In order to sustain in the competitive environment, many companies go for number of amalgamations/ mergers / demergers. This leads to the re-organisation of basic structuring of a company. Such schemes are approved by the court and provides two dates – ‘appointed date’ & ‘effective date’. These two dates are prominent aspect of the scheme. Both these dates are crucial in many respects, including, for purposes of indirect tax as well as direct tax.
The present article discusses about the significance of ‘appointed date’, ‘effective date’ and various clauses of the scheme of amalgamation/ merger/ demerger in the light of indirect tax laws.
Company needs to have audited financial records before applying for the scheme of amalgamation/ merger/ demerger since the valuation of assets and investments getting transferred and valuation of share price must be done. For this reason, the actual application for demerger/ amalgamation will be on a date after the latest available balance sheet. By the time scheme is lodged, the business would have carried on by the transferor/ old entity for the period pending the filing/grant of scheme.
As required under the Companies Act, 2013, every scheme of amalgamation/ merger/ demerger approved by the Court must necessarily provide for appointed date as well as effective date.
‘Appointed Date’ is the date with effect from which the Scheme shall, upon sanction of the same by the High Court, be deemed to be operative. ‘Effective date’ denotes the date on which the demerger is completed in all respects after having gone through the formalities involved, and a copy of the High Court's order sanctioning the scheme is filed with Registrar of Companies. With that, the process of amalgamation/ merger/ demerger is completed.
Practically, amalgamation/ merger/ demerger requires surrender of old registration and obtaining a new / amending registration by the successor. There could be transaction of supply of goods, services, etc., during the intervening period i.e., between the appointed date and effective date. Since tax registration to the successor is granted only after receiving court order approving the scheme, typically, indirect taxes on the transactions are being paid, issuance of invoices, filing of returns, other procedural compliances are continued by the transferor/ predecessor during the intervening period.
In the above background, the dispute may arise in respect of those transactions which were undertaken between the appointed date and effective date/till the fresh registration under Indirect Tax is obtained by the successor in its own name. The dispute may arise because of appointed date being retrospective to the effective date and the successor entity obtains registration post effective date.
The probable litigation objections may be (i) successor should have obtained registration w.e.f. from the appointed date; (ii) issue of invoices, discharge of tax liability, filing of returns, procedural compliance of indirect tax laws should have been done by the successor during the intervening period and not by the predecessor; (iii) scheme of demerger retrospectively effective from the appointed day would be contrary to the provisions of indirect tax laws and the rules made thereunder.
In similar circumstances, the issue arose before the Division Bench of Gujarat High Court in the case of L&T Hydrocarbon Engineering Ltd. v. Union of India [Judgment dated 3.2.2022 in Special Civil Application No. 11308 of 2019], whether the successor entity would again be liable to excise duty on the clearances made during the appointed date till effective date of de-merger, when the same duty was already discharged by predecessor in its old registration.
It was held that ‘appointed date’ is of no significance under the law till final demerger order is received from the Court. So, until transfer as a result of demerger is completed, transferor Company continues to pay tax, file returns as if there is no proposal for demerger as the case may be. Therefore, the Court provides for effective date also in the scheme and provisions of the scheme take care of these aspects.
The Court observed that in terms of the scheme approved by the Court, benefits of all statutory and regulatory permissions, registration or other licenses, and consents shall vest in and become available to the Transferee Company as if they were originally obtained by the Transferee Company. Therefore, the excise registration in the name of the predecessor stood vested in name of the successor automatically and without anything more. By interpreting various clauses contained in the scheme, the High Court held that despite the appointed date being retrospective, the supplies affected, payment of tax, raising of invoice and filing of return and other indirect tax compliance by the predecessor between the intervening period would be treated as compliance done by the successor and is in absolute compliance of the Central Excise laws. The High Court considered the ratio laid down in the landmark case of Marshal and Co. v. ITO [1997] 223 ITR 809 (SC)].
The High Court also observed that scheme of de-merger was sanctioned by the High Court and transfer of assets took place by operation of law. The Central Government was party to the scheme through the Office of the Regional Director, Ministry of Corporate Affairs and hence, was aware of the Scheme at all times. It noted that once, the Scheme was approved by the High Court, the Central Excise department was now barred to raise any objection to the said scheme in the present proceeding and was bound by the order passed by the High Court approving the scheme of demerger. The High Court agreed to the ratio laid down in Sadanand Varde and Others v. State of Maharashtra [(2001) 247 ITR 609 (Bom)].
Conclusion
The issue decided by High Court has general application across the country as this is applicable to every scheme of demerger/ merger/ amalgamation. Every such scheme would always be retrospectively effective from the appointed day. In such case, non-compliance of procedural requirement under various law by the transferee between the appointed date and effective date would always arise. So, this issue would arise under various other laws including GST.
Section 87(1) of Central Goods & Services Tax Act, 2017 (‘CGST Act’) provides that when two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly.
Section 87(1) only provides for the liability in case of amalgamation and merger in respect of supply between the transferor and transferee during intervening period. In GST, there is no express provision which prescribes the liability to discharge tax liability in case of supply and receipt of goods or services or both to or from other than transferor/transferee. In the absence of any specific provision, the aforesaid dispute may continue and the judgment prevailing in earlier indirect tax regime as well as aforesaid High Court decision may be relevant.
Though specific facts in each case could lead to different conclusion, various courts have decided the issues by relying on the clauses contained in the scheme approved by the Court. Therefore, the companies must consider the terms of the amalgamation/merger/ demerger from taxation point of view and impact of this case. While framing scheme, the Company should consider the following amongst other various aspects like:
(i) Taxability of the transaction during intervening period.
(ii) Continuity of tax benefits exemptions and obligations.
(iii) Transferability of tax credit balance.
(iv) Procedural compliance of various laws.
[The author is a Joint Partner in GST practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]