Grasim’s Rs 5,872-Crore Tax Reduction Has An important Courses For Demergers

Grasim Industries Ltd. received the high-stake tax fight in relation to its 2017 M&A. The M&A scheme concerned the merger of Aditya Birla Nuvo Ltd. and demerger of its monetary services and products industry.

All through the tax scrutiny, the source of revenue tax division raised a requirement of over Rs 5,800 crore. The tax place of job had claimed that the demerger of the monetary services and products industry basically contained funding in stocks of a subsidiary that constituted over 95% of the worth of the belongings demerged. 

In its view, such belongings didn’t represent an ‘enterprise’ which is important to categorise the transaction as a tax-neutral demerger. The tax place of job, due to this fact, held that demerger isn’t tax-neutral and as a substitute amounted to a ‘deemed dividend’ entailing get advantages to Grasim’s shareholders.

The Source of revenue Tax Appellate Tribunal, Mumbai bench brushed aside the dep.’s case whilst offering nuanced factual and prison research to rule in favour of Grasim.

The order discusses ideas in relation to an ‘enterprise’ – a pre-requisite for a tax-neutral demerger. An insignificant maintaining of stocks in an organization will not be considered an ‘enterprise’.

The steerage from the Tribunal ruling would additionally help in long term M&As in which “funding” actions are sought to be segregated from the primary industry.

Grasim undertook the M&A involving:

• Merger of Aditya Birla Nuvo (ABNL) with Grasim from 1 July 2017.

• Demerger of Monetary Products and services Trade (FS Trade) of ABNL + Grasim (Merged Entity) into Aditya Birla Monetary Products and services Ltd., later renamed to Aditya Birla Capital Ltd. (ABFSL / ABCL) efficient 4 July 2017. ABFSL held 90.23% in Aditya Birla Finance Ltd. (ABFL). ABNL held the stability 9.77% stake in ABFL.

• On 30 June 2017, i.e., an afternoon ahead of the efficient date of the merger, a non-public fairness fund bought a stake in ABFSL.

Normally, a transaction of merger or demerger is tax impartial for the firms and shareholders concerned if sure stipulations are glad. For instance, in relation to a demerger, one such requirement is that the industry will have to qualify as an ‘enterprise’ and will have to be transferred as a going fear. An enterprise as consistent with the tax rules contains part of an enterprise, or a unit or department of an enterprise or a industry process taken as an entire. It particularly excludes particular person belongings or liabilities or their aggregate which doesn’t represent a industry process.

The tax government held that the FS Trade, which has been demerged via Merged Entity to ABNL, didn’t meet the ‘enterprise’ standards. The cause of arriving at this conclusion was once that out of the entire e book worth of belongings of Rs 1,876 crores belonging to FS Trade, stocks held in ABFL had a worth of Rs 1,729 crores. Tax government had been thus of the view that the goal was once to switch a 9.77% stake held in ABFL via the Merged Entity to ABNL, and there’s no ‘enterprise’ as such.

Pursuant to demerger, shareholders of the Merged Entity had been allocated stocks via ABFSL / ABCL in accordance with worth of FS Trade. The tax officer rejected the tax-neutral demerger and held that Grasim not directly allotted worth identical to 9.77% stocks in ABFL to its shareholders. Accordingly, the truthful worth of the stocks allocated via ABFSL / ABCL on demerger is handled as a “deemed dividend” distribution at Rs 24,037 crores. The DDT and passion had been computed as Rs 5,872 crores.

The litigation has travelled via more than a few discussion board throughout the tax division, the Top Courtroom on a writ petition and ITAT during the last 4 years.

The appellate tribunal dominated that the FS ‘enterprise’ of Grasim constituted a separate industry process. At the side of funding in ABFL, different belongings value about Rs 150 crores, together with mounted belongings, choice stocks, inter-corporate deposits, and mutual budget, had been transferred. As well as, borrowings, present liabilities and deferred tax liabilities had been additionally transferred. If transferred to a brand new corporate, such belongings would have required registration as a Non-Banking Monetary Corporate (‘NBFC’) with the Reserve Financial institution of India. ITAT additionally held that mere non-disclosure of FS industry as a separate industry within the tax go back shape as a result of inadequate columns therein does now not cross towards the assessee.

ITAT dominated that Grasim’s case was once now not that of loading an additional asset to the enterprise or offloading a essential asset. ITAT undertook an “enterprise” research in accordance with more than a few factual sides (mentioned later) across the FS Trade of the Merged Entity. ITAT trusted a Top Courtroom ruling and held that had it been a trifling switch of stocks, it would now not had been stated to be a switch of an enterprise. ITAT additionally concluded that every one different stipulations for a tax-neutral demerger are glad.

At the factor of deemed dividend categorisation[1], ITAT held that there was once no distribution via Grasim of any of its belongings to the shareholders and after all, the precise provisions round deemed dividend exclude the distribution of stocks pursuant to demerger to the shareholders of the demerged corporate.

Some of the arguments via Grasim was once that when the Courtroom authorized the Scheme and the tax place of job didn’t document any objection throughout the method, they may now not have raised a tax call for later. On the other hand, ITAT has dominated that whilst tax government can’t rewrite the provisions of the Scheme, they’ve a proper to inspect the taxability of transactions even after the approval via Courtroom/NCLT.

ITAT famous following essential factual sides whilst figuring out if the “enterprise” existed:

• Background and a historical past of actions in related industry (on this case – monetary).

• Good enough disclosures of the process as a separate industry process in annual studies, director’s studies, monetary statements, tax returns (Source of revenue-tax and oblique tax), and tax audit studies.

• Discussions in studies via exterior establishments corresponding to credit score businesses.

• Providing source of revenue within the tax go back as industry source of revenue.

• Reporting of ‘income from operations within the monetary statements.

• Involvement of particular Key Control Body of workers and staff in working the monetary / funding process.

• Switch of staff, licenses, litigations, and so forth., at the side of all belongings and liabilities relating the monetary / funding process within the Scheme of demerger.

• Regulatory or contractual causes for wearing out the monetary / funding process via a subsidiary.

A company crew would possibly imagine life of those and different elements ahead of beginning a scheme.  Then again, a few of these sides may well be proactively documented to exhibit the life of the continuing industry enterprise.  The life of “enterprise” is a very powerful now not just for demerger but in addition for “droop sale” transaction.  For droop sale transactions, absence of enterprise, leads to opposed source of revenue tax in addition to GST implications.

Earlier than we log off, we reiterate the ITAT’s conclusion {that a} M&A Scheme as soon as authorized via the NCLT with none tax objection does now not debar tax government from inspecting the scheme throughout the common tax scrutiny.