|CORAM:||B.S.V Prakash Kumar (JM), Ravikumar Duraisamy (TM)|
|GENRE:||Domestic Tax, Other Laws|
|CATCH WORDS:||GAAR, Impermissible Avoidance Agreement, tax avoidance|
|COUNSEL:||Gaurav Joshi, Hemant Sethi, Somasekar Sundaresan|
|DATE:||August 30, 2018 (Date of pronouncement)|
|DATE:||December 12, 2018 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|GAAR: Objections of the Dept that the scheme of amalgamation is a deliberate measure to avoid tax burden and is an ‘Impermissible Avoidance Agreement’ because it results in avoidance of Divided Distribution Tax (DDT), tax on business profits and MAT u/s ll5JB etc has merit. The scheme is not in public interest & cannot be sanctioned|
21. Objections of Income Tax Department:-
Income Tax Department raised various objections vide its letter dated 05.10.2017 and the same are narrated below:-
(1) Office of the Deputy Commissioner of Income Tax Mumbai vide reply letter dated 05.10.2017, submitted a detailed report submitting the objection against the scheme of amalgamation and arrangements between Gabs Investment Pvt. Ltd (GIPL) and Ajanta Pharma Ltd. (APL) and respective share holders. This representation has been forwarded with Prior approval of Principal Commissioner Income Tax (Central)-4.
The department observed that 61.17% of shares are held by Agrawal Family Members in APL as on 31.07.2017. Share holding of GIPL is controlled by Agrawal Family Members only.
(II) The income tax department after considering the facts, the family tree of Agrawal Family, background of the scheme, salient features of the scheme, consideration payable, accounting treatments in the books of APL as per the scheme, financials of GIPL, financial implication of the scheme, the departments has made a valid observation as under.
(Ill) The department has articulated that GIPL being a private limited company has to be considered as separate entity and any “assets” of the Pvt. Ltd. company cannot be transferred and distributed directly. The company has to pay the Divided Distribution Tax (DDT) @ 20% and accordingly the DDT will be Rs 134.16 Crores. This DDT of Rs 134.16 Crores will be loss if this amalgamation scheme is approved.
(IV) The total cost of acquisition of shares of APL by GIPL is Rs. 48,73,20,332 as per the submissions made by APL. Further, as per the object mentioned in the MOA of GIPL, the investment and dealing in equity/shares is the business of the company and once the equity is sold in the market the business profit will be acquired by GIPL and the amount will at Rs 958.34 Crores (Rs 1007.07 Crore – Rs 48.73 Crore). On this business profit, Income tax @ 30% is payable and accordingly Rs 287 .50 Crores income tax will be payable by the GIPL. Further, in case the applicability of MAT u/s ll5JB @ 20% should also be kept in mind, in case the GIPL adopts another method of computation of income. This tax of Rs 287.50 Crores will be lost if this amalgamation scheme is approved by the NCLT Mumbai.
(V) In view of the above computation, total loss to the revenue will be approximately Rs 421.66 Crores, if this amalgamation Scheme is approved.
(VI) The department has further argued that in view of GAAR provisions, the scheme of amalgamation is a deliberate measure to avoid tax burden by using the via media of NCLT and this scheme is purely Impermissible Avoidance Agreement (IAA) and should not be allowed by the NCLT.
(VII) The proposed scheme of arrangement is nothing but Round trip financing which includes transfer of funds among the parties to the arrangements through the series of transactions.
36. All these 3 share holders are also share holders of Gabs.
Total number of share holders of APL as on 31.03.201 7 is 38,075. The rationale given in the scheme among others thing s are the proposed amalgamation of the transferor company into Transferee Company by the scheme, as a result of which the share holders of the transferor company viz. the promoters of the transferor company (who are also the promoters of the transferee company) shall directly hold shares in the transferee company and the promoters would continue to hold the same percentage of shares in the Transferee company pre and post merger.
37. The above rationale presented by the petitioner company is without any Justification. Petitioner has to comply with all applicable laws. By this scheme of amalgamation and arrangement Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the Income Tax Department as discussed Supra. Any transfer of property from one entity to other has to be treated as sale/transfer and the same has to comply with applicable provisions of law including applicable tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc.
However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income Tax Department, their undertaking to pay the huge tax liability as pointed out by the income department etc.
38. From the above analysis of the financials of Gabs, the bench noted that with an equity share capital of only Rs 1,91,100 the promoters /shareholders of Gabs who are also the common promoters of APL, by way of this proposed scheme of amalgamation and arrangement would get the shares of APL worth Rs 1477.50 Crores (market value as on 31.03.2017) and that too without paying any Income Tax, Stamp Duty etc. for which the bench is of the considered view that the same is not in the public interest, thousands of shareholders of Transferee company especially retail shareholders. The market value of the same number of shares as at 31.03.2016 was Rs 1,182.59 Crores.
39. Since Income Tax department (IT) has raised strong objections about tax benefit, tax avoidance, tax loss as discussed above, we are of the opinion that it would be advisable to settle the important /crucial issue of huge tax liability before sanctioning the scheme by the Tribunal rather than disputing the same at a later stage after the scheme is sanctioned by the Tribunal. It is mandatory as per section 230 (5) of the Companies Act, 2013, a notice under sub section (3) along with all the documents in such form shall also be sent to central government , Income Tax Authorities, RBI, SEBI, ROC, stock exchanges, OL, CCI and other Sectoral regulators or Authorities for their representations. In response to the notice received as per above section the Income Tax Department has raised valid observation/objections as detailed above, we find merit in the objections raised by Income Tax Department and we are also inclined to agree with the objections raised.
40. As discussed supra the financials of Gabs are also not strong rather it had weak financials from the financial year 2011 upto 2015. Whereas by this proposed scheme of Amalgamation and Arrangement the 4 common promoters of both transferor and transferee company would get 83,92,262 equity shares of APL and the market value as on the appointed date works out to Rs 1,477 Crores approx. It is quite interesting to observe that on an investment of approx Rs 48.70 Crores the Common Promoters would get market value of Rs 1477 Crores without paying any income tax. Considering the above facts and circumstances, analysis of balance sheet, profit and loss account for various years, we are of the considered view that the proposed scheme of Amalgamation and Arrangement would benefit only the common promoters of both transferor and transferee companies and the scheme is devised only to benefit the common promoters and it does not serve any public interest as envisaged , more so unfair advantage flows only to the common promoters therefore, the bench is not inclined to sanction the scheme as proposed.
48. It is an admitted legal position that Gabs is holdings shares in APL and not the 4 individual share holders whose names are mentioned above. Therefore any allotment of the shares other than to the original share holders would amount to transfer /sale of shares and that would attract applicable provisions of tax. In this case, the Income tax department has rightly quoted various provisions, objections and huge loss to exchequer etc. In the instant case shares of the transferee company were not directly allotted to individual share holders of Transferor Company, or it is not a bonus shares to be allotted to the individual share holders of the transferor company, nor it is transmission of shares to the individual share holders of the transferor company. Therefore we are also inclined to agree with the objection raised by the Income Tax Department. Any scheme of amalgamation/merger has to be in compliance with the Section 2(1B) of the Income Tax 1961. However, in the instant case, IT Department has raised serious objections not to sanction the scheme and highlighted huge tax loss to the government.
49. From the records it is observed that the transferor company Gabs Investments Pvt. Ltd is holding approximately 9.54% of the equity shares of APL and its major income ranging from 92%-99% is the divided income from APL. As discussed supra Gabs has only 4 share holders each having 25% paid up share capital of Gabs. Further as discussed supra, all these 4 share holders and the Gabs itself holding shares ranging from 24% -30% shares of APL during the financial year ended 31.03 .20 I 6 & 20 I 7 respectively. As per the proposed scheme of amalgamations and arrangement shares of transferee company will be allotted only to these 4 share holder s of Gabs who are nothing but promoters of the transferee company /common promoters of both transferor and transferee company.
50. We have also taken into consideration, objections /representation of Income Tax Department and total loss of revenue to the exchequer amounting to approximately ~421.66 Crores (~ 287.50 Crores + ~134.16 Crores), the proposed scheme is a deliberate measure to avoid tax burden , it results directly and indirectly, in the misuse or abuse of the provisions of IT Act etc.
As discussed supra, no provision is also made with regard to open offer to be made by the promoters of Gabs.
51. Incidentally the bench also noted that the common Promoters of petitioner companies are prima-facie required to comply with the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. As per the report of the Income Tax Department, the proposed scheme would amount to transfer/sale of shares.