Mergers and acquisitions (M&A), transfer pricing and ownership control exercises are not new in India. However, they have become bone of contention between the income tax department of India and many companies. As a result neither the tax authorities nor the companies are happy with this environment. On top of it, the corporate compliance requirements have significantly increased after the enactment of Companies Act, 2013.
India has already proposed establishment of Income Tax Overseas Units (ITOUs) of India in foreign countries so that tax evasion become difficult. Now the Finance Ministry has decided to scrutinise mergers and acquisitions dealings in India. As per media report, the Finance Ministry has asked its officials to ensure that mergers and acquisitions deals do not result in loss to the exchequer.
In fact, the Central Board of Direct Taxes (CBDT) has issued a communication to Chief Commissioners that the concerned revenue officials should raise concerns on tax issues while submitting their comments on mergers and acquisition deals to the Ministry of Corporate Affairs (MCA) so that they could be incorporated in reports to the High Court. As per the communication, the officials should “object to the scheme of amalgamation if the same is found prejudicial to interest of revenue”.
Under the current rules, Regional Directors of MCA are required to obtain specific comments from the Income Tax Department within 15 days of the receipt of notice before filing response to the Court on mergers and acquisitions. The MCA is also required to incorporate comments and inputs from the Income Tax Department so as to ensure that the proposed scheme of reconstruction or amalgamation has not been designed in such a way to defraud the revenue and consequently prejudicial to public interest. M&As are required to be vetted by the concerned High Court to be effective.
The CBDT has issued the instructions after a High Court rejected its intervention application in a case of amalgamation saying the tax department has no locus standi in the matter as the Regional Director, MCA enjoys that power.