Introduction of indirect transfer provisions by way of Finance Act, 2012 forever changed the mergers and acquisition (M&A) landscape in India. It was the 2012 landmark Supreme Court ruling in the case of Vodafone that paved way for introduction of indirect transfer provisions in India. Due to the sheer size of tax demands involved, many tax rulings in high profile cases such as Sanofi and Cairn provided impetus that made indirect transfer provisions an active ingredient of M&A deals involving entities that have significant India presence. Under the Indian indirect transfer provisions, shareholders of a foreign entity, which is being acquired/transferred, are subjected to tax in India if that entity derives substantial value from assets situated in India. The indirect transfer provisions apply whether transfer of the foreign company is happening for internal restructuring or as part of acquisition. While the indirect transfer provisions were introduced by the Finance Act, 2012, the government introduced several exemptions from its applicability in the Finance Act, 2015. One such exemption was: if shares of the foreign company (that derives substantial value from India) are transferred by the amalgamating company to the amalgamated company in an overseas amalgamation, indirect transfer provisions do not apply, subject to certain conditions. While this is a welcome exemption, it still leaves the shareholders of the amalgamating companies exposed to tax as the shareholders of the amalgamating company receive shares in the amalgamated company in exchange for their existing shares in the amalgamating company.
The unintended consequence appears that the action of shareholders giving up their shares/ interest in the amalgamating foreign company and receiving shares of the amalgamated foreign company could potentially be subjected to indirect transfer tax in India.
Reference can be drawn to the December 2016 circular issued by the Central Board of Direct Taxes (CBDT) which stated that the exemption provided in the Income-Tax Act,1961 is only to the amalgamating companies and cannot be extended to its shareholders. However, the circular was subsequently kept in abeyance. Clarity in the Budget of 2018 on this aspect would be a welcome step.
Value of assets
Another issue that needs attention is that under indirect transfer provisions, the taxpayer is required to assess whether the value of assets situated in India are substantial i.e., more than 50% of value is derived from assets situated in India as on the specified date. The specified date is either the date of the last audited balance sheet or the date of transfer if the value of assets has increased by 15% since the last balance sheet date. The balance sheet on the date of transfer is required to be certified by an accountant. This poses significant challenges and creates hurdles to the transaction completion. It would therefore be a welcome relief if the requirement for certification of the balance sheet as on date of transfer is done away with. Alternatively, the law could require the balance sheet to be prepared and certified two months prior to date of transfer.
(D.V. Manohar is a Partner and Chethan Bhat is a Manger with Deloitte Haskins andSells LLP)
