March 2010
Capital gains arising on transfer of Indian assets by way of amalgamation of overseas companies with an Indian company, is exempt from tax in the hands of the overseas amalgamating companies under section 47(vi), read with section 2(1B) of the Act.
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18 Star Television Entertainment Limited
(AAR) (2010–TIOL-01-ARA-IT)
Sections 47(vi), 47(vii), 2(1B)
Dated: 21.01.2010
Issues:
-
Capital gains arising on transfer of Indian
assets by way of amalgamation of overseas companies with an Indian company, is
exempt from tax in the hands of the overseas amalgamating companies under
section 47(vi), read with section 2(1B) of the Act.
-
Shareholders of overseas amalgamating companies
are entitled to exemption under section 47(vii), read with section 2(1B) of
the Act.
-
Taxpayers are entitled to plan affairs so as to
avail of the benefit of tax exemptions and are not precluded from minimising
their tax burden. Only a sham or a nominal transaction or a transaction which
is a contrived device, solely for tax avoidance, can be ignored.
Facts:
-
The applicants — three
group entities of the Star Group — were foreign companies registered in UAE/BVI.
These companies (herein Amalgamating Companies) owned Indian telecasting
channel rights, as also certain overseas assets. The Amalgamating Companies
disposed of their non-Indian assets and proposed a scheme of amalgamation with
another group company in India (viz. SIPL). SIPL is held by two Mauritius
companies.
-
The main reason for the
amalgamation was stated to be to obtain operational synergies, enhanced
flexibility and to create a strong base for future growth of the entities.
Upon amalgamation, SIPL was to issue shares to the shareholders of the
Amalgamating Companies, based on a fair swap ratio determined by the valuer.
-
The scheme of amalgamation
was filed with the Bombay High Court for approval, as required under the
provisions of sections 391 and 394 of the Companies Act, 1956. The application
to the AAR was filed at the time when the amalgamation petition was pending
before the High Court for approval.
-
The issue before AAR was
whether the scheme of amalgamation would result in any capital gains tax
liability in the hands of the Amalgamating Companies or their shareholders.
-
The applicant’s
contentions before the AAR were:
(a) The conditions stipulated for exemption under sections
47(vi) and (vii), read with section 2(1B) were fulfilled and, hence, capital
gains were exempt from tax.
(b)
The scheme of amalgamation
had specifically provided that all liabilities including arrears of tax dues
of the Amalgamating Companies would vest in and would be ultimately recovered
from the assets of the amalgamated Indian company. As a result, the interests
of the tax department were not likely to be prejudiced.
(a) The object of the scheme of amalgamation was to avoid
capital gains tax arising on the transfer of business by the Amalgamating
Companies.
(b) Had the parties directly transferred the shares of the
amalgamating companies to the amalgamated company, capital gains arising on
such transfer would have attracted tax in India.
(c) The scheme of amalgamation should be kept on hold until
the high court has accorded its sanction, as the tax department would then be
able to present its case before the court on the adverse financial
repercussions of merger.
(d) There was no business or commercial purpose for the
proposed amalgamation. The object of the scheme was primarily to avoid payment
of taxes and it was a plan to artificially inflate profits and reduce
liability of the amalgamating companies.
Held
The AAR accepted the applicant’s contentions and held:
(a) Capital gains arising due to the proposed amalgamation
would be exempt from tax in the hands of the Amalgamating Companies as well as
their shareholders, as the conditions prescribed under section 47 (vi)/(vii)
of the Income Tax Act would be fulfilled.
(b) The contention of the tax department that acceptance of
the application should be kept in abeyance until the high court has accorded
its approval, cannot be accepted as it would lead to the AAR, a statutory
authority, refusing to exercise jurisdiction vested in it by law. The Ruling
was sought and was also provided on the basis that the scheme will have
approval of the Court. The ruling would take effect only after the court’s
approval. The AAR can provide its ruling on the proposed transaction in the
interest of providing a firm idea of tax implications in India.
(c) The scheme is not
likely to jeopardize the interests of the tax department as all tax dues of
the amalgamating companies vest in and can be recovered from SIPL.
(d) The application cannot be rejected on the ground that
it is a pure and simple design to avoid capital gains tax. Relying on the Apex
Court’s decision in the case of Azadi Bachao Andolan and the Gujarat High
Court’s decision in the case of Sakarlal Balabhai , the AAR held that it was
possible for a taxpayer to enter into a transaction in such a manner that
legitimate tax exemptions are availed of and the tax liability is reduced. The
AAR also observed that:
