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Advisory on acquiring a software application development business

Engagement: SKP was engaged by a USD-80-billion Japanese multinational conglomerate for assisting them in an acquisition of a part of the business of two Indian technology companies engaged in software application development

Solution/ Value Addition
During the due diligence process, SKP pointed out that the profits were overstated as the expenses were incorrectly capitalised, and as most of the employees were on a contract basis, the continuity after takeover may be disrupted. Further, even though it was outside the envisaged scope, we highlighted the fact that the patent for the software application was filed by the Director in his personal capacity and not in the name of the company. Therefore, the ownership of the software application would be questionable.

SKP also highlighted the fact that certain activities carried out by the company may result in tax exemption as provided under the Income Tax Act being declined to the company. As a result, the company would need to pay taxes, making the acquisition slightly unfavourable for the Japanese company.