While the past 15 months have caused much pain and disrupted one and all, it was also a period where governments across the world approved stimulus packages in the trillions, markets surged on a deluge of liquidity and M&A activity boomed. India was no exception – we saw several public market transactions; many new unicorns were created and there was hectic M&A activity across sectors. Interestingly, some of these transactions in FY 20-21 were structured as a ‘slump sale’. Simply put, a slump sale is the transfer of business from one entity to another for an agreed value, payable in cash or kind.
Several slump sale transactions were signed and closed while others were still in progress in FY 20-21, when Budget 2021 proposed two changes that impacted slump sales in a fundamental way- (1) Goodwill (premium paid on a business purchase) would no longer be tax depreciable and (2) the tax law will define the consideration paid for a slump sale as its Fair Market Value (‘FMV’). For example, even if the consideration for a slump sale was agreed to be 100, tax law could override business contract and say that the FMV was 125. And these changes were effective from April 1, 2020 meaning that they had retrospective effect. The final catch was that the methodology for computing FMV in a slump sale would be notified in due course, so these rules were eagerly awaited indeed.
Earlier this week, the CBDT notified the rules (FMV Rules) for determining FMV in a slump sale transaction and fortunately, corporates would be heaving a collective sigh of relief. The good news is that the FMV Rules are structurally consistent with past provisions where the tax law sought to provide a minimum FMV on which tax will apply even though the contracted consideration may be lower. For example, if a plot of land is transferred for 100 whereas its FMV (stamp duty value) is 125, tax applies assuming the sale consideration to be 125.
It’s been widely assumed that the government’s intent behind providing FMV as deemed consideration for slump sale was to plug loopholes that were being exploited to reduce tax impact on transactions, rather than create new domestic transfer pricing norms. Though seemingly well intentioned, the FMV Rules for slump sale had the potential to create enormous uncertainty for taxpayers if they were based on arm’s length basis or Discounted Cash Flow method. Thankfully, whatever be the controversy over the retrospective nature of the amendment, the content of the FMV Rules do not disappoint. The FMV Rules stick to the script as being anti-abuse rules, largely in line with other comparable cases where sale consideration is deemed to be a prescribed FMV.
The FMV Rules provide that the sale consideration will be considered as the higher of the following: