Taxation Times

January 2025

1	Introduction
2	Article : Tax Implications of Mergers and Acquisitions (M&A)
3	Case Laws
4	Circulars and Notifications: December 2024
5	Tax Calender: January 2025
6	Tax News from Around the World

Introduction

by Anjali Darak

Manager - Direct Tax

Mergers and acquisitions (M&A) are complex business transactions that involve the combination or purchase of companies. These transactions can have significant tax implications, influencing the structure of the deal, the financial outcomes, and the parties involved. Understanding the tax implications of M&A is essential for businesses, investors, and advisors to navigate the process successfully.

Coming to this month’s, Taxation Times, here’s what we have:

An article on Tax Implications of Mergers and Acquisitions (M&A)
Case Laws from various courts & jurisdictions.
Tax Compliance Calendar – January 2025;
Circulars & Notifications – December 2024;
Tax News from around the world

We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at info@uja.in

Happy New Year!
Happy Reading!

Best Regards,
UJA Tax Team

Tax Implications of Mergers and Acquisitions (M&A)

Mergers and acquisitions (M&A) are critical strategic tools for companies seeking growth, market expansion, diversification, or operational efficiencies. These transactions involve the consolidation of two or more companies into one, either through the purchase of shares or assets. While M&A deals can lead to significant business benefits, they also come with complex tax considerations that can influence the structure and financial outcomes of the transaction.

Understanding the tax implications of M&A is essential for both buyers and sellers, as the transaction’s tax treatment can impact not only the overall cost and profitability of the deal but also the long-term financial health of the involved entities. These implications span across various aspects, such as capital gains, depreciation, asset transfers, and employee compensation, and may differ based on the deal structure (asset purchase vs. stock/share purchase), jurisdictional tax laws, and specific corporate objectives.

The careful consideration of tax issues in an M&A transaction is crucial to avoid unintended consequences, minimize tax liabilities, and maximize the transaction’s value. This introduction provides an overview of the key tax implications that both parties must consider when navigating mergers and acquisitions, ensuring informed decision-making and effective tax planning throughout the process.

Here’s an overview of the key tax considerations in M&A transactions:

1. Tax Structure of the Transaction

Asset Purchase vs. Stock/Share Purchase

Asset Purchase:
In an asset purchase, the buyer acquires specific assets and liabilities of the target company, such as property, equipment, inventory, or intellectual property. From a tax perspective, this structure offers advantages such as:
The buyer can “step up” the basis of the acquired assets, allowing for depreciation and amortization deductions over time.
Liabilities of the target company are not automatically transferred unless explicitly assumed, providing the buyer with some protection from potential unknown liabilities.
Stock/Share Purchase:
In a stock or share purchase, the buyer acquires the shares of the target company, and the target company continues to exist as a legal entity. Tax implications include:
The buyer does not get a stepped-up basis for the target company’s assets (unless specific elections are made, as in a “Section 338” election in the U.S.).
The buyer inherits the liabilities of the target company, which could involve dealing with any existing tax issues, legal liabilities, or operational risks.
Tax Consideration:
An asset purchase is often more tax-efficient for the buyer, while a stock purchase may be preferable for the seller, as it allows them to potentially avoid recognizing certain gains or losses.

2. Capital Gains Tax and Sale Proceeds

Seller’s Perspective:
The seller will be subject to capital gains tax on the proceeds from the sale of assets or shares. However, the tax treatment depends on whether the transaction is structured as an asset or share purchase:
In an asset purchase, the seller may face capital gains tax on the sale of assets and potentially additional taxes depending on the nature of the assets (e.g., real estate, goodwill).
In a stock purchase, the seller may recognize capital gains on the sale of shares, which can be taxed at a favorable rate if the shares are considered long-term holdings.
Tax Implication for the Seller:
The seller’s overall tax burden depends on how the sale is structured, including factors like the nature of the asset (e.g., goodwill or tangible property), the holding period of shares, and the country’s tax laws.

3. Tax Consequences for the Buyer

Depreciation and Amortization Deductions:

Asset Purchases:
One of the primary benefits of an asset purchase for the buyer is the ability to step up the basis of the acquired assets, meaning the buyer can depreciate or amortize the assets over their useful life, reducing future taxable income. For example, real estate, machinery, or intangible assets like patents can be depreciated or amortized, creating tax deductions.
Stock Purchases:
In a stock purchase, the buyer typically does not get a step-up in the basis of the acquired assets, meaning there is no opportunity for immediate depreciation or amortization deductions.
Tax Loss Utilization:
In some M&A transactions, the buyer may inherit unused tax attributes (e.g., net operating losses or tax credits) from the target company. However, there are restrictions on how these attributes can be utilized, particularly in stock purchases, due to rules designed to prevent tax avoidance through the purchase of loss companies (e.g., Section 382 in the U.S.).
Debt Financing:
Buyers often finance the transaction through debt (e.g., leveraged buyouts), and the interest on this debt may be tax-deductible, which can provide ongoing tax benefits. However, there are restrictions on the amount of interest that can be deducted under certain rules (e.g., the thin capitalization rules).

4. Taxation of Goodwill

Goodwill and Intangibles:
In an asset purchase, any amount paid above the fair market value of the identifiable assets is typically classified as goodwill. The tax treatment of goodwill varies:
Amortization of Goodwill:
In the U.S., for instance, goodwill can be amortized over 15 years, offering the buyer a deduction over time. In some other countries, goodwill may not be amortized, or the amortization period may differ.
Impairment of Goodwill:
If the value of goodwill declines, it may need to be written down, potentially resulting in a tax deduction if impairment is recognized.

5. Transaction Costs and Deductions

Transaction Expenses:
The costs associated with completing an M&A transaction (e.g., legal fees, advisory fees, financing costs) can often be deducted by the buyer, though specific rules vary by jurisdiction. In an asset deal, the buyer may be able to treat transaction costs as part of the purchase price, capitalizing them and amortizing over time.
Deductibility for Sellers:
Sellers are typically not allowed to deduct expenses related to the sale of their shares or assets, although some legal and advisory costs may be deductible depending on the structure of the deal.

6. Cross-Border M&A and Tax Implications

Withholding Taxes:
Cross-border M&A deals often involve withholding taxes on payments made between the buyer and the target company, such as dividends, interest, and royalties. The buyer and seller may need to navigate these taxes in order to avoid double taxation or ensure the optimal tax treatment of cross-border payments.
Transfer Pricing:
In international transactions, transfer pricing rules can apply to ensure that transactions between the buyer and the target company are priced at arm’s length (i.e., at market value) for tax purposes. This is important for multinational companies engaging in M&A activities.
Tax Treaties:
Countries with tax treaties may offer reduced withholding tax rates or other benefits, which can influence the choice of structure for an international M&A deal.
Exit Taxes:
Some countries impose taxes when a company moves its tax residence abroad (known as an exit tax), which may apply to the seller or target company in a cross-border transaction.

7. Tax Implications of Employee Stock Options and Compensation

Employee Equity and M&A:
In many M&A transactions, employees with stock options or other equity-based compensation may face tax consequences as a result of the transaction. For example:
Employees may be taxed on the vesting or exercise of their options if the transaction is structured as a stock purchase.
In an asset deal, the treatment of employee stock options depends on how the buyer chooses to handle the options (e.g., whether they are converted into new options for the buyer’s stock or cashed out).
Golden Parachutes:
Severance or retirement packages, often referred to as “golden parachutes,” may be triggered during an M&A transaction. The tax treatment of these payments is scrutinized, as excessive golden parachutes can result in a punitive excise tax under U.S. tax laws (i.e., the 280G rules).

8. Anti-Avoidance Rules

Avoidance of Tax Sheltering:
Governments often implement anti-avoidance rules to prevent companies from using M&A transactions to artificially reduce their tax liabilities. These rules are designed to prevent tax avoidance strategies, such as “tax-free” reorganizations or shifting profits to low-tax jurisdictions.
Reorganizations and Spin-Offs:
Certain M&A transactions, such as spin-offs or tax-free reorganizations, may be structured in ways that allow tax deferral or avoidance. However, these transactions are heavily scrutinized, and specific requirements must be met to qualify for favorable tax treatment.

9. Tax Compliance and Reporting

Filing Requirements:
M&A transactions often require extensive tax reporting, particularly in cross-border deals. This includes the filing of tax returns that reflect the new ownership structure, any changes in tax status, and the allocation of purchase price across assets.
Due Diligence:
Proper due diligence is crucial for identifying any potential tax issues that could arise from the target company’s prior tax filings, outstanding liabilities, or tax positions. Buyers often engage in thorough due diligence to uncover any tax risks associated with the target company’s history.

Conclusion

The tax implications of mergers and acquisitions are significant and complex, with the structure of the deal playing a central role in determining the tax outcomes for both buyers and sellers. The buyer’s ability to step up the basis of assets, the seller’s capital gains treatment, the treatment of goodwill, and the impact of transaction costs all require careful planning and consideration. Additionally, cross-border M&As introduce complications such as withholding taxes, transfer pricing, and international tax treaties. Both parties must work closely with tax advisors to navigate these complexities, optimize the transaction from a tax perspective, and ensure compliance with applicable tax laws.

Case Laws

DATE: DECEMBER 20, 2024

[2024] 169 taxmann.com 506 (Bombay) image HIGH COURT OF BOMBAY Chamber of Tax Consultants v. Director General of Income-tax

Section 139, read with sections 87A and 119, of the Income-tax Act, 1961

Return of income – Revised return (87A rebate) – Assessment year 2024-25 – Revenue published a change in utility for filing income tax returns online with effect from 5-7-2024, said modification unilaterally disabled assessees from claiming rebate under section 87A – Whether procedural changes, such as modifications in utility software or instructions issued by tax department, cannot override substantive right to rebate under section 87A – Held, yes – Whether any action or inaction on part of tax authorities that limits ability of taxpayers to avail of this statutory benefit is arbitrary and violative of rule of law – Held, yes – Whether thus, assessee was entitled to file revised return computing rebate under section 87A – Held, yes – Whether since last day to file a belated return in terms of section 139(4) was 31-12-2024, CBDT was to be directed to issue requisite notification under section 119 and extend due date for e-filing of income-tax returns in relation to assessees who were required to file a return of income by 31-12-2024, at least to 15-1-2025 – Held, yes [Paras 14, 15 and 17] [In favour of assessee]

Facts:

The revenue annually releases utilities for filing income tax returns online. The revenue published a change in utility with effect from 5-7-2024, said modification unilaterally disabled assessees from claiming rebate under section 87A. As a result, taxpayers, despite being statutorily eligible, were effectively deprived of their entitlements solely due to technical modifications introduced by the revenue.
The Chamber of Tax Consultants (petitioner) had filed the present petition seeking a direction to modify the system developed and put in place by the Tax Department for filing income-tax returns for the assessment year 2024-2025 to allow the assessees at large to take complete benefit of the rebate available under section 87A.

Held:

The issue which arises for consideration in the present writ petition is, whether the utility in the form of software can take away the statutory right to claim rebate as per the proviso to section 87A and is it necessary for an assessee to make a claim for seeking rebate under section 87A. [para 13]
The issue involved in the present petition requires detailed examination by giving an opportunity of hearing to both sides to make submissions in detail. However, at this stage, the matter is being considered for the purpose of grant of interim relief and as to whether the petitioner has made out a case for grant of interim relief. Therefore, for considering a prima facie case, it is necessary to note that under the Income-tax Act, 1961, there is a concept of self-assessment wherein an assessee is to compute his own income, determine his tax liability, and pay such tax, and then file a return declaring his income. However, due to the change in the utility with effect from 5-7-2024, the assessees at large were not able to compute rebate under section 87A under the new regime, in respect of income taxable at special rates. As a result, the assessees may have to pay additional tax to the extent of the rebate not allowed to be claimed by the assessee. The petitioner is entitled to file a revised return computing rebate under section 87A, which would enable such an assessee to compute a refund in the revised return. Undisputedly, the last day to file a belated return in terms of section 139(4) is 31-12-2024, which allows even those assessees who have not filed their return within normal due dates. [Para 14]
The rebate under section 87A is inherently linked to the total income and tax liability of the taxpayer. The responsibility lies with the tax authorities to ensure proper implementation of the rebate, as long as the taxpayer fulfills the statutory criteria. Procedural changes, such as those in utility software or instructions issued by the tax department, cannot override the substantive right to the rebate. Any action or inaction on the part of the tax authorities that limits the ability of taxpayers to avail of this statutory benefit is arbitrary and violative of the rule of law. Taxpayers should not bear the consequences of administrative inefficiencies or unilateral executive actions that undermine the legislative intent behind section 87A. [Para 15]

It is well-settled that statutory benefits must be extended in a manner that aligns with the objectives of the legislature. In this regard, procedural changes that deprive taxpayers of such benefits warrant judicial intervention to rectify the anomaly and ensure justice. Tax authorities must act as facilitators to help taxpayers comply with the law rather than creating impediments through technical or procedural hurdles. Ensuring fairness, equity, and transparency in tax administration is crucial for upholding public confidence in the system. [Para 16]
Based on the above discussion by way of interim relief, the respondent Central Board of Direct Taxes is hereby directed to forthwith issue requisite notification under section 119 extending the due date for e-filing of the income-tax returns in relation to the assessees who are required to file a return of income by 31-12-2024, at least to 15-1-2025. This extension is to ensure that all taxpayers eligible for the rebate under section 87A are afforded the opportunity to exercise their statutory rights without facing procedural impediments. [Para 17]

In Favour of: The Assessee

[2024] 169 taxmann.com 586 (Bombay) image HIGH COURT OF BOMBAY Principal Commissioner of Income-tax v. Culver Max Entertainment (P.) Ltd

Reference: Section 143, read with section 292B, of the Income-tax Act, 1961

Assessment – General (Amalgamation) – Assessee-company informed department that an amalgamation under sections 391 to 394 of Companies Act, 1956 had taken place between two companies SPENI with one SPNI and requested to pass final assessment order in name of surviving company as former was no more in existence – However, Assessing Officer proceeded to pass final assessment order in name of non-existent entity – Tribunal observed that apart from first communication, there was a subsequent communication and such factual position as pointed out by assessee was not assailed by revenue – Tribunal following order of Supreme Court in Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd (2019) 107 taxmann.com 375 (SC),held that assessment order passed in name of said non-existing entity, would be without jurisdiction – Whether thus, findings, as recorded by Tribunal following decision of Supreme Court, could not be faulted and were in accordance with law.

Facts:

The assessee-company informed the Assessing Officer about amalgamation of one SPENI with one SPNI and requested the final assessment order to be passed in the name of SPNI.
The Assessing Officer, however, passed the final assessment order in the name of SPENI.
On appeal, the Commissioner (Appeals) held that the impugned assessment order was passed against a non-existent entity.
On further appeal, the Tribunal also upheld the order of the Commissioner (Appeals).

HELD:

The Tribunal has observed that as there was a clear intimation by the assessee vide its letter informing the Assessing Officer, as also the Transfer Pricing Officer about the amalgamation between SPENI and SPNI under sections 391 to 394 of the Companies Act effective from 1-4-2015 and that the Assessing Officer could not have proceeded to pass the assessment order against a non-existent entity. The Tribunal has in fact observed that apart from the first communication, there was a subsequent communication. The Tribunal observed that such factual position as pointed out by the assessee was not assailed by the department. [Para 2]
In the aforesaid circumstances, the findings, as recorded by the Tribunal rejecting the Revenue’s appeal following the decision of the Supreme Court in Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd [2019] 107 taxmann.com 375 (SC), cannot be faulted and are in accordance with law [para 3]
In the light of the above discussion, the appeal would not give rise to any question of law. It is accordingly rejected. [Para 5]

In Favour of: The Assessee

Circulars and Notifications December 2024

Circulars / Orders

GUIDANCE NOTE 2/2024 ON PROVISIONS OF THE DIRECT TAX VIVAD SE VISHWAS SCHEME, 2024

The Direct Tax Vivad Se Vishwas Scheme, 2024 (hereinafter referred as ‘DTVSV Scheme, 2024’ or ‘Scheme’) has been enacted vide Chapter IV of Finance (No.2) Act, 2024 to provide for dispute resolution in respect of pending income tax litigation. The objective of the Scheme is to, inter-alia, reduce pending income tax litigation, generate timely revenue for the Government and benefit taxpayers by providing them peace of mind, certainty and savings on account of time and resources that would otherwise be spent on the long-drawn and vexatious litigation process.

The commencement date of the said Scheme has already been notified as 1-10-2024, Further, Rules and Forms for enabling the Scheme have also been notified on 20-09-2024. After enactment of the DTVSV Scheme, 2024, several queries were received from the stake-holders seeking guidance in respect of various provisions contained therein.

Accordingly, under Section 97 of the DTVSV Scheme, 2024 which empowers the Board to issue directions or instructions in the public interest, Guidance Note 1/2024 in the form of answers to the frequently asked questions (FAQs) was issued vide circular no. 12 of 2024, dated 15-10-2024. However, several other queries have been received from the stakeholders for clarification. Thus, Guidance Note 2/2024 in the form of answers to the frequently asked questions (FAQs) is hereby issued to provide further clarification. This will be helpful for the taxpayers to create better awareness and understanding of the provisions of the Scheme.

CIRCULAR NO. 19 OF 2024 [F. NO. 370142/22/2024-TPL], DATED 16-12-2024.

Press Release

CBDT LAUNCHES ELECTRONIC CAMPAIGN TO ADDRESS INCOME AND TRANSACTION MISMATCHES FOR FY 2023-24 AND FY 2021-22

The Central Board of Direct Taxes (CBDT) has launched an electronic campaign to assist taxpayers in resolving mismatches between the income and transactions reported in the Annual Information Statement (AIS) and those disclosed in Income Tax Returns (ITRs) for the financial years 2023-24 and 2021-22. This campaign also targets individuals who have taxable income or significant high-value transactions reported in their AIS but have not filed ITRs for the respective years. The initiative is part of the implementation of the e-Verification Scheme, 2021.

As part of this campaign, informational messages have been sent via SMS and e-mail to taxpayers and non-filers where mismatches have been identified between transactions reported in AIS and the ITRs filed. The purpose of these messages is to remind and guide individuals who may not have fully disclosed their income in their ITRs to take this opportunity to file revised or belated ITRs for FY 2023-24. The last date to file these revised or belated ITRs is December 31, 2024.

For cases pertaining to FY 2021-22, taxpayers can file updated ITRs by the limitation date of March 31, 2025.
Taxpayers can also provide their feedback, including disagreeing with the information reported in the AIS, through the AIS portal accessible via the e-filing website (https://www.incometax.gov.in/iec/foportal/).

This initiative reflects the Income Tax Department’s commitment to leveraging technology to simplify compliance and ensure transparency. By utilizing third-party data, the department aims to create a more efficient, taxpayer-friendly system that aligns with the vision of Viksit Bharat.

The CBDT encourages all eligible taxpayers to take advantage of this opportunity to fulfil their tax responsibilities and contribute to the nation’s economic development. This effort not only supports the government’s vision for a developed India but also promotes a culture of transparency, accountability, and voluntary compliance.

PRESS RELEASE, DATED 17-12-2024

Notifications

SECTION 197A OF THE INCOME-TAX ACT, 1961 - DEDUCTION OF TAX AT SOURCE - NO DEDUCTION IN CERTAIN CASES - PAYMENT RECEIVED BY CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES

In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961) (hereafter in this notification referred to as the said Act), the Central Government hereby notifies that no deduction of income-tax shall be made under Chapter XVII of the said Act on any payment received by the Credit Guarantee Fund Trust for Micro and Small Enterprises as referred to in clause (46B) of section 10 of the said Act.

This notification shall come into force on the date of its publication in the Official Gazette.

NOTIFICATION S.O. 5476(E) [NO. 128/2024/F.NO. 275/77/2024-IT(B)], DATED 18-12-2024

SECTION 35(1)(ii) OF THE INCOME-TAX ACT, 1961, READ WITH RULES 5C AND 5E OF THE INCOME-TAX RULES, 1962 - SCIENTIFIC RESEARCH EXPENDITURE - APPROVED SCIENTIFIC RESEARCH ASSOCIATION/INSTITUTION

In exercise of the powers conferred by clause (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961 (43 of 1961), read with Rules 5C and 5E of the Income-tax Rules, 1962, the Central Government hereby approves the International Institute of Information Technology, Hyderabad (PAN: AAAAI6797B) for ‘Scientific Research’ under the category of ‘University, college or other institution’ for the purposes of clause (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961 read with rules 5C and 5E of the Income-tax Rules, 1962.

This notification shall apply with effect from the date of publication in the Official Gazette (i.e. from the Previous Year 2024-25) and accordingly shall be applicable for Assessment Years 2025-26 to 2029-30.

NOTIFICATION S.O. 5187(E) [NO. 125/2024/F. NO. 203/07/2024/ITA-II], DATED 2-12-2024.

Tax Calender: January 2025

07th January 2025

Due date for deposit of Tax deducted/collected for the month of December 2024. However, all sum deducted/collected by an office of the government shall be paid to the credit of the Central Government on the same day where tax is paid without the production of an Income-tax Challan.

15th January 2025

Quarterly statement of TCS deposited for the quarter ending December 30, 2024
Due date for furnishing of Form 15G/15H declarations received during the quarter ending December 2024
Belated/Revised Income Tax Returns: Last date to file belated or revised returns for the Financial Year 2023-24 (Assessment Year 2024-25).

30th January 2025

Last date for furnishing Challan-cum-Statement in respect of TDS under Section 194-IA, 194-IB, 194S and 194M for the month of December 2024.
Quarterly TCS certificate in respect of tax collected for the quarter ending December 31, 2024.

31st January 2025

Quarterly statement of TDS deposited for the quarter ending December 31, 2024, in form of Form 24Q/26Q/27Q/26QF.
Intimation under section 286(1) in Form No. 3CEAC, by a resident constituent entity of an international group whose parent is non-resident.

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