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THE INSIGHT

Demand of Tax In The Case of Merged & Acquired or Amalgamated Entities
By Hans Raj Garg, Addl. Director, DRI (Retd.)
Aug 02, 2021

TAXPAYER entities enter into 'arrangements' such as merger, acquisition, amalgamation, demerger, etc. among themselves for various reasons such as to achieve growth inorganically, economies of scale, to concentrate on core competence, etc.

Merger and acquisition refer to transaction between two or more legal entities combining in some form wherein mostly a large entity acquires or engulfs one or more smaller entities, thereby absorbing their businesses. The merged or the acquired entities cease to exist legally from the date the merger or the acquisition is effective. In the case of acquisition, sometimes identity of the acquired entity is maintained by making it a subsidiary of the acquiring entity.

In the case of amalgamation, two or more entities combine to form a new single legal entity with a new name & identity. All the amalgamated entities cease to exist from the date the amalgamation takes effect.

In the context of such 'arrangements', in common parlance, the term M & A is loosely used which also connote seven demerger, business transfer, etc. The Companies Act, 2013 uses the expression 'merger and amalgamation'.

To effectuate the said 'arrangements', various enactments, including the Companies Act, 2013; the GST Law; the Customs Act, 1962 and the rules & regulations made thereunder, come into play.

M & A are order of the day. Many high-profile M & A have been reported in the recent past which include prolific acquisitions including Aakash Educational Services by Byju's& Uber Eats by Zomato; merger of various banks & of Thyssen Krupp with Tata Steel; and amalgamation of Vodafone & Idea.

The officers of the CBIC have to be careful while raising demand of taxes short levied or not levied upon the tax payer entities which have undergone the said arrangements. Such arrangements can take place even during the period intervening between the issue of show cause notice and its adjudication. Therefore, even the adjudicating authority should also be aware.

The department at the national level should proactively sensitize and alert the officers about such arrangements by posting such news on its website. The officers thereafter need to carefully study the documents created to give effect to the 'arrangements' before raising and/or confirming the demands.

Instances have come to notice where the officers have fastened the liability on the transferor entity even after the fact of merger/acquisition or amalgamation was specifically brought to their notice . To re-iterate, on merger or amalgamation, the transferor entity loses its identity and gets subsumed in the operations of the transferee entity and it is the transferee entity which is responsible for any statutory liability (for past as well as present)and, accordingly, the transferee entity is accountable for the statutory liability under the Customs Act, 1962; the GST Law et al.

In case of demerger, care should be taken to find out as to which entity is to be fastened with the statutory liability i.e. on the demerged unit or the existing enterprise, which would depend upon the facts of the case.

Demands raised on entities, which were merged or amalgamated, have been litigated in the past. In this regard, the recent case of M/s Intas Lifesciences since merged with Intas Pharmaceuticals Ltd, Ahmedabad Vs Asstt Commissioner of Income Tax, Ahmedabad reported as refers. In this case, under the Income Tax Act, 1961, it was observed that:

“In the case of Emerald Company Ltd., ITAT Kolkatta Bench has also dealt with similar situation after making reference to judgment of the Hon'ble Delhi High Court in the case of  CIT Vs. Dimension Apparels P.Ltd.,  as well as decision of Hon'ble Delhi High Court in the case of Spice Entertainment Ltd. The ITAT has also made reference to the decision of Hon'ble Karnataka High Court in the case of  CIT Vs. Intel Technology Ltd. P. Ltd., . The Tribunal has held that action under section 263 is a jurisdictional action against an assessee. In the case of a company, the ld. Commissioner was required to issue a show cause notice against a juridical person contemplated in section 2(31) of the Income Tax Act and if a juridical person ceases to exist then it would not be construed as a person within the meaning of section 2(31) against whom any action can be taken. The Commissioner would not assume proper jurisdiction and such type of defect would not be cured with help of section 292B of the Act, because it is not a procedural irregularity which could be cured. We also note that this Tribunal in the case of  Snowhill Agencies Pvt. Ltd. Vs. Pr. CIT - TOG-326-ITAT-AHM-2020  involving identical facts and circumstances has decided the issue in favour of the assessee. In view of above, we note that the assessment framed under section 143(3) r.w.s. 92CA of the Act is not sustainable. Hence the additional ground of appeal of the assessee is allowed.”

In conclusion, the officers can be oblivious to the latest happenings in the commercial & legal world at their own peril inasmuch as demands raised and/or confirmed against non-existing entities will not stand the test of law as these would be without jurisdiction and hence a nullity.

Vigilantibus et Non Dormientibus Jura Subveniunt. (The law aids the vigilant, not those who slumber on their rights.)

[The views expressed are strictly personal.]