Direct Taxes Code Bill, 2010 Impact on MA Himanshu Patel

1. Direct Taxes Code Bill, 2010 Impact on M&AHimanshu Patel June 3, 2011

2. Impact of DTC on M&A 2

3. Sequence of events – Direct Taxes Code 3 Impact of DTC on M&A In line with proposed implementation of GST from April 1, 2012 which however, as per news reports, may be delayed. DTC likely to meet the April 1 deadline - no revenue sharing issues.In line with proposed implementation of GST from April 1, 2012 which however, as per news reports, may be delayed. DTC likely to meet the April 1 deadline - no revenue sharing issues.

4. 4 M&A Alternatives Impact of DTC on M&A No definition of business reorganization under ITA. Scope restricted to reorganization between residents only.No definition of business reorganization under ITA. Scope restricted to reorganization between residents only.

5. 5 Amalgamation Impact of DTC on M&A

6. 6 Amalgamation Impact of DTC on M&A Exemption for investment assets. Is business assets covered? No specific provisions for cost of acquisition of such assets which are not depreciable. Under ITA, only specified banking company/ Hotels/ ships/ industrial undertaking owning companies eligible for losses of amalgamating company. For foreign company amalgamation, condition of 25% shareholders to continue to remain shareholders under ITA. Section 72AA of ITA introduced by Finance Act, 2005 before merger of Centurion Bank with Bank of Punjab in 2005. Section 72A amended by Finance Act, 2007 to include airline companies before merger of Indian Airlines and Air India in 2007 (Appointed date – April 1, 2007). Exemption for investment assets. Is business assets covered? No specific provisions for cost of acquisition of such assets which are not depreciable. Under ITA, only specified banking company/ Hotels/ ships/ industrial undertaking owning companies eligible for losses of amalgamating company. For foreign company amalgamation, condition of 25% shareholders to continue to remain shareholders under ITA. Section 72AA of ITA introduced by Finance Act, 2005 before merger of Centurion Bank with Bank of Punjab in 2005. Section 72A amended by Finance Act, 2007 to include airline companies before merger of Indian Airlines and Air India in 2007 (Appointed date – April 1, 2007).

7. 7 Demerger Impact of DTC on M&A Under ITA, even preference shares could be issued to shareholders of demerged company [Section 2(19AA)]. Exemption for investment assets. Is business assets covered? No specific provisions for cost of acquisition of such assets which are not depreciable. No specific provisions for cost of acquisition of assets under ITA - considered at ‘book’ value being the value at which transferred No business continuity test under ITA.Under ITA, even preference shares could be issued to shareholders of demerged company [Section 2(19AA)]. Exemption for investment assets. Is business assets covered? No specific provisions for cost of acquisition of such assets which are not depreciable. No specific provisions for cost of acquisition of assets under ITA - considered at ‘book’ value being the value at which transferred No business continuity test under ITA.

8. 8 Slump Sale Impact of DTC on M&A “Division of business” not covered under ITA and DTC 2009. Section 53(1) defines cost of acquisition of an “investment asset” to be purchase price of the asset. Investment asset as per Section 314 (141) includes any undertaking or division of a business. However, purchase price has not been defined under DTC 2010.“Division of business” not covered under ITA and DTC 2009. Section 53(1) defines cost of acquisition of an “investment asset” to be purchase price of the asset. Investment asset as per Section 314 (141) includes any undertaking or division of a business. However, purchase price has not been defined under DTC 2010.

9. 9 Indirect transfer of interest Impact of DTC on M&A Vodafone case issue under the ITA clarified under DTC. The taxability of indirect transfer under DTC would be independent of the outcome of the Vodafone case.Vodafone case issue under the ITA clarified under DTC. The taxability of indirect transfer under DTC would be independent of the outcome of the Vodafone case.

10. 10 General Anti–Avoidance Rules (GAAR) Impact of DTC on M&A Can GAAR be read into Income-tax Act, 1961? In December 2010, Gujarat High Court rejected a demerger scheme of passive infrastructure Assets (PIA) of Vodafone Essar Gujarat Limited (VEL) into Vodafone Essar Infrastructure Limited (VEIL) on account of absence of business justification and tax evasion. Main observation of the HC – The transferee company is a shell/ paper company, being an intermediate vehicle for transferring PIA from VEL to a third party for the sole purpose of tax evasion. Had the PIA been transferred at market value for exchange of consideration, then capital gains tax, stamp duty and Value Added Tax would have been payable which are sought to be avoided. Artificial reduction in MAT. Can GAAR be read into Income-tax Act, 1961? In December 2010, Gujarat High Court rejected a demerger scheme of passive infrastructure Assets (PIA) of Vodafone Essar Gujarat Limited (VEL) into Vodafone Essar Infrastructure Limited (VEIL) on account of absence of business justification and tax evasion. Main observation of the HC – The transferee company is a shell/ paper company, being an intermediate vehicle for transferring PIA from VEL to a third party for the sole purpose of tax evasion. Had the PIA been transferred at market value for exchange of consideration, then capital gains tax, stamp duty and Value Added Tax would have been payable which are sought to be avoided. Artificial reduction in MAT.

11. 11 Others Impact of DTC on M&A Under ITA, one level DDT credit available.Under ITA, one level DDT credit available.