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Treat mergers, amalgamations practically
May, 27th 2013

The earlier article in this section had discussed the practical issues involved with the transfer of Cenvat credit, in case of a merger or sale of a business. This article extends the discussion to the practical issues involved with respect to the transfer of business under the scheme of merger, amalgamation or demerger under different state value-added tax (VAT) laws.

Under the Gujarat VAT Act, 2003, for example, there is a specific provision to deal with the practical issues arising on account of time lag between the effective date of implementation of the scheme of merger and the date of order by the high court.

According to Section 52 of the Gujarat VAT Act, when two or more companies are amalgamated by an order of court and the order is to take effect from an earlier date, notwithstanding anything contained in the court order, till the date of order of the court both the companies are to be treated as distinct companies for all the purposes of Gujarat VAT Act. Typically, it happens that the companies may have made sales to each other and issued VAT invoices in connection with the sales. The purchasing company would have taken VAT credit on the purchases and reported this on its VAT returns. They may have issued VAT invoices to their customers, on sales of the goods purchased from each other.

After the passing of the high court order, the companies are merged with retrospective effect of between a few months and one to two years. Obviously, in case of two companies that have merged, they cannot buy or sell goods to/from each other, as they are one legal entity. However, Section 52 effectively provides that things should remain unchanged for the period already past.

This is a model provision which effectively takes care of majority of practical issues involved with the invoicing, payment of tax, utilisation and transfer of input VAT credit from the existing dealer to the new dealer. A similar provision also exists under section 47 of Maharashtra VAT Act, 2002.

However, this issue has not been addressed under most other state VAT acts. Unlike Gujarat and Maharashtra, the absence of a clear provision in different state VAT laws leaves the state VAT authorities with no option but to require the companies to unwind a number of transactions as explained above. With this perspective, the tax authorities endeavour to implement the scheme from the effective date in literal interpretation of the court order, as opposed to the more practical approach of implementing the scheme from the date of order of the court.

In fact, there has been a considerable amount of litigation on this issue as well and the courts have issued contradictory rulings on this issue, under similar sets of facts. The ruling of the Bombay High Court in the case of Asahi India Glass Ltd ((2009) 25 VST 31 (Bom)), is one such that is pragmatic rather than legalistic.

Effectively, the Bombay High Court gave relief from the deadlines under the relevant rules, because these deadlines could only be met in the relatively rare situation where a scheme of merger was approved within one month or so of its effective date.

However, in the case of state of AP versus Jindal Strips Limited, and Jindal Stainless Limited versus Commercial Tax Officer and others ((2007) 10 VST 777 (AP)), the Andhra Pradesh High Court took the view that all sales that took place between two amalgamating companies stood cancelled from the effective date of the amalgamation. This view is quite unassailable in its logic from a legal perspective. It is also perhaps reasonably practical under the erstwhile sales tax regime.

However, under today's VAT regime, when a business is merged with effect from an earlier date, all transactions between the merging companies would be cancelled between the effective date of the merger and the date when the merger is approved by the court. Similarly when there is a demerger, all transfers of goods between the erstwhile divisions of the company would have to be treated as sales between two independent companies. This is more complicated than the first situation, since one would have to establish a fictitious sale price. These are unnecessary steps from the perspective of either desirability or fairness.

We would therefore suggest that through appropriate provisions in the law, all states create a simple and pragmatic provision that leaves all past transactions undisturbed when there is a merger, demerger or sale of a business.

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