• PAGE ONE
• INDEX
• HOME

Merger & acquisition transaction -- Merchant banks' services not taxable

Hema Ramakrishnan

NEW DELHI, July 1

THE Finance Ministry has excluded services provided by merchant banks and other agencies in a merger and acquisition (M&A) transaction from the scope of taxable services provided by a `management consultant.'

The rationale accorded is that the role of such agencies is limited to compliance of any statute or regulation -- such as takeover regulations of the Securities and Exchange Board of India (SEBI) -- and not governed by any contractual relation ship with the advisee company.

Merchant banks do not provide any consultancy on an M&A transaction, but merely verify and submit a report to the authorities concerned, according to the Central Board for Excise and Customs (CBEC).

Barring the services of merchant banks, any service rendered in relation to an M&A transaction will be covered under the scope of taxable service provided by the management consultant and will be liable to service tax, the Board has ruled.

The CBEC's ruling has set at rest doubts raised by a section of the industry on the issue. Industry representatives held that services provided in respect of M&A cannot be construed as a management consultancy service, but were in the nature of financial advisory service.

They further opined that acquisition or divesting of shareholdings was a purely financial transaction and distinct from the advice or service provided prior to taking a decision to divest, merge or acquire an organisation.

The Board, on its part, consulted the Indian Institute of Management (IIM), Ahmedabad, to obtain an expert opinion on the matter. Based on their inputs, it has taken the view that merger, acquisition and any other form of restructuring of business organi sation have emerged as key elements in modern management and the term `management' covers multifarious activities required for effective functioning of an organisation.

Any advisory service rendered in an M&A transaction will hence come under the purview of taxable service rendered by a `management consultant,' it has held.

However, the exclusion of the services rendered by merchant banks from the scope of taxable services of a `management consultant' will not translate into a revenue loss for the exchequer. This is because the services provided by these agencies have been covered specifically under the `banking and other financial services' in this year's Budget. Service tax levy on such services will come into force as soon as the Government notifies the same.