Mumbai, May 10: A closer reading of The Finance Act, 2000, reveals that the euphoria - be it for ESOPs or amendments to Sec 10A and Sec 10B - is completely unjustified. The way the drafting is done, serious practical problems may arise. Some of the major amendments are discussed below.Problems related to restructuring.Section 10A which exempts the profits and gains of units set up in software technology parks/hardware technology parks for a period of 10 years has been amended and a new sub-section 9 has been inserted. This sub-section provides that on the transfer of ownership or beneficial interest in the undertaking by any means will result in deduction under sub-section (1) not being available to the ``assessee'' for the relevant assessment year and the subsequent years. Explanation 1 provides that in the case of a company, where on the last day of the previous year, the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by the persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking.
Simply stated, at least 51 per cent voting rights on the last day of the previous year should be held by the same persons who held it on the last day of the year in which the undertaking was set up. This adds one more complication to the already complicated process of restructuring, be it demerger, slump sale or amalgamation.
Grey areas: Comments Rajesh Kadakia, Partner, Ernst & Young, ``the term used is assessee and not transferor. Does it mean that it will apply to transferee also who will be deprived of the benefit of deduction u/s 10A? The use of the word ``assessee'' suggests so though CBDT had earlier clarified in the context of Chapter VIA that any transfer of business will not deprive the transferee of the benefit. Kadakia lists the other problems:
What if after the dilution of equity, the stake of the persons who held 51 per cent prior to dilution is reduced to less than 51 per cent? What if in a 50:50 JV, one stakeholder wants to get out completely? (up to 49 per cent sale of stake does not pose a problem) An undertaking set up in 1996 will have to meet ownership test from FY 2000-01 onwards. In case of quoted companies, the list of shareholders who own 51 per cent equity shares may run in to hundreds of pages. At times, companies are set up with the paid-up capital of less than Rs 1000 held by directors & key employees and the balance is in share application account brought in by promoters. When the share application money gets converted into paid up capital, the 51 per cent test will pose problems.Section 10A(4) provides that for the purpose for sub-section (1), the profits derived from export of articles or things or computer software (italics begins) shall be the amount which bears to the profit of the business, (ends) the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee.
Points out Kadakia, ``the key word is `profit of the business.' Similar expression was used in Sec 80HHC (3) before its amendment and Special Bench of the Tribunal has held that ``profits of business'' includes profits of non- manufacturing activity export activity also. If this interpretation is accepted, then all that is required to be done is to set up an EoU and every income of the assessee including commission income for example will be pro-rated and proportionately tax free.
Section 80-IB (8A) : New sub section has been inserted which provides for a 10 year tax relief to companies having profits and gains from the business of carrying on research and development. A few conditions would have to be satisfied for claiming this deduction such as, the company should have its main object the scientific and industrial research and development and should be approved by the prescribed body before April 1, 2003.
The implication of this provision would be that royalty or licensing income received by pharmaceutical companies for products or processes developed by them would be tax free in their hands. However, practical problems may arise if the product is manufactured by the same company, as it cannot charge royalty to itself. Also, most of the companies would not have main object clause of carrying on R&D activities.
The result is that many companies would form wholly-owned subsidiaries for carrying on their R&D activities. This provision gives a very big incentive to giant multinational corporations which would set up a 100 per cent subsidiary owned by the parent (and not by the listed Indian company) which would carry on the R&D activities and license the products so developed to the Indian subsidiary.
The finance minister has also taken care of expenditure incurred on R&D which does not yield results, by increasing the amount allowed as a deduction u/s 35(2AB) to 150 per cent from 125 per cent of the amount actually spent on such activities.
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