Service Tax — Services rendered in respect of merger and acquisition are taxable services provided by management consultant

Circular No. 1/1/2001-ST (Section 37-B), dated 27-6-2001

F. No. 177/2/2001-CX.4

Government of India

Ministry of Finance (Department of Revenue)

Central Board of Excise & Customs, New Delhi

Subject :          Services rendered in respect of merger and acquisition - Whether covered under the scope of taxable services provided by “management consultant”

I am directed to say that a doubt has been raised as to whether services rendered in respect of merger and acquisition will be covered under the scope of taxable services provided by a “management consultant”.

In response to a public notice issued on 15th February, 2. 2001, by the Central Board of Excise and Customs, the trade and other agencies have represented that services provided in respect of merger and acquisition is in the nature of financial advisory services and is not a management consultancy service. It is stated that services provided by them involves, inter alia, analysis of business opportunities for merger or acquisition, valuation of target companies, transaction structuring, negotiating, documentation and compliance with the regulations for effecting a buy or sale transaction. Acquisition or divesting of share holdings is purely a financial transaction and are distinct from the advice or service provided for deciding to divest/merge or acquire an organisation. Hence they claim that the services provided by them would not be covered under the taxable services provided by ‘management consultant’.

The matter has been carefully examined by the Board. The 3. term ‘management consultant’ has been defined in Section 65(37) of the Finance Act, 1994 to mean “any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organisation in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualising, devising, development, modification, rectification or upgradation of any working system of any organisation”. Further the taxable service in respect of management consultant has also been defined under clause (r) to Section 65(72) as any service provided in connection with the management of any organisation, in any manner.

‘Management’ has been 4. generally understood to mean the process of application of management principles, methods and practice for the efficient functioning of different systems of an organisation such as production, personnel, marketing or finance. It is seen that as a part of modern business management practice, company form of business organisations pursue merger and acquisition to strengthen their competitive position in one or more business area such as product groups or markets. Merger and acquisition is also resorted to enhance operating efficiencies and to capture synergies in one or more functional area such as marketing, manufacturing, R & D or finance. Similarly, companies undertake divestiture transaction to withdraw from business areas with weak competitive positions or to reduce the losses/costs. From the above, it appears that merger, acquisition or other forms of restructuring have emerged as key element in management of modern business organisation.

The merger and advisory services rendered by any adviser 5. or consultant may include one or more of the following specific components or activities. These may either be on the buy-side transaction assisting companies to acquire or on the sell-side assisting companies to divest, resulting into merger, acquisition or other forms of organisational restructuring :-

(a)        Strategic review and establishing strategic rationale for merger or acquisition;

(b)        Performing financial and business analysis;

(c)        Target screening, identification and evaluation;

(d)        Financial analysis and valuation of target company or merging companies;

(e)        Carrying out financial and legal due diligence;

(f)         Detailed analysis of regulatory and tax implications and evaluation of alternative structures;

(g)        Deal structuring such as merger, friendly acquisition, hostile bid, asset buy-out, demerger, slump sale etc.;

(h)        Advising as to the means and source of financing transactions and arranging finance, if required;

(i)         Complying with regulatory requirements such as managing public offer under SEBI’s Takeover Regulations;

(j)         Counselling on bidding strategy and tactics;

(k)        Establishing negotiating positions and assist in negotiating with the target company management;

(l)         Coordinating with legal counsel in finalising the terms of the purchase/acquisition agreement; and

(m)       Assisting in post-acquisition integration.

Out of the above services, so far as (a) and (m) are concerned these services are mainly offered by strategy/general management consultants or other consultants specialising in Human resource management. In so far as (b) to (l), these services are offered, either jointly or severally, by variety of firms.

The services provided in connection with merger and 6. acquisition is in the nature of providing an advice, assistance in the financial management of an organisation resulting into merger, acquisition or other form of financial or organisational restructuring of a company. The nature of services provided by an adviser/consultant vary depending upon the contractual obligation and the legal compliance under various regulations governing such transactions. However, these factors in no way change the nature of service provided by such service provider. Accordingly, they appear to be providing service in relation to management of an organisation.

In this regard, the Board had consulted the Indian 7. Institute of Management, Ahmedabad for obtaining an expert opinion on the subject matter. They have opined that the term “Management” is generally understood to mean running the affair of an organisation in an organised and systematic manner. To be able to do this efficiently and effectively, management typically involves carrying out a host of activities, functions and tasks and at different levels. Thus management encompasses both strategic and operational level functioning and would include tasks such as planning, organising, staffing, directing, controlling and coordinating. Management also invariably involves designing organisational structure around functions such as marketing, manufacturing, research and development and finance and/or business area such as product groups or geographical markets. Thus management of any organisation involves carrying out a wide variety of clearly defined activities across a number of organisational sub-units in a coherent and coordinated manner. Since the expression “Management” is an inclusive term, ‘management consultant’ would also be equally encompassing expression and would include any adviser who renders services on any aspect of management. They have further opined that financial advisory services rendered in merger and acquisition transactions are clearly in the nature of services in connection with the management of an organisation as merger and acquisition themselves are important dimension of modern management.

After considering the ILO publication on “management 8. consulting”, various other literature on the subject, management practices and profiles of practicing management consultants they have concluded the following: (i) the term ‘management’ is a broad term to cover the various functions and the multifarious activities required for its efficient and effective functioning; (ii) management consulting is not restricted, but is wide enough to include advisory services rendered on any aspect of management; (iii) merger and acquisition are an important aspect of management of any organisation today; and (iv) advisory services, including financial advisory services, for merger and acquisition clearly fall with in the realm of management consulting. It is also stated by them that even though merger and acquisition is provided by a variety of agencies, known as investment banks/merchant banks, corporate finance/advisory services of commercial banks/financial institutions, corporate finance/advisory services division of accounting/audit firms, specialized mergers and acquisition boutiques, strategy/general management consultants having differing organisational or ownership profile, such semantic differences in any way do not obliterate the basic nature of the services that clearly relate to management of an organisation. Accordingly they had concluded that the financial advisors for merger and acquisition would come under the category of ‘management consultant’ for the reasons that the services provided by them are clearly in connection with the management of any organisation.

Taking into account all the above points, the Board has 9. taken a view that merger, acquisition and other form of restructuring of business organisation have emerged as key element in the modern management and as the term ‘management’ covers the various functions and the multifarious activities required for efficient and effective functioning of an organisation, any advisory services rendered in merger and acquisition transaction are also includible under the taxable service rendered by ‘management consultant’. However, those agencies providing services as per the requirement of any statute or regulation such as Takeover Regulations of SEBI and, if their role is limited to the compliance of such act or regulations and not governed by any contractual relationship with the advisee company, then such services will not be covered under the scope of ‘management consultant’.

Now, therefore in exercise of the powers conferred 10. under Section 37B of the Central Excise Act, 1944, (as made applicable to service tax by Section 83 of the Finance Act, 1994) the Board hereby clarifies that any services rendered in relation to merger and acquisition will be covered under the scope of taxable services provided by “management consultant” and these services will be liable to service tax accordingly.

It is further clarified that certain agencies such as 11. merchant banks who are required to play only a statutory role under any act or regulation such as Takeover Regulations of SEBI, and do not provide any advice or consultancy but merely verify and submit a report to the concerned authorities, in connection with merger and acquisition transaction are not treated as ‘management consultant’. However, with the changes brought in by the Finance Act, 2001, the services provided by such agencies would also be covered specifically under the ‘banking and other financial services’ [Section 65(10)(vi)] on which the service tax levy will come into force from a date to be notified by the Government.

The Board further directs 12. that copy of this order be sent to all Chief Commissioners and Commissioners of Central Excise for being observed and for being made available as required to all other persons employed in the execution of the Act and for issue of trade notice.

Receipt of this Order may please be acknowledged.

Hindi version will follow.