Introduction

Due to ever growing Globalisation and Cross Border Trade, many of the Indian Companies have acquired Foreign Companies.

Here are the top 10 acquisitions made by Indian companies worldwide: ¹

¹Source: http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/

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If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double the amount involved in US companies’ acquisition of Indian counterparts.

India also has received huge FDI for setting up subsidiaries of MNCs and also Joint Ventures. In order to provide the enabling platform, Indian Laws have been amended to permit Cross Border Mergers.

The intent of this Article to dwell upon the compliances relating to Merger or Amalgamation of Indian Company with Foreign Company (Cross Border Mergers), under the following enactments, statues, regulations:

1. Companies Act, 2013
2. Income Tax Act, 1961
3. Competition Act, 2002
4. SEBI regulations
5. FEMA regulations
6. Valuation and Accounting Standards
7. Indirect Tax matters

1. Companies Act, 2013

1.1. The Companies Act, 2013, does not define the term “Amalgamation”. In general parlance, Amalgamation/Merger can be defined as a combination of two or more entities into one, thereby coming into existence of a new and different entity which may or may not be one of those existing entities. Amalgamation was defined by the Supreme Court of India in the case of Saraswati Industrial Syndicate Ltd. v. CIT²

1.2. Whereas, the term Amalgamation is defined under the Income Tax Act, 1961, as the merger of one or more companies with another company, or the merger of two or more companies to form one company, and following conditions must be met by virtue of the merger, for such merger to qualify as an “Amalgamation”, under the Income Tax Act, 1961:

èAlltheproperty of the amalgamating company(ies) becomes the property of the amalgamated company;

èAlltheliabilities of the amalgamating company(ies) become the liabilities of the amalgamated company; and

èShareholders holding not less than 75% of the value of the shares of the amalgamating company become shareholders of the amalgamated company.

1.3. The effect of Amalgamation being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business, expansion and diversification of their business and to achieve their under lying objectives.

²[1990] 186 ITR 278/53 Taxman 92

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1.4. The possible objectives of mergers are manifold - economies of scale, acquisition of technologies, access to sectors / markets etc. Generally, in a merger, the merging entities would cease to be in existence and would merge into a single surviving entity.

Provisions under the Companies Act, 2013:

1.5. Chapter XV [Sections 230 to 240] of the Companies Act, 2013, and the rules framed therein, govern the various aspects relating to the Compromises, Arrangements and Amalgamations of Companies.

1.6. In view of globalisation, there are some revolutionary and much required concepts introduced in the

Companies Act, 2013 like:

èFastTrackMerger for Small Companies and merger of Holding companies with its wholly owned Subsidiary Companies, which has resulted in the simplification of the process of Amalgamation.

èMergerorAmalgamation of Company with Foreign Company(Cross Border Mergers)

èPurchaseofMinority Shareholding

1.7. Section 234 of the Companies Act, 2013, and rules framed there under deals with Merger of Amalgamation of Company with Foreign Company. The provisions of Section 234 came into force with effect from 13.04.2017, and to this effect, the Central Government, after consultation with the Reserve Bank of India, had made necessary amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, by including Rule 25-A, to the existing rules. The said amendment rules also came into effect from 13.04.2017.

1.8. Unlike under the Companies Act, 1956, where only merger of a foreign company with an Indian company was permitted, the provisions of Section 234 of the Companies Act, 2013, now allows Cross Border Mergers both ways viz.,

• A foreign company can merge with/into an Indian company; and

• An Indian company can merge with/into a foreign company, situated ina jurisdiction permitted under the rules.

1.9. “Foreign Company” for the purpose of Section 234 (2), means any company or body corporate incorporated outside India whether having a place of business in India or not.

1.10.In addition to the Compliance of the provisions of Section 234 and rules framed thereunder, in case of a Cross Border Mergers, the provisions of Section 230 to 232 of the Companies Act, 2013, and the rules framed thereunder are also to be complied.

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1.11.Aspects involved in Cross Border Mergers:

èPriorapproval of Reserve Bank of India:

Prior approval of Reserve Bank of India is mandatory for both the Inbound and Outbound Cross border mergers.

On receipt of the approval from the Reserve Bank of India, application can be made by the Indian company concerned with the National Company Law Tribunal, under whose jurisdiction, the State in which the Company is registered comes.

èPaymentofconsideration to the Shareholders:

Section 234 (2) provides that the scheme of merger may provide, among other things, for payment of consideration to the shareholders of the merging company in the form of cash or depository receipts or partly in cash and partly in depository receipts.

èRestrictionon the Jurisdiction:

In case of an Inbound Merger, no specific restriction is provided in the rules, which means, any Foreign Company, can merge with an Indian Company.

Whereas, in case of an Outbound Merger, a Indian Company can merge only with a Foreign Company which is incorporated in jurisdictions whose :

• Securities market regulator is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or

• Central Bank is a member of the Bank for International Settlements (BIS); and

• jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as:

• a jurisdiction having strategic 'Anti-Money Laundering or Combating the Financing of Terrorism' deficiencies to which counter measures apply; or

• jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

èValuationofShares (In case of Outbound Merger):

The rules framed under Companies Act, 2013 lay down the following requirements as to the valuation of the shares of the Foreign Company in case of Outbound Merger:

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• The Foreign Company/Transferee Company shall ensure that the valuation is conducted by valuers who are members of recognised professional body in their country, and

• The valuation is in accordance with internationally accepted principles on accounting and valuation.

The valuation report also needs to be annexed to the notice for meetings for approval of the scheme. This is expected to enable the shareholders to understand the business rationale of the transaction and take an informed decision.

It is to be noted that rules does not prescribe any valuation guidelines for the case of Inbound Merger

1.12.DIVISIONS AND DEMERGERS OF THE COMPANIES

In the Act of 1956 there was no mention of Divisions or Demergers. Section 232 of the Act of 2013 takes note of 'Division' (Section 232, Explanation (iii)). The Act, however, is silent on cross-border splits and demergers.

Amalgamation is to be distinguished from takeovers. It contemplates dissolution of the transferor-company without winding up. In a takeover, on the other hand, shares are acquired in order to get controlling interest. The Securities and Exchange Board of India has set rules to regulate such takeovers. Under the Act of 1956, it was possible for a company to secure a partial merger of one of its divisions with another company with incidental benefits like quota rights and licenses. This was known as 'spin off ' and would not amount to amalgamation under the income-tax law. Tax law operates differently, depending on the situation, namely, whether it is a case of amalgamation, takeover or spin off ?

1.13.The process flow of a Merger/Amalgamation application under the Companies Act, 2013, is as below:

Step-1: To consider the proposal of Merger by the Board of Directors

Step-2: Getting the Valuation of the proposed entities, and Fairness opinion from the Valuer.

Step-3: Preparation of the Scheme of Amalgamation, and obtaining the approval of the Audit Committee, if the Company has a Audit Committee.

Step-4: Board of Directors to consider and approve the scheme of Amalgamation and the Valuation.

Step-5: In case of Listed Companies, filing of the Scheme and other related documents with the respective Stock Exchange, SEBI, for their approvals, and receipt of approvals.

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Step-6: Filing of the Application with the National Company Law Tribunal, and seeking directions from NCLT, for sending notice of meeting along with the Scheme and valuation report, and fairness opinion on the valuation, to be sent to shareholders, creditors, all the Statutory Authorities like Central Government, Income Tax Department, Registrar of Companies, Official Liquidator, SEBI and the respective stock exchanges, seeking their objections, and their representations shall be made within 30 days from the date of receipt of the notice.

Step-7: Convening of meeting and approval of the Scheme.

Step-8: Filing of certificate by the company's auditor with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards.

Step-9: Receipt of Order of the Tribunal and filing of the same within a period of 30 days of receipt of the Order.

2. Income Tax Act, 1961 and rules made thereunder

2.1. Section 47 provides that transfer of capital asset in a scheme of amalgamation is not subject to tax in the hands of the transferor company and shareholders thereof.

2.2. Section 47(vi) provides that any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company (transferor) to the amalgamated company, if it is an Indian Company.

2.3. Section 47(vii) provides that any transfer by a shareholder in a scheme of amalgamation of a capital asset being a share or shares held by him in the amalgamating company provided: -

• The transfer is made in consideration of the allotment to him of any share or share in the amalgamated company³ and

• Amalgamated company is an Indian Company.

2.4. The Income Tax Act, 1961 as of now provide exemption only in relation to transfer of capital assets/shares where the transferee company is an Indian Company (Inbound Merger/Amalgamation). Therefore, with the introduction of cross-border mergers under the 2013 Act, corresponding changes would have to be made in the IT Act.

2.5. No exemption is provided in relation to transfer of capital assets/shares where transferee company is not an Indian Company (Outbound Merger/Amalgamation).

2.6. Even in case of Inbound merger or amalgamation if the consideration for transfer of shares in the foreign company paid by way of cash or depository receipts the exemption provided U/S 47 (vii) is not available to shareholders of foreign company. To achieve tax-neutrality for the amalgamating company transferring the assets, the amalgamated company should be an Indian company and the amalgamation should be as per Section 2(IB). In an amalgamation as per Section 2(IB) of the IT Act,

³Except to the extent shares already held by the amalgamated company.

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all the properties and liabilities of the merging companies immediately before the amalgamation should become the properties and liabilities of the amalgamated company, and 75% of the shareholders of the amalgamating companies have to remain the shareholders of the amalgamated company as well. Additionally, to achieve tax-neutrality for shareholders of the amalgamating company, the entire consideration should comprise of shares in the amalgamated company.

2.7. In case of outbound merger, the surviving company would be foreign company and it acquires the business interest and assets in India of transferor Indian Company.

2.8. No exemption is provided in section 47 for outbound merger/amalgamation and hence is subject to tax both in the hands of Indian Company and as well as their shareholders.

2.9. Global Mergers- A global merger takes place when a foreign company holding controlling stake (of more than 51%) in an Indian company merges with another foreign company, resulting in the transfer of shares of the Indian company to such other foreign company. Such a scheme is exempt from tax in India if 25% shareholders of the amalgamating company continue to be shareholders of the amalgamated company, and the transfer does not attract capital gains tax in the country in which the amalgamating company is incorporated.

2.10.Taxability of indirect share transfers -Where a foreign company transfers shares of a foreign company to another company and the value of the shares is derived substantially from assets situated in India, then capital gains derived on the transfer are subject to income tax in India. Further, payment for such shares is subject to Indian withholding tax (WHT). Shares of a foreign company are deemed to derive their value substantially from assets in India if the value of such Indian assets is at least INR100 million and represents at least 50 percent of the value of all the assets owned by such foreign company. Certain exemptions have also been included, e.g. for small shareholders (i.e. shareholding of 5 percent or less in foreign entity holding assets in India) and, in limited cases of group reorganizations, on satisfaction of prescribed conditions. New reporting obligations require Indian entities to submit information relating to an offshore transfer of shares in a prescribed format that is not yet released. Thus, the reporting methodology may need evaluation.

2.11.Indian Capital gain tax rates -When the shares are held for not more than 24 months (12 months for listed securities, units of equity-oriented funds and zero coupon bonds) , the gains are characterized as short-term capital gains and subject to tax at the following rates.

If the transaction is not subject to STT:

— 34.61 percent for a domestic company

— 43.26 percent for a foreign company

— 32.445 percent (flat rate) for an FII.

If the transaction is subject to STT, short-term capital gains arising on transfers of equity shares are taxed at the following rates

— 17.304 percent for a domestic company

— 16.23 percent for a foreign company or FII

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Where the shares have been held for more than 24 months (12 months for listed securities, units of equity-oriented funds and zero coupon bonds), the gains are characterized as long-term capital gains and subject to tax as follows:

If the transaction is not subject to STT:

— The gains are subject to tax at a 23.072 percent rate for a domestic company and 21.63 percent for a foreign company. Resident investors are entitled to an inflation adjustment when calculating long-term capital gains based on the inflation indices prescribed by the government of India. Non-resident investors are entitled to benefit from currency fluctuation adjustments when calculating long-term capital gains on a sale of shares of an Indian company purchased in foreign currency.

— Income tax on long-term capital gains arising from the transfer of listed securities (from the stock market), which otherwise are taxable at 23.072 percent or 22.042 percent, is restricted to a concessionary rate of 11.54 percent rate for a domestic company. The concessionary rate must be applied to capital gains without applying the inflation adjustment.

— A concessionary rate of 10.82 percent applies on the transfer of capital assets being unlisted securities in the hands of non-residents (including foreign companies). The concessionary rate must be applied to capital gains without the benefit of exchange fluctuation and indexation.

If the transaction is subject to STT, long-term capital gains arising on transfers of equity shares are exempt from tax.

2.12.WHT applies at the applicable rates to any payment made to a non-resident seller for the purchase of any capital asset on account of any capital gains that accrue to the seller. Applicable tax treaty provisions also need to be evaluated in order to determine the withholding tax rates.

2.13.Carry forward of losses - Amalgamated companies have the privilege of setting off depreciation and carry forward of unabsorbed/accumulated losses against its accrued profits. The same is however not available to public companies where shareholders carrying 51% voting rights on the last date of the year in which set off is sought are different from shareholders carrying 51% voting rights on the last date of the year in which the given loss was incurred by the company. Carry forward of losses is applicable only for the sectors that are specifically provided under the IT Act or notified by authorities.

However, certain tax benefits/deductions that are available to an undertaking may be available to the acquirer when the undertaking as a whole is transferred as a going concern as a result of a slump-sale.

Tax losses consist of normal business losses and unabsorbed depreciation (where there is insufficient income to absorb the current-year depreciation). Both types of losses are eligible for carry forward and available for the purchaser. Business tax losses can be carried forward for a period of 8 years and offset against future profits. Unabsorbed depreciation can be carried forward indefinitely. However, one essential condition for setting off business losses is the shareholding

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continuity test. Under this test, the beneficial ownership of shares carrying at least 51 percent of the voting power must be the same at the end of both the year during which the loss was incurred and the year during which the loss is proposed to be offset. This test only applies to business losses (not unabsorbed depreciation) and to unlisted companies (in which the public are not substantially interested).

2.14.Stamp Duty -The transfer of assets attracts stamp duty. Stamp duty implications differ from state to state. Rates generally range from 5 to 10 percent for immovable property and from 3 to 5 percent for movable property, usually based on the amount of consideration received for the transfer or the market value of the property transferred (whichever is higher). Depending on the nature of the assets transferred, appropriate structuring of the transfer mechanism may reduce the overall stamp duty cost.

2.15.Goodwill - Goodwill arises when the consideration paid is higher than the total fair value/cost of the assets acquired. This arises only in situations of a slump-sale. Under the tax law only depreciation/amortization of intangible assets, such as know-how, patents, copyrights, trademarks, licenses and franchises or any similar business or commercial rights, is permissible. Therefore, when the excess of consideration over the value of the assets arises because of these intangible assets, a depreciation allowance may be available. Recent judicial precedents have allowed depreciation on goodwill arising out of amalgamation by treating it as a depreciable asset

2.16.Dividends in India are subject to a dividend distribution tax (DDT) of 17.304 percent (as of October 2014, the effective DDT rate is 20.358 percent after applying grossing-up provisions). A parent company may be able to obtain credit for the DDT paid by its subsidiaries against its DDT liability on dividends declared.

2.17.Transfer pricing - After an acquisition, all intercompany transactions, including interest on loans, are subject to transfer pricing regulations.

2.18.If the foreign company after the outbound merger intends to continue the operations of erstwhile Indian Company (transferor), it would result in Permanent Establishment (PE) and profits attributable to PE is chargeable to tax in India.

2.19. As per section 9 of the Income Tax Act, 1961 income of a non-resident from business connection in India is deemed to accrue or arise in India and is chargeable to tax in India. Article 7 of DTAA provides for taxation of income of Permanent Establishment.

2.20.As per provisions of the section 44DAthe income by way of royalty or fees for technical services of a foreign company carries on business in India through PE in India and the right, property or contract in respect of which the royalties or fees for technical services are paid effectively connected with PE shall be computed under the head “Profits and Gains of Business and Profession”.

2.21.No deduction shall be allowed in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment.

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2.22.Once the provisions of section 44DA are applied no deduction shall be allowed in respect of amounts, otherwise than towards reimbursement of actual expenses, by PE to its head office or to any of its other offices.

2.23.Foreign Company shall keep and maintain books of account and other documents in accordance with the provisions in section 44AA and get accounts audited and report of such audit be furnished in form no.3CE along with return of income.

2.24.Place of Effective Management (“POEM”) – The cross border mergers should also take into consideration the POEM rules in India. The test of residency for foreign companies previously required 100 percent of their control and management to be in India. These provisions were amended to align the India tax provisions with global standards. The amendment provides that a foreign company is treated as Indian resident if its place of effective management (POEM) is in India in the given year. The POEM has been defined in line with the definition provided in the commentary to the Organisation for Economic Co-operation and Development’s (OECD) proposals on base erosion and profit shifting (BEPS). The POEM is the place where key management and commercial decisions that are necessary for conduct of business substantially are made.

2.25.GAAR- The General Anti Avoidance Rules ('GAAR') provisions will grant discretion to tax authorities to scrutinize arrangements and invalidate them as an 'impermissible avoidance agreement' ('IAA') where they lack commercial substance, resulting in denial of the tax benefit under the provisions of the Act or tax treaty. An IAA is an arrangement the main purpose of which is to obtain a tax benefit and which either, creates rights and obligations that are not ordinarily created between persons dealing at arm's length, or results in the misuse or abuse of tax provisions, or lacks commercial substance, or is not for a bona fide purpose.

GAAR's provisions would extend to all taxpayers irrespective of their residential or legal status (i.e. resident or non-resident, corporate entity or non-corporate entity). These provisions will apply only if tax benefit arising to all parties to the arrangement exceeds Rs 30 million in the relevant financial year.

2.26.Tax clearances -In the case of a pending proceeding against the transferor, the tax authorities have the power to claim any tax on account of completion of the proceeding from the transferee where the transfer is made for inadequate consideration. Income tax law provides mechanism for obtaining a tax clearance certificate for transfer of assets/ business subject to certain conditions.

In order to mitigate some of these tax risks, parties can obtain advance rulings or nil withholding tax certificates from tax authorities, negotiate and incorporate tax specific indemnities in their deal documents, and take the necessary tax insurance to cover potential tax risks.

3. Competition Act, 2002

3.1. As per section 5 of Competition Act, the Indian Company need to seek approval from Competition Commission for such M&A activity. The requirement of Section 5 are provided herein below for ready reference:

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@ Acquisitions where enterprise whose control, shares, voting rights or assets are being acquired have assets or turnover as per aforesaid threshold limits, are exempt from Section 5 of Competition Act, 2002 for a period of 5 years from 27-03-2017

4. SEBI Regulations

4.1. In case of Inbound Merger, the Indian Company, if listed on any Stock Exchange, inter alia, it has to comply with Regulation 11 read with Regulation 37& 94 and Schedule XI of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, wherein the scheme ,before filed with NCLT or any court, shall be filed with each stock exchange, where the shares of the company are listed as well as SEBI and shall obtain NOC from each stock exchange. However such NOC is not required in case of merger of WOS into the holding company. However it is not clear whether this exemption is eligible for cross border M&A as well.

4.2. In case of outbound merger, in addition to the above, the Foreign Company may have to issue the IDRs for Indian shareholders and inter alia, has to comply with relevant scheme.

5. FEMA

5.1. Reserve Bank of India (“RBI”) on 26th April, 2017 has published the Draft Guidelines related to Cross Border Mergers and invited the public comments. Based on the draft guidelines the following points are discussed hereinafter

5.2. The regulations may be called as Foreign Exchange Management (Cross border Merger) Regulations,

2017

5.3. ‘Foreign company’ means any company or body corporate incorporated outside India whether having a place of business in India or not. As per the Explanation under clause 2(v) the foreign company should be incorporated in a jurisdiction specified in Annexure B to Companies (Compromises, Arrangements and Amalgamation) Rules, 2016

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5.4. ‘Resultant company’ means an Indian company or a foreign company which is established or formed or is proposed to be established or formed on sanction of the Scheme of cross border merger

5.5. As per clause 3 of regulations, save as otherwise provided in these regulations or with the general or special permission of RBI, no person resident in India shall acquire or transfer any security or debt or asset outside India and no person resident outside India shall acquire or transfer any security or debt or asset in India on account of cross border mergers.

5.6. As per clause 4 of regulations, in case of Inbound Merger, the resultant company being the Indian Company, the shares proposed to be issued shall comply with FDI Regulations (Notification No. 20/2000, dated 3rd May, 2000). Also in case of outstanding foreign currency loan of transferor company are transferred to Indian Company, such oustanding loans are considered to be External Commercial Borrowings (ECBs) and shall comply with extant ECB regualtions. Also the Indian Company can hold any assets abroad, so long they are in compliance with applicable regulations under FEMA. If any assets are held not in compliance of the extant FEMA Regulations, such assets need to be disposed off within 180 days of sanction of the scheme and related sale proceeds shall be repatriated to India immediately through Banking Channels

5.7. As per clause 5 of regulations, in case of Outbound merger, the Indian Residents are permitted to acquire and hold the foreign security, in compliance with applicable FEMA Regulations. The Resultant Foreign Company shall liable to repay the outstanding borrowings as per the scheme sanctioned by NCLT under Companies Act. The Foreign Company can hold assets acquired due to the merger. Such assets can be disposed off in compliance with extant FEMA Regulations. In case of any assets are held not in compliance with extant FEMA Regulations, such assets need to be disposed off within 180 days of sanction of the scheme and related sale proceeds shall be repatriated ouside India immediately through Banking Channels

5.8. A declaration as to conformity of the Valuation as per Internationally Accepted Valuation Principles, is required to be submitted to the Reserve Bank of India.

5.9. All the transactions related to Cross Border Merger are required to be reported to RBI as per applicable FEMA Regualtions

5.10.Once the transaction has complied with aforesaid regulations, it is deemed that RBI has accorded its prior approval as required under Rule 25A of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016

5.11.In case the transaction has not complied with aforesaid regulations, separate application has to be made to RBI for seeking its prior approval as required under Companies Rules and only upon receipt of such prior approval, the scheme can be considered by NCLT

Since the above guidelines are given based on the draft regulations, the reader is required to verify the final regulations as may be notified by RBI, from time to time. The final regulations may vary from the draft regulations.

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5.12.In case of Outbound Merger, the Indian business is considered to be seperate branch in India and the Foreign Company need to comply with the FEM (Establishment In India of a Branch Office or a Liaison Office or a Project Office or any Other Place Of Business) Regulations, 2016, (notification no. 22(R), dated 31-03-2016) and Chapter XXII of Companies Act, 2013

6. Share Valuation and Accounting Standards

• Share Valuation

Valuation is a technique to assess the worth of the enterprise. Enterprises operate in a dynamic business environment and are subjected to possibilities such as the merger or takeover which leads to need for quantifying the value of the enterprise and the decision on the right price.

The subject of valuation has always been controversial in the accounting profession. No two accountants have ever agreed in the past or will ever agree in the future on the valuation of shares of a company, as inevitably they involve in the use of personal judgment on which professional men will necessarily differ.

The valuation exercise would now have economic overtones rather than legalistic determinants. The value of shares of a particular company will depend on various factors like history of earning, the value of its assets, nature of the business and further prospects of the company.

6.2. Compliance with Accounting Standards

Accounting norms for companies are governed by the Accounting Standards issued under the Companies Act. Normally, for amalgamations, demergers and restructurings, the Accounting Standards specify the accounting treatment to be adopted for the transaction.

The accounting treatments are broadly aligned with the provisions of the Accounting Standard covering accounting for amalgamations and acquisitions. The standard prescribes two methods of accounting: merger accounting and acquisition accounting. In merger accounting, all the assets and liabilities of the transferor are consolidated at their existing book values. Under acquisition accounting, the consideration is allocated among the assets and liabilities acquired (on a fair value basis). Therefore, acquisition accounting may give rise to goodwill, which is normally amortized over 5 years.

Under the Companies Act, 2013, the Tribunal will not sanction a scheme of capital reduction, merger, acquisition or other arrangement unless the accounting treatment prescribed in the scheme is in compliance with notified AS and a certificate to that affect by the company’s auditor has been filed with the Tribunal.

As the scheme tends to have overriding effect with respect to accounting treatment (specifically mentioned in AS-14 with respect to treatment of reserves), the onus has been shifted on the auditor to confirm that accounting standards have been followed.

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7. Service Tax:

The implications under service tax law for the transactions between such establishments depends upon whether establishment in India is receiving or providing services to the establishments outside India and hence analysed separately.

Treatment of Establishments of same legal entity in two different territories under Finance Act, 1994:

7.1. Even though as per Companies Act, 2013, both the establishments form part of a single legal entity, under the Finance Act, 1994, they are deemed to be different persons.

7.2. Explanation 3 to the Section 65B (44) of Finance Act, 1994 states that for the purposes of Finance Act, 1994 ‘an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons’.

7.3. Vide Explanation 4 to Section 65B (44) of Finance Act, 1994 it is stated that ‘A person carrying on business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory’.

7.4. Hence, on a combined reading of the above, it is very clear that the branch or agency or representational office in any territory shall be treated as having an establishment in such territory and establishment in taxable territory and his other establishment in a non-taxable territory shall be treated as distinct establishments. Let us understand the implications by treating them as distinct establishments in two scenarios, namely, where services are procured from establishment in non-taxable territory (NTT) by an establishment in taxable territory (TT) and vice-versa.

7.5. The phrases taxable territory and non-taxable territory has been defined vide Section 65B (52) and

• of Finance Act, 1994 respectively. As per Section 65B(52), ‘taxable territory’ means the territory to which the provisions of this Chapter apply’. As per Section 64(1) of Finance Act, 1994, the chapter extends to whole of India except State of Jammu & Kashmir. Hence, the taxable territory would mean whole India except Jammu & Kashmir.

7.6. As per Section 65B(35), ‘non-taxable territory’ would mean the territory which is outside the taxable territory. Hence, any territory outside India except Jammu & Kashmir shall be treated as non-taxable territory for the purposes of Finance Act.

Services procured from Establishment in NTT by an Establishment in TT:

7.7. The entire intention to treat the establishment in NTT and establishment in TT of same legal entity as distinct establishments is to levy service tax on services procured from establishment in NTT by establishment in TT.

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7.8. That is to say if a service which is procured from establishment in NTT by an establishment in TT is determined as consumed in TT in terms of Section 66C read with Place of Provision of Service Rules, 2012, then the establishment in TT has to pay service tax on such services in light of Section 68(2) of Finance Act, 1994 read with Rule 2(1)(d) (G) read with Entry 10 of Notification No 30/2012-ST dated 20.06.2012.

7.9. Hence, post amalgamation, if the establishment in TT procures any services from establishment in NTT, then the same shall be subjected to service tax in the hands of the establishment in TT.

Services provided to Establishment in NTT by an Establishment in TT:

7.10.On reading the above, one might conclude that since establishment in NTT and establishment in TT are difference, the services provided by establishment in TT to an establishment in NTT would qualify as export of services.

7.11.But the answer would be in negative. In order to qualify as an export of service, the service provider that is an establishment in TT shall satisfy all the conditions as mentioned in Rule 6A of Service Tax Rules, 1994 which are reproduced hereunder:

Export of services.- (1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

• the provider of service is located in the taxable territory,

• the recipient of service is located outside India,
• the service is not a service specified in the section 66D of the Act,
• the place of provision of the service is outside India,

• the payment for such service has been received by the provider of service in convertible foreign exchange, and

• the provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act

7.12.From the above, it is clearly understood that condition (f) as mentioned in Rule 6A of Service Tax Rules, 1994 fails in the given circumstance, since the establishment in TT and establishment in NTT are merely establishments of a same legal entity.

7.13.Hence, services provided to establishment in NTT by an establishment in TT cannot be qualified as export of services. However, if the services provided by establishment in TT to an establishment in NTT are deemed to be consumed in NTT in light of Section 66C read with Place of Provision of Service Rules, 2012, then there cannot be any tax on such transaction since the charging section vide Section 66B covers only services consumed in TT.

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8. Goods & Service Tax:

8.1. The transactions between the establishments in NTT and establishments in TT shall have the same impact even under Goods & Services Tax laws. The transactions gets more complicated when the supplies are received from establishment in TT from an establishment in NTT even there is no consideration involved as per Schedule I of the Central Goods & Services Tax Act, 2017. The valuation rules might propose a consideration and establishment in TT has to pay GST on such consideration in the capacity of recipient of supply.

8.2. Further, the services provided by an establishment in TT to an establishment in NTT might be subjected to integrated tax even the place of supply of such services is outside India, which is explained hereunder.

8.3. As per Section 7(5)(a) of Integrated Goods & Services Tax Act (IGST), 2017, if the place of supply is outside India and location of supplier is India, then such transaction is covered as Inter-State supply and according to Section 5 of IGST Act, such transaction is subjected to IGST. Hence, establishments in TT shall be subjected to IGST when the supplies are made to establishments in NTT.

9. Conclusion:

From the above, it can be seen that the provisions of Section 234 of the Companies Act, 2013, opens a two way door, permitting both Inbound and Outbound Mergers, which will help both the Indian and Foreign Companies to expand their scope of operations, resulting in far better growth, consolidation to achieve their under lying objectives. However the M&A need to be evaluated from the other aspects, some of which are listed above. In addition to the above the Indian Stamp Laws need to be amended suitably to accommodate the proposed Cross Border Mergers.

Finance Act, 2017 has introduced few changes to TDS (‘Tax Deducted at Source’)/TCS (‘Tax Collected at Source’) provisions ranging from introduction of new sections, rate changes and extension of concessional rate TDS. This article summaries the changes which are applicable w.e.f 01-04-2017/01-06-2017.

Section 194IB: - The Section provides that an Individual or HUF, other than one covered by Section 194-I¹ , responsible for paying to resident any income by way of rent exceeding Rs. 50,000/- per month or part of the month thereof after 01-06-2017 would be required to deduct tax @5%.

The tax is to be deducted at the time of credit of rent for the last month of previous year or last month of tenancy, if the property is vacated before the end of the previous year, to the account of the payee or at the time of payment, by cash, cheque or draft, whichever is earlier.

In short, TDS should be deducted earliest of credit or payment of rent to the payee. Payer is not required to obtain TAN for complying this section.

‘Rent’ for this section means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other arrangement or agreement for the use of any land or building or both.

FAQ: -

1)  whether Rent for agricultural land is also covered?

Ans: - Going by the definition of the term ‘Rent’ it has not provided any exception to the agricultural land. However, rent from agricultural land is exempted from tax U/S 10(1). If the payment is not income, TDS provisions are not applicable.

• If the rent for few months is less than Rs. 50,000/- and for few months is more than Rs. 50,000/-, is TDS is required to be deducted for the aggregate rent?

Ans: - TDS U/S 194IB is required to be deducted only if the rent per month or part of the month exceeding Rs. 50,000/-.so, TDS is required to be deducted from the month rent is more than Rs. 50,000/-

3) Whether the section is applicable if the Payer is Non-resident? Ans: - Yes. Section is applicable even if the individual paying rent is Non-resident.

• Whether the section is applicable if the Payee is Non-resident? Ans: - No. Section is applicable only if the Payee is Resident.

¹Who is subject to Audit U/S 44AB in the preceding financial year.

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5) If the owner doesn’t provide his PAN, whether provisions of section 206AA are applicable?

Ans: - Yes. However, the deduction shall not exceed the amount of rent payable for the last month or last month of tenancy. Ex: - If monthly rent is Rs. 55,000/- and the payee has not provided his PAN the TDS amount would be @20% (Sec 206AA) is Rs. 132000/- (Rs. 55,000*12= Rs. 6,60,000/- TDS @20% is Rs. 1,32,000). However, the TDS should not exceed Rs. 55,000/-.

• Is Certificate for lower or nil rate of deduction be obtained U/S 197? Ans: - No.

Section 194J: - The rate of TDS would be @2% in case of the payee engaged only in the business of operation of call centers. (w.e.f 01/06/2017)

Section 194-IC: - Any person responsible for paying to resident payee, being individual or HUF with whom any specified agreement is entered, any sum by way of monetary consideration under specified agreement (Joint Development Agreement) referred to in section 45(5A) shall deduct tax @10%. (w.e.f 01/04/2017)

The tax is to be deducted at the time of credit of such sum to the credit of account of payee or at the time of payment, whichever is earlier.

FAQ: -

• Whether TDS is required to be deducted if the payment is less than 50,00,000/-? Ans: - TDS is required to be deducted irrespective any amount.

• In which year TDS credit can be adjusted?

Ans: - TDS credit can be utilized in the year in which the capital gain is chargeable to tax U/S 45(5A)

3)  Is advance payment before execution of the agreement is subject to TDS?

Ans: - The agreement referred to in section 45(5A) should be registered to treat it as specified agreement. So, no TDS is required at the time of payment of advance before registration of agreement. However, TDS is required to be deducted when the agreement is registered or advance is adjusted. (Grossing may apply)

• Is Certificate for lower or nil rate of deduction be obtained U/S 197? Ans: - No.

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The Foreign Contribution (Regulation) Act, 2010 (for brevity ‘FC(R)A’), which has replaced the erstwhile Foreign Contribution (Regulation) Act, 1976 w.e.f 1^st May, 2011 ,has been introduced with an objective to regulate the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit the acceptance and utilization of foreign contribution or foreign hospitality for activities detrimental to the national interest. FC(R)A is administered by Ministry of Home Affairs (for brevity ‘MHA’) under Government of India (for brevity ‘GoI’).

The author earlier had drafted detailed article on FCRA and request the reader to refer the page no. 12 to

15 of WIKI for February, 2016 and it is accessible at

http://www.sbsandco.com/2016/06/15/february-2016-volume-19/

In recent past many changes had been made in FC(R)A for close scrutiny of receipt and utilization and Foreign Contributions or Foreign Hospitality. Hence, in light of the tough regulations, it is very important for individuals, associations or companies who are in receipt of foreign contribution to be updated with the changes made to FC(R)A, more specifically areas pertaining to the registrations and filing of returns. Here is the glimpse of the few significant changes which need to be complied with by the individuals, associations or companies who are in the receipt of the Foreign Contribution.

Registration & Related Matters:

Every person having a definite cultural, economic, educational, religious or social programme shall not accept foreign contribution unless such person is registered with central government or granted prior permission for the receipt of the foreign contribution.

Section 11 to Section 16 of FC(R)A read with Rules made there under deals with registration and related matters under the Act.

Procedure for obtaining registration:

Person intending to obtain registration shall:

uMakeanonline application vide Form FC-3 with the requisite information and documents; uTheapplicant shall pay a fee of Rs 2,000/-

Certificate of Registration:

The certificate of Registration will be granted within 90 days from the date of the receipt of the application with a validity of 5 years from the date of its issue, which need to renewed upon the expiry of the validity period.

Procedure for Renewal of CoI:

Every person who need to renew the CoI have to make an online application vide Form-FC-3 before six months of the date of expiry with the application fee of Rs. 500/-.

The renewed certificate of registration will be granted within 90 days from the date of receipt of application, if not the reasons for the same would be communicated to the applicant.

Amendment: As per the Public Notice circulated by the MHA vide file no. II/21022/36(0207)/2015-FCRA-

• dated 12^th May, 2017 the registrations for which the Renewal is sought cannot be granted unless the pending Annual Returns from FY 2010-11 to FY 2014-15 are submitted by the defaulting organizations.

Amendment: An opportunity have been given to the defaulting organizations by the MHA vide public notice dated 12^th May, 2017 to submit the pending annual returns from FY 2010-11 to FY 2014-15 within period of 30 days from 15^th May, 2017 to 15^th June, 2017 and no compounding fee will be imposed on the returns submitted during the said period.

Intimation of the Quarterly Receipts (w.e.f 03.03.2016):

Every person receiving the Foreign Contribution shall place the details of the Foreign Contribution on its official website or on the website specified by CG, within 15 days of the last day of the quarter in which it is received, clearly indicating the details of the donors, amount received and date of receipt. Associations not having own official website can file the prescribed information of the receipts on the MHA’s Website.

Filing of Returns:

Annual Returns under FCRA:

Every person registered under Section 12 of the Act, shall file an annual return in Form-FC-4 electronically at www.fcraonline.nic.in with the requisite documents specifying the amount, source of foreign contribution received and manner, purposes for which it has been utilized within 9 months i.e.,

31^st December from the closure of the financial year.

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Levy of Compounding Fee for Late Filing or Non-Filing of Annual Returns under FCRA (w.e.f 16.06.2016):

Annual returns under Lokpal and Lokayuktas Act, 2013:

Any person who is or has been a director, manager, secretary or other officer of every other society or association of persons or trust (whether registered under any law for the time being in force or not) in receipt of any donation from any Foreign Source under FC(R)A in excess of Rs. 10 lakh rupees in a year are required to furnish annual return of assets and liabilities till such time the entire amount of donation aforesaid received by such society or association of persons or trust stands fully utilized.

Due date of filing:

On or before 31^st July of every year.

Key Topics Covered:

• INTERNATIONAL TAXATION
• FEMA
• DIRECT TAX
• COMPANIES ACT, 2013
• SECTORAL ANALYSIS
• LABOUR LAWS

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.