NCLT unfolds a new angle to usual M&A deals
Recently, the Chennai Bench of National Company Law Tribunal (NCLT) approved the merger of a Limited Liability Partnership (LLP) with a private limited company, the first of its kind in India under the Companies Act, 2013.
Provisions relating to mergers of companies/ LLPs
Section 230 to 232 of the Companies Act, 2013 (Cos Act) deal with the provisions relating to compromises, arrangements and amalgamation between companies. Section 234 of the Cos Act permits a foreign company, including a body corporate incorporated outside India, to merge with an Indian Company or vice versa. In general parlance, a body corporate also includes an LLP.
It is imperative to note that under the erstwhile section 394 of the Companies Act, 1956, the transferor company included a body corporate, whether incorporated in India or outside. On the other hand, the Cos Act, 2013 provides for body corporates incorporated outside India but no specific provision for the amalgamation of a body corporate incorporated in India with a company. However, there are no specific restrictions under the Cos Act for the same as well.
In addition, sections 60 to 62 of the LLP Act, 2008 deal with compromises, arrangements, reconstruction and amalgamation of LLPs, which are similar to provisions of the Cos Act. However, none of the Acts provide for a merger of LLP with a company or vice versa. The powers to approve mergers under the respective Acts vest with the NCLT. Hence, it is open to the NCLT to take a view whether cross mergers of companies and LLPs are permissible.
In the past, the Mumbai Bench of NCLT approved a scheme of amalgamation of LLP with a company, which was originally filed under the Companies Act, 1956, and later transferred to the NCLT.
In a recent ruling, the Chennai Bench of NCLT approved the amalgamation of an LLP, Real Image LLP with a company, Qube Cinema Technologies Private Limited, under a scheme of amalgamation filed before it.
Approving the amalgamation, the NCLT stated that the intent behind enacting both the laws is to facilitate the ease of the doing business and create a desirable business atmosphere for companies and LLPs and therefore, both the Acts have provided for merger or amalgamation of two or more LLPs and Companies.
The NCLT observed that the absence of a specific provision in the Cos Act, 2013/ LLP Act for amalgamation of LLPs with companies and vice versa is clearly a case of omission. The NCLT stated, if the intention of the parliament is to permit a foreign LLP to merge with an Indian Company, then it would be wrong to presume that the Companies Act 2013 prohibits a merger of an Indian LLP with an Indian company.
Accordingly, the NCLT held that there appears no express legal bar to allow or sanction the merger of an Indian LLP with an Indian company.
Under the Income-tax Act, 1961, (ITA), the definition of amalgamation outlines mergers in the context of companies. A company is defined, inter-alia, to include an Indian Company and body corporate incorporated outside India. In case the transaction qualifies as amalgamation, as defined under the ITA, no tax implications arises for the company being amalgamated and its shareholders.
However, the ITA does not deal with the amalgamation of an Indian LLP with a company or vice-versa. Hence, one could argue that the amalgamation of an Indian LLP into a company is not covered under the definition of amalgamation, and therefore, the tax exemption shall not be available to such transactions.
In such case, there could be tax implications in the hands of the LLP and its erstwhile partners. However, a question of computing tax in such cases may arise, in the absence of any specific provisions under the ITA.
Tax implications in the hands of the LLP
The amalgamation of an LLP with a company is akin to succession of an LLP or a firm (as firm includes LLP under the ITA) by a company. The ITA exempts the succession of a firm into a company subject to the satisfaction of certain prescribed conditions. Hence, a view is possible that if such conditions are satisfied in case of amalgamation of an LLP into a company, no tax implications should arise for the LLP.
If any such conditions are not satisfied, one could argue that since the LLP is no longer in existence, no taxes could be recovered from it. However, successor liability, in such case, could fall onto the company, as per section 170 of the ITA.
Tax implications in the hands of the erstwhile partners of the LLP
Similar to the above, in case of succession of LLP by a company, one could argue that there is no gain or loss arising to the erstwhile partners, and they receive shares in the company in lieu of their partnership interest in the LLP. The Bombay High Court has upheld this in the case of CIT v. Umicore Finance Luxemburg.
However, it is noteworthy that since there is no express exemption available to the partners on succession of a firm/ LLP by a company, litigation on this account cannot be ruled out.
Tax implications in the hands of the company
No tax implications may arise in the hands of the company, as it has received the business undertaking of the LLP on amalgamation and the business undertaking is not covered under the definition of property being defined for the purpose of recipient taxation under the provisions of the ITA.
This ruling of the Chennai Bench of NCLT is a landmark judgment and paves the way for similar transactions. However, since the judgment is not binding in other States, it will be interesting to note how other Benches of the NCLT view such transactions. This would also mean a new avenue of restructuring alternatives for large businesses having complex structures to streamline their presence in India.
However, from a tax standpoint, at present, there are no express provisions exempting the amalgamation of an LLP into a Company. Accordingly, a clarification/ amendment in this regard would be required in the ITA for clarity on taxability and avoiding litigation by tax authorities.
Disclaimer: This article includes inputs from Himanshu Aggarwal, Sr. Manager, M&A Tax PwC India and Aanchal Sood, Associate, M&A Tax PwC India.
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