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Unit 13: Tax Treatment for Business Restructuring

12. ………………… defines demerger in relation to companies, as the transfer, pursuant to a Notes
scheme of arrangement under section 391 to 394 of the Companies Act, 1956.
13. As per ………………. of the Income Tax Act, the transfer of any capital asset by the
demerged company to the resulting company will not be regarded as transfer for the
purpose of capital gain.
14. Accumulated losses and depreciation relatable to the undertaking being transferred in
a scheme of demerger is allowed to be carried forward and set off in the hands of the
……………………
15. The depreciable assets base for tax purposes in the hands of the resulting company would
be tax ………………. in the hands of the demerged company.

Case Study Corporate Business Restructuring gets a Tax Fillip

umbai 2010: In a ruling that will provide great relief to corporate planning to
restructure their businesses, the Authority for Advance Ruling (AAR) held that
Mrestructuring of businesses cannot be construed as an exercise for avoiding tax
in India.
AAR, a quasi judicial body for settling tax disputes involving foreign entities, in an order
last week on an application filed by the Star Group companies, held that any tax benefi t

resulting from the restructuring of businesses cannot be a ground for income-tax (IT)
authorities to conclude that the entire exercise was for avoiding tax.
The parties that applied before AAR were Star Television Entertainment (STEL), the entity
which owns Star Plus TV channel, and Star Asian Movies (SAML), which owns Star Gold,
and Star Asia Region, the owners of Star Utsav and Star One. While STEL and SAML are
based in British Virgin Islands, Star Asia Region is based in the United Arab Emirates
(UAE). These three companies have been amalgamated with the Indian company Star
India with effect from April 1, 2009.
These companies’ rationale for the amalgamation was based on business and commercial
grounds. The group had told AAR that with this amalgamation, all the three overseas
entities’ assets as well as liabilities would be transferred to the Indian company.
This ground was acceptable to AAR, which held that it is within the legitimate right of

the parties to enter into transactions that would help them access the benefits given under
the tax statute. The AAR also observed that the contracting parties are not expected to do
transactions in a way that would entail any tax liability.

The three foreign entities had moved the AAR in relation to the tax benefits resulting from
the amalgamation. The AAR’s ruling is binding on the company paying taxes and the I-T
department.
The I-T authorities did not dispute the fact that its laws provided exemption from capital
gains tax on such cases. However, despite admitting that transfer of capital asset is entitled
to exemption provided under Section 47 with Section 2 IB of the I-T Act, the tax authorities
held that since the entire exercise was driven by a motivation to avoid tax, the amalgamation
should not be accepted by the AAR. It is this argument the AAR had declined to accept. M
Lakshminarayanan, national tax leader, Deloitte India, said “this order will benefi t cross-
border M&A transactions”.

Contd...

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