A Mumbai tribunal hearing the case of Avaya Global Connect v ACIT has provided much-needed clarity in the taxation of “no-consideration” demergers.
Telecom company Avaya Global Connect recently transferred one of its divisions, TFD, to an Indian company called ITEL Industries. A scheme of arrangement between Avaya and ITEL, which was approved by Bombay High Court, provided for the transfer of all TFD’s assets and liabilities to ITEL. The scheme provided that no consideration would be payable upon the demerger. The value of the assets taken over by ITEL was less than the liabilities of TFD and therefore the net worth of TFD was negative.
The tax authorities, however, viewed the transaction as a “slump sale” rather than a demerger and sought to tax the capital gains income from the transaction.
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