Constitution of India - Where more than one interpretation can be given to Court's order, then benefit has to be given to party against whom contempt is alleged: HC (See 'Legal Desk') SEBI Act - Merely attending board meetings cannot lead to conclusion that appellant is involved in day to day affairs of Company: SAT (See 'Legal Desk') Competition Act - Grievances of Informants like payment of maintenance and electricity charges is in nature of contractual issue and disputes not having any Competition concern: CCI (See 'Legal Desk') India attends G20 Working Group Meeting at Brasilia (See 'Corp Brief') SEBI ICDR Regulations, 2018 - By not locking entire pre-preferential allotment shareholding of two allottees Noticee violated SEBI ICDR Regulations : SEBI (See 'Legal Desk') Arbitration Act - Serving officer of respondent shall act as arbitrator is invalid stipulation which makes it incumbent on Court to appoint independent sole arbitrator to adjudicate disputes : HC (See 'Legal Desk') SEBI Act - Appellant is misleading its investors that it is registered with SEBI as investment advisor and played fraud in violation of IA Regulations : SAT (See 'Legal Desk') CCI okays subscription to CCPS B of API Holdings by MEMG LLP and 360 ONE (See 'Corp Brief') PMLA - Court will not cancel interim bail granted to respondent as interim bail is about to expire within short period of time : HC (See 'Legal Desk') CCI approves 100% acquisition of Lanco Amarkantak Power by Adani (See 'Corp Brief') CGST Act - Case does not fall under ambit of Anti-Profiteering provisions of CGST Act : CCI (See 'Legal Desk') BRO connects strategic Nimmu-Padam-Darcha road in Ladakh (See 'Corp Brief') Arbitration Act - Any party having failed to make substantive claim in arbitral proceedings, cannot seek recovery by way of interim mandatory injunction u/s 17 : HC (See 'Legal Desk') SEBI Act - Trading pattern of appellants with other noticees indicate that there is meeting of mind between appellants and other noticees : SAT (See 'Legal Desk') SARFAESI Act - Respondent shall not take any coercive steps against Petitioner prior to 15th March, 2024 provided Petitioners file appeal before DRAT on or before March 01, 2024 : HC (See 'Legal Desk') Guj Govt sets up Telecom Facilitation Centre to support stakeholders (See 'Corp Brief') SEBI Act - SEBI shall not initiate any enforcement action against Applicant for SAST violations provided representation made in settlement proceedings are subsequently not found untrue : SEBI (See 'Legal Desk') India, Bhutan ink MoUs on clean energy, agriculture & tourism (See 'Corp Brief') PMLA - Surgery of knee cannot be categorized as 'life-threatening situation' and surgery which is to be undergone by applicant is not of such nature which necessitates applicant's release on interim bail only : HC (See 'Legal Desk') NCC, NPCIL ink MoU to raise awareness on peaceful use of nuclear power (See 'Corp Brief') SEBI - Any violation committed by Company which is fraudulent in nature has to be attributed to individual acting as Director at relevant point of time : SAT (See 'Legal Desk') Golden Jubilee Celebration of KVKs held in Puducherry (See 'Corp Brief') PMLA - Court declined to grant bail to Satyendar Jain in money laundering case and also cancelled interim bail granted as there are sufficient material collected by ED to show that he is prima facie guilty of alleged offences : SC (See 'Legal Desk') 42nd IPHE Steering Committee to be hosted by EU (See 'Corp Brief') IBC - Application filed u/s 7 of code can be admitted as debt and default has been established : NCLT (See 'Legal Desk')

Foreign Amalgamations? A word of caution for Indian Tax exemption

Published: Jun 16, 2021

By Shankar Iyer, Direct Tax Leader, DAA Consulting

WHILE mergers of foreign companies are commonplace, one may have to look into the aspect of their shareholdings in Indian companies more carefully and much in advance. In case of any innocuous oversight in the machination in these transactions, there could be potential tax implications in India which could have been completely avoided in hindsight, had one just pondered through the steps in foreign amalgamation process more carefully and checked beforehand for any potential Indian tax implications.

Under Indian tax law, in case shares in an Indian company are held by a foreign parent / company, then transfer of such shares in Indian company pursuant to scheme of amalgamation ("Scheme") of foreign parent with another foreign company would be exempt from any capital gains tax in India subject to fulfilment of certain conditions.

Let's say, there is a Scheme between two foreign sister companies (say, A Co and B Co) held by a common foreign parent (say, Z Co). A Co held shares in an Indian company (I Co) and hence the case becomes relevant for discussion here. Further to amalgamation of A Co into B Co, there would not have been any change in shareholding pattern of B Co and it would have continued, as before, to be the subsidiary of Z Co. The 'innocuous oversight' - no shares are issued by B Co to shareholder of A Co (ie to Z Co) upon such amalgamation. However, the same may qualify as amalgamation in the jurisdiction of A Co and B Co, respectively.

Under Indian Income tax Act, 1961 ("IT Act"), Section 47(via) provides an exemption from capital gains tax in India for any transfer, in a scheme of amalgamation, of a capital asset being a share held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if-

(a) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated

Apparently, pursuant to the aforesaid Scheme, both cumulative conditions are satisfied i.e. Z Co which was at least 25% shareholder in amalgamating company A Co, continued to remain shareholder in amalgamated company B Co and secondly, the amalgamation was tax neutral in that foreign jurisdiction. So apparently, no glitches and exemption from capital gains tax ought to be granted under Section 47(via) w.r.t transfer of shares in Indian company from A Co to B Co under Scheme - right?

Well, Not Exactly.

Let me explain, the phrase used in the beginning of Section 47(via) is 'any transfer, in a scheme of amalgamation'. What becomes relevant here is the term "Amalgamation" and the same has been defined by Section 2(1B) of IT Act as under:

"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-

(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;

(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;

(iii) shareholders holding not less than 3/4 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,

otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;

In other words, the amalgamation of A Co into B Co should also qualify as such under the definition of "amalgamation" prescribed under Section 2(1B) of IT Act in order to qualify for such exemption provided under Section 47(via) of IT Act.

While all other conditions are generally satisfied, the third condition (bold and underline) deserves critical attention. It states that shareholders holding at least 75% shares in amalgamating company become shareholders in amalgamated company by virtue of the amalgamation. While Section 47(via) would specifically override the 75% criterion and read the same down to 25%, the definition of "amalgamation" under Section 2(1B) of IT Act would presage and nevertheless require such 25% shareholder to 'become shareholder' in B Co by virtue of the amalgamation. That is to say, at the least, a single share ought to be issued by B Co to Z Co pursuant to scheme of amalgamation of A Co into B Co, in order for Z Co to qualify as 'becoming shareholder by virtue of the amalgamation' irrespective of the fact that Z Co was already the parent shareholder of B Co even prior to the amalgamation and continues so even post amalgamation without issue of shares by B Co to Z Co upon amalgamation. The key issue is balancing (a) applicability of rigidity of definition of "amalgamation" under Section 2(1B) (i.e. Z Co 'becoming' shareholder in amalgamated company B Co 'by virtue of amalgamation') with (b) the effective net result required under Section 47(via) (i.e. Z Co before and after 'continued to remain shareholder in amalgamated foreign company B Co' nevertheless). Here, one would be really impelled to side with the argument that so long as the condition under Section 47(via) of 'continued to remain shareholder in amalgamated foreign company' was satisfied, there was really no problem in India with respect to the exemption from capital gains tax granted for transfer of shares in Indian company pursuant to such foreign amalgamation.

However, the definition of "amalgamation" is the primal condition mentioned at the start of the beneficial provision of Section 47(via) and subsequently the other conditions are mentioned. The rigour of Section 2(1B) defining the term "amalgamation" would be watered down only to the extent specifically mentioned by Section 47(via) i.e. 75% criterion read down to 25%. Thereafter, definition of "amalgamation" would nonetheless prevail and mandate that such "25% foreign shareholder" in amalgamating foreign company 'become shareholder in amalgamated foreign company by virtue of amalgamation'. In the absence of issue of any shares by amalgamated foreign company B Co to Z Co (being at least 25% shareholder of amalgamating foreign company A Co) pursuant to scheme of amalgamation, the exemption from capital gains tax in India w.r.t transfer of shareholding in Indian company from A Co to B Co under such scheme of amalgamation would technically not be available as the transaction does not qualify as "amalgamation" defined in Section 2(1B) of IT Act.

Lesson - One would need to check Indian tax laws more carefully before such group restructuring exercises.

[The views expressed are strictly personal.]

 

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