Background
The Chandigarh Bench of National Company Law Tribunal (“NCLT”) rejects Income-tax Department’s (“ITD”) plea to deny sanction to amalgamation by invoking General Anti Avoidance Rules (“GAAR”) and approved the Scheme of Amalgamation between Panasonic India Private Limited (“Transferor”) and Panasonic Life Solutions India Private Limited (“Transferee”) (collectively referred as “Petitioner Companies”).
The NCLT is a quasi-judicial body in India that adjudicates issues relating to corporate governance, corporate laws and insolvency resolution. As per prescribed procedures, notice of hearing was served upon by NCLT to the Income Tax Department (ITD) along with other regulatory bodies to register any objections on the said scheme. The ITD made certain observations wherein it stated that the scheme is not at arm’s length having its main objective as to take benefit of carry forward of losses of Transferor and thus GAAR provisions should be invoked.
GAAR provisions under the Income-tax Act (“act”) came into effect from April 1, 2017. The GAAR provisions enable tax authorities to declare an arrangement to be an Impermissible Avoidance Arrangement (“IAA”) and provide broad powers to tax authorities to determine tax consequences by disregarding any structure, denying treaty relief, etc.
The Petitioner companies had prayed for sanctioning of the scheme of Amalgamation between the respective companies stating that they have clearly made out a case of operational synergy between the amalgamating companies and that the scheme is for business consolidation and the tax arrangements are merely a consequential fall out of the implementation of the Scheme.
Representations by ITD
- The Scheme was not at arm’s length and could not be termed as a prudent acquisition on any commercial terms and all the benefits accrued to Panasonic Japan only (Effective owner of the Petitioner Companies).
- It is further alleged that the scheme of Amalgamation’s main objective appears to take benefit of accumulated losses of around INR 14,375 million which are eligible for set off in future periods.
- It is further stated that there will be a loss of revenue approximately to the tune of INR 3,594 million on account of possible non-payment of the capital gains realizable by the shareholders of the Transferor Company while selling shares of the Transferee Company in the future as these shareholders are residents of Singapore and the Netherlands and they enjoy such benefits under the provisions in the respective DTAAs.
- It is further stated that the merger is nothing but a vehicle to transfer accumulated losses eligible for set off from Transferor to Transferee Company which would attract GAAR provisions and the provisions of Section 96(1) of the Income-tax Act, 1961.
Response by Petitioner Companies
- The Scheme was entered into for various commercial reasons which includes reduction in operating and marketing costs, economies in procurement, increased value to customers, offering holistic customer solutions, and enhancing shareholder’s value.
- No prejudice was caused to the Revenue since the conditions of section 2(1B) read with section 47 of the Act were fulfilled.
- There was no loss to the Revenue with respect of capital gains in the hands of the shareholders of the Transferor company upon the ultimate sale of shares in Transferee company since non-resident shareholders were in anyway not obligated to pay capital gains taxes by virtue of the relief under the India’s tax treaty with Netherlands and Singapore on transfer of shares of the Transferee company if the transaction of merger had not taken place.
- Conditions laid down under section 72A read with Rule 9C of the Income Tax Rules, 1962 (“IT Rules”) would be fulfilled by the Petitioner companies in order to qualify for carry forward and set off of unabsorbed business losses and brought forward depreciation of the amalgamating company in the hands of the amalgamated company and all the pending tax litigation of the Transferor company was to continue in the hands of the Transferee company in the same manner.
NCLT Ruling
- The rationale of the scheme justified the claim of the Petitioner companies that the scheme was for business consolidation and the tax arrangements were merely a consequential fallout of implementation of the scheme of amalgamation by placing reliance on the decision of the Supreme Court in the case of Hindustan Lever Employees’ Union V. Hindustan Lever Ltd.1 where it was held that “unless there is some illegality or fraud involved in the scheme the court cannot decline to sanction the scheme of amalgamation”.
- The provisions of section 72A and section 79 of the Act were sufficient to protect the interests of the Revenue in the case of amalgamation/demerger. Section 72A of the IT Act, contains provisions relating to carry-forward and set-off of accumulated loss and unabsorbed depreciation allowance in case of re-organization of business by way of amalgamation or demerger, etc.
Section 79 of the IT Act provides that the accumulated business losses of a company may not be carried forward and set off, if on the last day of the previous year, pursuant to a change in shareholding, shares representing at least 51% of the voting power of the company are no longer beneficially held by persons who beneficially held shares representing 51% of the voting power of the company on the last of day of the year in which the losses were incurred. - Since the scheme of amalgamation approved by NCLT cannot override the existing provisions of the Act, the Revenue can examine the issues arising therefrom at the time of assessment of the Petitioner companies.
- As regard GAAR, in case the assessing officer during assessment/reassessment proceedings believes that GAAR should be invoked, the Income tax Department is at liberty to do so provided the case is referred to Principal Commissioner or Commissioner of Income Tax who in turn has to refer the matter to the approving panel in accordance with the provisions of section 144BA of the Act.
Rejecting the objections raised by the Income-tax department and considering that the proposed Scheme of Amalgamation was in compliance with the requirements of all the relevant sections of Companies Act, 2013, the NCLT sanctioned the proposed scheme of amalgamation.
Conclusion
This order is a welcome step and affirmation by the NCLT of the taxpayer’s right to arrange its affairs in a tax-efficient manner provided that the sole objective behind the transaction should not be to obtain a tax-benefit. The fact that a scheme of arrangement may result in tax benefits for the parties should not be the determinative factor in withholding sanction to a scheme, provided it is real or genuine and has a commercial rationale. However, the order should not be seen as an absolute sanction of the scheme but the tax authorities are free to examine the issues during the tax proceedings.
1 [1995] 83 Comp Cas 30 (SC); [1995]
