After the introduction of the Limited Liability Partnership Act, 2008 (LLP Act), it was anticipated that many corporate houses would consider Limited Liability Partnership (LLP) as a vehicle to run their business operations, mainly due to lower administrative compliances and ease of repatriation of profits to its partners. Although there are many advantages in being incorporated as an LLP vis-à-vis a Limited Liability Company, the restructuring involving an LLP, i.e., the merger of an LLP with another LLP or Company is yet to see the light of day in practical terms, except in rare cases.
The LLP Act does provide for merger or restructuring of two LLPs through the National Company Law Tribunal (NCLT) approval process. The Indian Income-tax Act, 1961 (ITA) has provisions for mergers/ demergers involving companies and prescribes conditions for tax neutrality of such mergers/ demergers in the hands of the transferor entity, its shareholders and the transferee entity. However, there are no specific provisions under the ITA providing tax exemption for mergers or restructuring of LLPs akin to merger of companies. Thus, there is no clarity on taxation in the hands of the transferor/ transferee LLP and their partners. Another important aspect in the restructuring of LLPs is the applicability of stamp duty. Most states have amended the definition of “Conveyance” to include orders passed under section 391 to section 394 of the Companies Act, 1956/ section 230 to 234 of the Companies Act, 2013, as “Conveyance,” and accordingly, the same is liable to stamp duty. In addition, it is important to note that there are concessional rates of stamp duty in many states for such court orders. However, one needs to evaluate whether the order passed in case of merger of two LLPs would also be covered under the definition of “Conveyance”. Before the amendment of the definition of “Conveyance,” there have been contrary judgements on whether the NCLT/ High Court order approving merger would be subject to stamp duty. Thus, even with regard to stamp duty, the implications for the merger of an LLP with another LLP are ambiguous.
The clarity on this front, i.e., merger or restructuring of two LLPs would help sectors such as real estate, wherein typically, a separate SPV is formed for every project. In such cases, developers can consider setting up LLPs for separate projects and can be merged/ restructured at a later point in time if required.
Another interesting concept revolves around the merger of an LLP with a Company. The erstwhile Companies Act, 1956, allowed the amalgamation of any body corporate into a Company, while the new Companies Act, 2013, does not contain a similar provision. In a recent decision delivered by the Chennai Bench of the National Company Law Tribunal,[1] the amalgamation of an LLP with a Limited Liability Company has been approved. The rationale provided for the merger by the Tribunal is as follows:
“The legislative intent of enacting the LLP Act, 2008 and the Companies Act, 2013 was to facilitate ease of doing business and creation of desirable business environment for companies and LLP.” The Tribunal highlighted the fact that, “merger of two or more LLP and Companies has been provided for in the Companies Act, 1956 however, there is no specific provision in the Companies Act, 2013. Therefore, this is a case of casus omissus.” Further, it inferred that “if the intention of the parliament is to permit a foreign LLP to merger with an Indian Company, then it would be wrong to presume that the Act prohibits a merger of Indian LLP with an Indian Company and there does not appear any express legal bar to allow/ sanction merger of an Indian LLP with an Indian Company.”
It is interesting to note that Section 234 of the Companies Act, 2013 provides for amalgamation of the foreign company. The said section defines ‘foreign company’ to include a company or body corporate incorporated outside India which may include a foreign LLP. The section 391 to 394 of erstwhile Companies Act, 1956 permitted merger of ‘body corporate’ with company; however, the similar provisions are not provided u/s 232 of Companies Act, 2013 permitting merger of Indian LLP with an Indian company. Hence, the Tribunal’s decision to allow merger of Indian LP with Indian company after take into account said anomaly is a positive step forward.
In the given context, it is imperative to analyse and understand the tax implications of the merger of an LLP with a Company. As discussed earlier, there are specific provisions only for the tax neutral merger of two companies and there are no specific provisions for the merger of an LLP with a Company. However, the ITA does provide for succession of business held by LLP into a Company, and hence, one may argue that the merger of an LLP with a Company is nothing but the succession of business, and hence, may be exempt under income tax subject to compliance of certain conditions. As far as stamp duty on the merger of an LLP with a Company is concerned, one can argue that the same may be considered as “conveyance” based on the amended definition of conveyance, as the order for merger of LLP with Company would be passed under provisions of the Companies Act, 2013.
Typically, small and medium enterprises (SMEs) could consider starting business operations in an LLP owing to its unique advantages and can consider converting/ merging an LLP into a Company in case the promoters are contemplating an IPO to raise funds from the capital market.
Briefly, the above judgement is a welcome move that can be considered for restructuring LLPs going forward. However, clarity on tax and stamp duty laws on the taxability of merger of an LLP with LLP/ Company would be very helpful.
[1] In the matter of M/ s Real Image LLP with M/ s Qube Cinema Technologies Private Limited (CP/ 123/ CAA/ 2018)
Description
The recent judgement by Chennai National Company Law Tribunal has delivered an unprecedented move of merger of an LLP with a Company. The analysis of the same would be of vital importance to understand the key observations made by the Tribunal while delivering the judgement and further analyzing the impact of such restructuring from tax and regulatory perspective would be interesting.
The views expressed in this article are personal. This article includes inputs by Parag Doshi, Executive Director – M&A Tax, PwC India, Muthukumar Iyer – Assistant Manager, M&A Tax, PwC India and Bhakti Sharma – Associate, M&A Tax, PwC India
Author: Hiten Kotak, Leader – M&A Tax, PwC India and Bhavin Vora, Director – M&A Tax, PwC India
It is indeed a welcome judgement by the Chennai NCLT and also paves way for further clarity in this aspect.