, (iii) whether the transaction has taken place on the floor of the recognized stock exchange (“RSE”) or by way of a private arrangement, and (iv) whether the seller is a resident or a non-resident for tax purposes. Further, in respect of a cross-border share sale, the relevant Double Taxation Avoidance Agreement (“DTAA”) would determine whether capital gains are taxable in India or in the other country or both. The general rule is that STCG arise from the transfer of a capital asset which is held for less than 3 years, while LTCG arise if the capital asset is held for more than 3 years. However, gains arising on transfer of listed shares held for more than 12 months would be classified as LTCG; in any other case, such gains would be classified as STCG. Gains arising on transfer of unlisted securities held for more than 24 months would be classified as LTCG; in any other case, such gains would be classified as STCG. The table below sets out the rates at which capital gains are taxable under the ITA for different forms of share sales:52 Short-Term Capital Gains Long-Term Capital Gains Resident shareholder Non-resident shareholder or foreign company Sale of listed equity shares on 10% without foreign 15%53 10%54 without indexation or the floor of the RSE (Securities exchange fluctuation foreign exchange fluctuation Transaction Tax (“STT”) paid) benefit55 benefit Sale of other listed securities Rate of tax generally applicable 20% with indexation benefit; or 10% without indexation to taxpayer 10% without indexation benefit, benefit57 whichever is more beneficial56 Sale of unlisted securities § For Individuals, as per 10% without foreign prescribed slab rates 20% with indexation benefit58 exchange fluctuation § For Domestic Companies, 15% to 30% as applicable benefit59 § For Foreign Companies, 40% Section 115AD of the ITA provides special rates for Foreign Portfolio Investors (“FPIs”), in respect of capital gains arising to FPIs from transfer of securities. While the rate of tax for LTCG remains the same, under Section 115AD 52. Surcharge, and, a health and education cess at 4% on the aggregate amount of tax and surcharge applies. Rates of surcharge are: Taxable income Foreign Companies Domestic companies Individuals Up to INR 5 million Nil Nil Nil Above INR 5 million up to INR 10 million Nil Nil 10% Above INR 10 million up to INR 20 million 2% 7% 15% Above INR 20 million to INR 50 million 2% 7% 25% Above 50 million to INR 100 million 2% 7% 37% Above INR 100 million 5% 12% 37% 53. Section 111A of the ITA. 54. Section 112A of the ITA. LTCG arising from transfer of listed equity shares in a company on or after April 1, 2018 and where such transfers are liable to STT on acquisition and transfer, are taxable at 10%, where such capital gains exceed INR 0.1 million. Taxpayers have been granted the benefit of step up of COA based on fair value of listed equity shares as on January 31, 2018. Further, CBDT has notified certain transactions of acquisition of equity shares (like initial public offer, offer for sale, merger, shares allotted to qualified institutional buyers, bonus issue etc.) on which the condition of payment of STT shall not apply and accordingly, LTCG on transfer of such equity shares shall be taxable at 10%. 55. Ibid. 56. Section 112 of the ITA. 57. Ibid. 58. Ibid. 59. Ibid. © Nishith Desai Associates 2022 Provided upon request only 10  Tax Issues in M&A Transactions 1. Introduction STCG is taxable at 30% for FPIs (except STCG from sale of listed equity shares on the floor of the RSE where STT is paid – taxable at 15%). B. Section 56 Section 56(2)(x) provides that where any person receives any property, other than immovable property, including shares of a company, without consideration, or for a consideration which is less than the FMV (computed as per Rule 11UA of the ITR) of the property by an amount exceeding INR 50,000, the differential between the FMV and the consideration is taxable in the hands of the recipient under head ‘income from other sources’ (“IOS”). The rate at which such income will be taxable depends on the tax status of such person: § In case of an individual: Taxable at the applicable slab rate for such individual; § In case of domestic corporates: Corporate tax rate ranging from 15% to 30% as applicable;60 § In case of Indian firm: 30%; and § In case of foreign company: 40%. Other considerations: i. Securities Transaction Tax If the sale of shares takes place on the floor of an RSE in India, STT is levied on the turnover from share sale. In the case of intraday sales, STT at the rate of 0.025% is payable by the seller, while in the case of delivery-based sales, STT at the rate of 0.10% is payable by the seller. ii. Indirect Taxes GST is not applicable on sale of shares as ‘securities’ are specifically excluded from the definition of ‘goods’ and ‘services’ under the CGST Act. iii. Stamp Duty Transfers of shares in a company are liable to stamp duty at the rate of 0.25% of the value of the shares when held in physical form. However, as per the amendment made by the Finance Act, 2019 with effect from July 1, 2020, transfer of shares is liable to stamp duty at the rate of 0.015% on the value of shares transferred. Earlier, no stamp duty was levied in case the shares were held in an electronic (dematerialized) form with a depository (and not in a physical form). However, the Finance Act, 2019 also amended to limit such exemption to transfer of securities from a person to a depository or from a depository to a beneficial owner. 60. Where the total turnover or gross receipt of a domestic company in previous year 2018-19 does not exceed INR 400 crores, corporate tax is applicable at rate of 25%, otherwise 30%. Further, the Taxation Laws (Amendment) Ordinance, 2019 made changes to corporate tax rates under the ITA whereby existing domestic companies and new manufacturing companies have been provided an option to pay tax at concessional rates of 22% / 15% respectively, subject to fulfillment of certain conditions. © Nishith Desai Associates 2022 Provided upon request only 11  Tax Issues in M&A Transactions 1. Introduction IV. Slump Sale A ‘slump sale’ is defined under the ITA as transfer of one or more undertaking(s) by any means for a lump sum consideration, without assigning values to individual assets or liabilities (definition of slump sale has been amended by Finance Act, 2021 – please refer the discussion below).61 ‘Undertaking’ has been defined to include an undertaking, or a unit or a division of an undertaking or business activity taken as a whole. However, undertaking does not mean a combination of individual assets which would not constitute a business activity in itself.62 The ITA states that gains arising from a slump sale shall be subject to capital gains tax in the hands of the transferor in the year of the transfer.63 In case the transferor held the undertaking for a period of 36 (thirty-six) months or more, the gains would be taxable as LTCG, otherwise as STCG. The amount subject to capital gains tax shall be the full value of consideration (“FVC”) for the slump sale less the ‘net worth’ of the undertaking, which has been defined to mean the aggregate value of the assets of the undertaking less the value of liabilities of the undertaking.64 The value of the assets and liabilities to be considered for the computation is the depreciated book value of such assets or liabilities, with certain exceptions. The Finance Act, 2021 brought about an amendment which provides that the FVC shall be deemed to be the FMV of the undertaking to be determined as per prescribed rules.65 What constitutes ‘slump sale’? In light of the definition of slump sale in the ITA, and judicial interpretation of this definition over the years, the following are considered the fundamental requirements to qualify as a slump sale: i. Transfer by any means: The erstwhile definition of slump sale under the ITA covered a transfer by way of ‘sale’ under the ambit of slump sale and not a transfer by any other mode. In R.R. Ramakrishna Pillai,66 the SC confirmed that transfer of an asset for consideration other than for monetary consideration is an exchange and not a sale. The Delhi High Court, in SREI Infrastructure Finance Ltd,67 held that on the transfer of business in exchange of another asset, there is indeed a monetary consideration which is being discharged in the form of shares. The Delhi High Court further held that it would not be appropriate to construe and regard the word ‘slump sale’ to mean that it applies to ‘sale’ in a narrow sense and as an antithesis to the word ‘transfer’ as used in Section 2(47) of ITA. However, a contrary view was taken by the Bombay High Court in Bharat Bijlee Limited68 where it has held that for any transaction to be considered a ‘slump sale’, an essential element is that the transfer of the undertaking must be for cash consideration. This position has been clarified post the amendment by the Finance Act, 2021 which replaced the words “undertaking as a result of sale” with “undertaking, by any means” in the definition of slump sale. The amendment broadens the scope of slump sale to include transfer (as defined under section 2(47) of the ITA) of one or more undertakings by any means and effectively overturning the decision of Delhi High Court in case of Bharat Bijlee Limited. 61. Section 2(42C) of the ITA. 62. Explanation 1 to Section 2 (19AA). 63. Section 50B of the ITA. 64. Explanation 1 to Section 50B of the ITA. 65. Rule 11UAE of the ITR 66. CIT v. R.R. Ramakrishna Pillai (1967) 66 ITR 725 SC. 67. SREI Infrastructure Finance Ltd. v. Income Tax Settlement Commission 207 Taxman 74 (Delhi). 68. CIT v. Bharat Bijlee Ltd. 365 ITR 258 (Bombay). © Nishith Desai Associates 2022 Provided upon request only 12  Tax Issues in M&A Transactions 1. Introduction ii. Transfer of an undertaking: The continuity of business principle also assumes that all assets and liabilities of the concerned undertaking are transferred under the sale. This view has been upheld by the SC, whereby it held that an ‘undertaking’ was a part of an undertaking / unit / business when taken as a whole.69 Additionally, the ‘net worth’ of the undertaking being transferred considers the book value of the liabilities to be reduced from the aggregate amount of assets of the undertaking, emphasizing the requirement of transferring liabilities. While an essential element of a ‘slump sale’ is that the assets and liabilities of the undertaking are transferred to ensure continuity of business, for a transaction to be characterized as a ‘slump sale’, it is not essential that all assets are transferred. The Punjab and Haryana High Court has held that it is not essential that all assets are transferred for a transaction to qualify as a slump sale. Even if some assets of the transferor are retained by it, and not transferred to the transferee, the transaction may still retain the characteristic of a slump sale. However, for a transfer to be considered a slump sale, what is crucial is that the assets (along with the liabilities) being transferred forms an ‘undertaking’ in itself, and can function ‘without any interruption’, i.e. as a going concern as discussed below.70 This understanding of the term ‘undertaking’ is equally applicable to demergers. iii. Transfer as a going concern: The Bombay High Court while dealing with the concept of ‘slump sale’ generally, clarified that one of the principle tests for determination of whether a transaction would be a ‘slump sale’ is whether there is continuity of business.71 Thus, the concept of ‘going concern’ is one of the most important conditions to be satisfied when analyzing whether a transaction can be regarded as a slump sale. This view has also been upheld by the Punjab and Haryana High Court.72 iv. Lump-sum consideration: The consideration for the slump sale must be a lump-sum figure without attributing individual values to the assets and liabilities forming part of the transferred undertaking. Another important aspect of a slump sale is that the gains arising from the sale of an undertaking (if any) shall be computed as LTCG, if the undertaking as a whole has been held for a period of 36 months, irrespective of the fact that some of the assets may have been held for a period of less than 36 months. The substance, not the form of a slump sale transaction is to be examined. In cases where the entire undertaking has been transferred under different agreements, the Income Tax Appellate Tribunal (“ITAT”), Mumbai has held that the same would constitute a slump sale.73 Valuation rules for computation of FVC for slump sales: 74 CBDT has prescribed valuation rules for determination of FVC for slump sale under Rule 11UAE of the ITR (“Valuation Rules”). The Valuation Rules provide two methods for determining the FVC as on the date of slump sale and the higher of the two shall be considered to be the FVC. a. Book value based formula: Broadly under this method, the FVC is a function of the book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) as reduced by the book value of all the liabilities; 69. R.C. Cooper v. Union of India AIR 1970 SC 564. 70. Premier Automobiles Ltd. v. ITO (2003) 264 ITR 193 (Bom), as approved CIT v. Max India Ltd. 319 ITR 68 (P&H). 71. Premier Automobiles Ltd. v. ITO (2003) 264 ITR 193 (Bom). 72. CIT v. Max India Ltd. 319 ITR 68 (P&H). 73. Mahindra Engineering & Chemical Products Ltd. v. ITO 51 SOT 496 (Mum). 74. For a detailed analysis of the aforementioned decision, please see our hotline here https://www.nishithdesai.com/SectionCategory/33/Tax-Ho- tline/12/53/TaxHotline/4668/1.html © Nishith Desai Associates 2022 Provided upon request only 13  Tax Issues in M&A Transactions 1. Introduction b. Actual consideration received: This should be a sum of the monetary and non-monetary consideration received or accrued as a result of the slump sale. The Valuation Rules also prescribe the method for computing value of the non-monetary consideration received on account of slump sale. The Valuation Rules seek to align the rules pertaining to valuation for transfer of shares and immovable property with that of business transfers by way of slump sales, plugging the gap on the tax arbitrage opportunity that slump sales provided. Other considerations: A. Indirect Tax There should be no GST on sale of the business as a slump sale. This is because what is being sold is the undertaking or the business on a slump sale basis, and ‘business’ per se does not qualify under the definition of ‘good’. B. Stamp Duty Please refer to the below section on “Asset Sale”. Difference between slump sale and demerger S. Parameter Demerger Slump sale No. 1. Meaning A form of restructuring whereby one or more business Transfer of one or more undertaking(s) by any ‘undertakings’ of a company are transferred either to means undertaking(s) for a lump sum consideration, a newly formed company or to an existing company without assigning values to individual assets or and the remainder of the company’s undertaking liabilities on a going concern basis continues to be vested in the first company 2. Transfer of All liabilities pertaining to and apportioned to All liabilities pertaining to undertaking need not liabilities undertaking being transferred, need to be transferred be transferred, provided what is being transferred to resulting company qualifies as ‘going concern’ 3. Sanctioning A scheme of arrangement under the CA, 2013 with Business transfer agreement document approval of NCLT 4. Form of Consideration for demerger flows to shareholders of Cash / non-cash consideration may be received by consideration the demerged undertaking either through issuance of the seller (to be determined as per the Valuation shares by the resulting company or other instruments Rules) (for it to qualify as a tax neutral demerger) or by way of cash 5. Capital gains tax No capital gains tax for demerger meeting conditions Gains arising from slump sale subject to capital implications of ‘tax neutral’ demerger under Section 2 and Section gains tax in hands of transferor in year of transfer; 47 of ITA Capital gains computed as difference between sale consideration and net-worth of undertaking § LTCG in case undertaking held for more than 36 months prior to transfer § STCG in case undertaking held than less than 36 months prior to transfer 6. Carry forward of Allowed, if conditions under Section 72A(4) satisfied Not allowed business losses 7. Carry forward Allowed by Courts on pro rata basis, only qua Not allowed of Minimum demerged undertaking Alternate Tax (“MAT”) Credit © Nishith Desai Associates 2022 Provided upon request only 14  Tax Issues in M&A Transactions 1. Introduction 8. Claim of tax Resulting company cannot claim benefit for unexpired Transferred undertaking can continue to avail tax holiday period holiday for unexpired period, provided other conditions for claiming tax holiday continue to be satisfied 9. Indirect tax No GST on transfer of business undertaking on going No GST on sale of business as slump sale concern basis V. Asset Sale An asset sale is an itemized sale or piece-meal sale of identified assets of a company. As compared to a slump sale, an asset sale offers the seller / buyer the flexibility to cherry pick assets or liabilities to be transferred depending on commercial considerations. The buyer pays for each asset separately which is accounted for in that manner in the books of the seller. In an itemized sale of assets, for determining taxability of capital gains, a distinction is drawn between depreciable and non-depreciable assets. A. Non-depreciable Assets Assets which are not held for the purpose of business use on which depreciation is not available under Section 32 of ITA are considered non-depreciable assets and capital gains on such assets is calculated as per Sections 45 and 48 of the ITA. Accordingly, on sale of a non-depreciable asset, the COA of the asset should be reduced from the sale consideration received for the asset. Each asset is assigned a value, and the consideration for such asset is also determined. The gains from the sale of each asset is determined and the transferor is liable to capital gains tax on the gains (if any) from the sale of each asset. Further, whether the sale would result in STCG or LTCG would need to be analyzed individually depending on the holding period for each asset by the transferor. Accordingly, it may be possible that certain assets result in STCG, while some result in LTCG, despite being sold as part of the same transaction. B. Depreciable Assets Section 50 of the ITA provides for computation of capital gains in case of depreciable assets i.e. assets inter-alia being building, plant or machinery etc. on which depreciation is available under Section 32 of the ITA. The manner of computation based on whether the Block of Asset75 (“Block”) from which the asset is transferred in an itemized sale ceases to exist post transfer or continues to exist. i. Capital gain where Block continues to exist post-transfer Capital gains from the transfer would be deemed to be STCG and should be taxable in hands of transferor at the applicable tax rate, irrespective of the period of holding of such asset. The capital gains will be determined as the difference, if any, between (1) the sale consideration from the transfer of the concerned assets, together with the transfer of any other asset within that block in the same financial year, and (2) the aggregate of:76 75. ‘Block of assets’ is defined in Section 2(11) of the ITA as a group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. Such block of assets may comprise of (a) tangible assets such as buildings, machinery, plant or furniture; (b) intangi- ble assets such as know-how, patents, copyrights etc. 76. Section 50(1) of the ITA. © Nishith Desai Associates 2022 Provided upon request only 15  Tax Issues in M&A Transactions 1. Introduction i. Expenditure incurred in connection with such transfers; ii. Written Down Value (“WDV”) of the Block at the beginning of the financial year; and iii. Actual cost of any asset acquired during that year and forming part of that Block. If the sale consideration does not exceed the aggregate of the above values, then no capital gain is said to have arisen from the sale of the asset even if the sale consideration exceeds its COA. In such a situation, the sale consideration is adjusted within the block and the value of the block is reduced by the amount of the sale consideration of the asset. Accordingly, due to such an adjustment the transferor should be eligible for reduced depreciation on such Block in the next financial year. ii. Capital gain where Block ceases to exist post-transfer Where all assets from a Block are transferred such that the Block ceases to exist, capital gain from such transfer should be deemed to be STCG and should be taxable in hands of transferor at the applicable tax rate, irrespective of the period of holding of such asset. The capital gain from such transfer should be determined as the difference, if any, between (1) the sale consideration from the transfer of the concerned assets, together with the transfer of any other asset within that Block in the same financial year, and (2) the aggregate of:77 i. WDV of the Block at the beginning of the year; ii. Actual cost of any asset acquired during that year and forming part of that Block. The main features of an asset sale can be best understood in contrast to the sale of an undertaking under a slump sale: 1. While in a slump sale, each asset is assigned a value for purposes of only stamp duty, etc., in case of an asset sale, each asset is considered as a separate sale and hence values are assigned to each asset. The Hyderabad ITAT, quoting multiple judgments from the SC, has held that what is important for a transaction to be an itemized sale is that each asset be assigned a value for the purpose of the transaction.78 The Hyderabad ITAT went on to state that the mere fact that values had been assigned to individual assets would not necessarily mean that the transaction is an itemized asset sale, but that it could still be regarded as a slump sale. What is essential is that the values have been assigned for the purpose of the sale of the assets. 2. As the name suggests, an asset sale does not include the transfer of liabilities of the transferor company. In some cases, all the assets of a business may be transferred, which may be required to operate the business going forward, without transferring any liabilities. In such cases while the transferred assets operate as a going concern, the transaction is an asset sale, since the liabilities are not transferred. Other considerations: a. Indirect Tax GST could be applicable depending on the nature of asset sold and could be as high as 28%. 77. Section 50(2) of the ITA. 78. Coromandel Fertilisers Ltd. v. DCIT (2004) 90 ITD 344 (Hyd). © Nishith Desai Associates 2022 Provided upon request only 16  Tax Issues in M&A Transactions 1. Introduction b. Stamp Duty Stamp duty payable on transfer of assets, whether in case of an itemized sale or a slump sale, is governed by the provisions of the relevant stamp act where the document or instrument of transfer is executed / produced. For instance, in Maharashtra, the stamp duty payable on conveyance of immovable property and movable property is 5% and 3%, respectively, of the consideration paid therefor. However, since the stamp duty is payable on the instrument of transfer, no stamp duty is payable if there is no instrument effecting the transfer. For instance, if the movable tangible assets are delivered by way of physical delivery and the buyer merely acknowledges receipt of such assets by way of a ‘delivery note’, then no stamp duty is payable on such acknowledgement or receipt of assets. As regards movable assets that are intangible in nature, such as goodwill, stamp duty at the rate of 3% will need to be paid on the instrument conveying such intangible assets. If the intangible asset like goodwill is transferred by way of an instrument, such as the business transfer agreement or the asset purchase agreement, then the business transfer agreement or the asset purchase agreement will need to be stamped to the extent of at least 3% of the value of the goodwill. If there are other assets that are being conveyed by way of the business transfer agreement or the asset purchase agreement, then such instruments should be stamped to such appropriate value as may be required under the relevant stamp act. The applicable rates of stamp duty will vary on a state-by-state wise basis. VI. Comparative Analysis The table below provides a comparison between the various methods (discussed above) of undertaking M&A transactions. Particulars Slump Sale Share Sale Asset Sale Amalgamation Demerger Definition Transfer of one or Acquisition in The sale of the whole or Merging of one Transfer of more undertakings whole or part of the part of the assets company into undertaking / businesses by any shareholding of a of a target to an acquirer another company, of company to means for lump- company from existing with individual values or merging of two another company sum consideration shareholders. Unless assigned to each asset or more companies under an NCLT- on a going concern specifically agreed to form a new approved process basis without values to, the seller has no company under in compliance with being assigned to continuing interest in, an NCLT-approved Sections individual assets or obligation with process, in 230 to 232 of the and liabilities being respect to the assets, compliance with CA, 2013 transferred liabilities or operations Sections 230 to of the business 232 of the CA, 2013 Court Not required Not required Not required Required. Not Required Approval required in case of FTM Transfer All assets + All assets + liabilities Such assets that the All assets + All Assets+ liabilities pertaining pertaining to the parties may determine liabilities of the Liabilities relatable to the undertaking company Amalgamating the to the undertaking company being transferred Particulars Slump Sale Share Sale Asset Sale Amalgamation Demerger Capital Capital gains Capital gains realized For depreciable assets, No capital gains No capital gains Gains realized on transfer on transfer of listed manner of computation tax for tax neutral tax for tax neutral of the undertaking, shares, if held for of capital gains depends amalgamation, demerger, and if held for: more than12 months on whether Block from and if transaction if transaction is more than 36 is taxed as LTCG, which asset is transferred is covered under covered under months, are taxed otherwise taxed as ceases or continues to exist Section 47 of ITA Section 47 of ITA as LTCG. STCG post transfer. Nature of capital gain on transfer of less than36 months, Capital gains realized depreciable assets deemed are taxed as STCG on transfer of unlisted to be STCG securities, if held for For computing more than 24 months For non-depreciable assets, capital gains, COA taxed as LTCG; capital gains tax computed would be ‘net-worth’ otherwise taxed as as difference between of the undertaking STCG sale consideration and on the date of COA. Nature of capital transfer gain depends on period of holding of each asset © Nishith Desai Associates 2022 Provided upon request only 17