TaxTMI 
TaxTMI 
2011 (3) TMI 1470
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....lar Limited (the transferor company No. 7) and M/s. Vodafone Essar Infrastructure Limited (hereinafter referred to as the transferee company). 2. The registered offices of the petitioner/transferor company Nos. 2, 5 and 6 and the transferee company, all of whom have approached this Court, are situated at New Delhi, within the jurisdiction of this court. 3. The registered offices of the transferor company Nos. 1, 3, 4 and 7 are situated at Mumbai, Kolkata, Ahmedabad and Coimbatore, respectively. 4. The petitioner/transferor company No. 2 was originally incorporated under the Companies Act, 1956 on 27-3-1992 with the Registrar of Companies, Tamil Nadu under the name and style of Sterling Cellular Limited. The company changed its name to Hutchison Essar Telecom Limited after passing the necessary resolution to this effect and obtained the fresh certificate of incorporation on 12-8-2002. The company again changed its name to Hutchison Essar Mobile Services Limited and obtained the fresh certificate of incorporation on 1-3-2005. Thereafter, the company shifted its registered office from the State of Tamil Nadu to NCT of Delhi and obtained a certificate in this regard from the Registr....
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....,00,00,00,000 divided into 20,00,00,000 equity shares of Rs. 10 each. The issued, subscribed and paid up capital of the company is Rs. 1,99,71,64,690 divided into 19,97,16,469 equity shares of Rs. 10 each. 9. The authorized share capital of the petitioner/transferor company No. 5, as on 31-3-2009, is Rs. 10,42,00,00,000 divided into 54,00,00,000 equity shares of Rs. 10 each aggregating Rs. 5,40,00,00,000; 2,00,000 preference shares of Rs. 100 each aggregating Rs. 2,00,00,000 and 5,000 preference shares of Rs. 10,00,000 each aggregating Rs. 5,00,00,00,000. The issued, subscribed and paid up capital of the company is Rs. 7,01,60,75,000 divided into 53,96,07,500 equity shares of Rs. 10 each aggregating Rs. 5,39,60,75,000; 2,00,000 preference shares of Rs. 100 each aggregating Rs. 2,00,00,000 and 1,600 preference shares of Rs. 10,00,000 each aggregating Rs. 1,60,00,00,000. 10. The authorized share capital of the petitioner/transferor company No. 6, as on 31-3-2009, is Rs. 1,01,20,00,000 divided into 10,12,00,000 equity shares of Rs. 10 each. The issued, subscribed and paid up capital of the company is Rs. 1,01,10,00,000 divided into 10,11,00,000 equity shares of Rs. 10 each. 11. The....
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....e policy of the Government of India, as reflected in the Report of the Working Group on the Telecom Sector for the Eleventh Five Year Plan (2007-2012) issued by the Department of Telecommunications, Ministry of Communications and Information Technology, Government of India, wherein it is recommended, inter alia, in Chapter 5.5. thereof, that the parties concerned; "Promote sharing of infrastructure so that costs can be kept down - this is essential for rural penetration. Incentivize such sharing." 14. So far as the share exchange ratio is concerned, the Scheme provides that the Scheme is intended to restructure, within the VEL Group, the holding of the assets constituting the Passive Infrastructure Assets in a more efficient manner consistent with the diverse needs of business, and does not involve any movement of assets or liabilities to any company outside the VEL Group. Since the transfer of the Passive Infrastructure Assets is within the VEL Group, such transfer shall be without any consideration. Accordingly, the transferee company shall not be required to issue any shares or pay any consideration to any of the transferor companies or their shareholders for acquiring the Pas....
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....angement, all the employees of the transferor companies engaged in or in relation to the Passive Infrastructure Assets of the Transferor companies who are in such employment as on the appointed date shall continue to remain employees of the respective transferor companies, without any break or interruption in their services. 20. The Regional Director has further submitted that the details of individual assets and liabilities and values thereof pertaining to, "Passive Infrastructure Assets", of all the transferor companies proposed to be transferred to the transferee company are not mentioned in the Scheme, and that such details of individual assets and liabilities thereof should have been part of the Scheme so that the same are known to the shareholders and creditors of all the companies. 21. In response to the above objection, the petitioner companies in their rejoinder stated that assets have been defined in the Scheme of Arrangement and that, as such, the assets being transferred are identifiable and a list of assets of each of the petitioner companies is not required to be a part of the Scheme. The petitioner companies have also placed on record a provisional list of assets t....
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....prior written approval of the licensor even in cases of amalgamation under section 391/394 of the Companies Act, 1956. 25. In response to the above objection, the petitioner companies have submitted that none of the transferor companies are transferring any telecommunication licenses issued by the Department of Telecommunications to the transferee company pursuant to this Scheme and that the aforesaid letter issued by the Department of Telecommunications has no application to this Scheme. Consequently, the transferor companies before this court will continue to operate as telecommunication service providers even after the demerger is effected. It is further submitted that the transferee company has been registered as an Infrastructure Provider Category- I by the Department of Telecommunications, which permits the transferee company to establish and maintain Passive Infrastructure Assets to lease, rent or sell such assets to licensees of the telecom services under section 4 of the Indian Telegraph Act, 1885. A true copy of this registration certificate dated 17-6-2008 has also been placed on record by the petitioners. In view thereof, this objection raised by the Regional Director ....
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....interest in mind, i.e., that nothing in the Scheme should come in the way of applicability of the relevant taxing statutes to the transactions flowing therefrom. Although it is disputed by the petitioners, the Income-tax Department has claimed an outstanding tax liability of approximately Rs. 19 crore against the petitioners before this Court, from assessment year 1999-2000 onwards. 28. In this context, two broad submissions were made by the Income-tax Department. The first was that the expression 'arrangement with members' used in section 391, did not contemplate a gift from one party to the Scheme to the other party for the reason that the aforesaid expression contemplated an arrangement in the nature of a contract with a consideration involved, which is missing in this case. The second submission was that the Scheme is against public interest. 29. At the outset, it is necessary to record that Dr. Singhvi, counsel for the petitioners, submitted, on instructions, that notwithstanding any sanction or approval that may be granted by this Court to the proposed Scheme, his clients would be bound by all obligations that may be imposed on them under the applicable provisions of the In....
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....ift, as understood in law, and that the "arrangement", contemplated by section 391 can only be a transaction in the nature of a contractual arrangement for consideration. In respect of the effect of this transaction on the non-leviability of capital gains tax, the Income-tax authorities submitted that this rendered the Scheme contrary to public interest, which issue will be taken up subsequently. But first, the issue whether a transfer by gift is within the scope of a Scheme of arrangement, shall be dealt with. 33. Section 391 contemplates a scheme which is a compromise or arrangement with a company and its creditors or any class of them, or between a company and its members or any class of them. According to counsel for the Income-tax Department, the present Scheme falls into neither of the above categories, and therefore, cannot be sanctioned by this Court in exercise of its jurisdiction under section 391 because it contemplates neither a compromise nor an arrangement. According to counsel, the scope of the expression "arrangement", contemplated under section 391, is limited only to a contract which involves the transfer of consideration from each party to the other, and therefo....
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....on of a director. Admittedly the rights of a member are very limited, and so it may be said that a member does not lose much under the scheme because he has not much to lose. Nor did he pay much for his membership rights in the first place - merely an entrance fee of five shillings. Be that as it may, the company has become prosperous, no doubt as a result of the support which members gave to the company's marketing undertaking during the period that it traded, and the profit thereby made by the company. However little a member originally paid for his membership, and however small his effective stake in the company and his opportunity to control its operations, nevertheless he has rights and under the scheme he loses all." He also relied on the following : "Then comes the more serious point, whether this is a compromise or arrangement which is within either the words of the section or within the true spirit of the legislation; that is to say, whether the court has either jurisdiction to sanction it, or ought to sanction it. I do not think myself that the point of jurisdiction is worth discussing at much length, because everybody will agree that a compromise or agreement which has....
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....tion of the rights of an objecting minority member by virtue of a majority- approved Scheme, cannot amount to either a 'compromise' or an 'arrangement' by that company with its members and therefore any sanction granted to such a Scheme would amount to sanctioning a scheme of confiscation. It also took the view that it would be improper for the Court to allow such an arrangement to be forced on any class of members, since it could not reasonably be supposed by any sensible commercial standard to be for the benefit of that class. The relevant distinguishing factor was that, in that case, the objectors were the members who were subject to the proposed confiscation. However, in the present case, as also clarified by Dr. Singhvi at the Bar, in view of the nature of the shareholding between the transferors and transferee company, there is clearly no question of any confiscation of the rights of any party to the Scheme. Furthermore, all the concerned shareholders have given their consent and there is no objecting shareholder. 38. Mr. Mehta, who addressed the Court for the Income-tax Department on this aspect, further sought to interpret the meaning of the words, "compromise or arrangeme....
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....n "give and take" used in that judgment implies a degree of voluntariness in the transactions contemplated by the Scheme between all parties thereto, and no more. Even the offer of a gift by the donee and its required acceptance by the donor, are sufficient to satisfy this test. In that case (supra), the Court did not venture further since that decision was rendered in the light of a scheme passed by the majority which operated to confiscate the rights of the objecting minority. The scheme was held to be a confiscatory transaction because there was no element of voluntary, 'give and take', in the sense explained above, since it could not be said that what was given, was given willingly, or that it was taken with the consent of the giver. In the light of the foregoing, it becomes clear that in a confiscatory Scheme, since there is no element of voluntariness, there can be no give and take, as understood above. To put it differently in that case (supra), there was no 'giving' by the members whose rights were being forfeited, rather, there was only a 'taking' sanctioned by the majority of the members as per the Scheme, which made the Scheme confiscatory qua the objecting minority. The....
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....cient consideration, he admitted that it would be sufficient and that, in that case, all objections to the issue of transfer by way of a gift would no longer stand and the Scheme would be squarely covered under section 391 of the Companies Act, 1956. 42. Counsel for the Income-tax Department then tried to rely on Ganpat Rai (supra ), wherein the expression "compromise" in section 20(3) and (5) of the Legal Services Authorities Act, 1987, was examined by the Supreme Court to mean that a compromise is always bilateral and implies mutual adjustment, that some element of accommodation on each side is implied in the word itself, and that "it is not apt to describe total surrender". Relying on this judgment, counsel submits that the act by which a donor gifts any property to a donee would be an act of surrender and therefore cannot be construed as an arrangement of the type contemplated under section 391 of the Companies Act. That decision does not hold that, a "gift" amounts to, "total surrender"; nor does the dictionary meaning of the word, "gift" and "surrender" lead us to any such conclusion. The question whether a "gift" also amounts to a, "total surrender", was not before the Supr....
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....ven their unanimous consent to the Scheme for transfer of the passive infrastructure assets for nil consideration, and that there was no dissent expressed by any one of them, nor is there any element of expropriation or surrender in the proposed Scheme. It was also averred by the petitioners that there is indeed a 'compensating advantage' conferred on the transferor companies, i.e., that after the demerger, an asset which previously did not generate any revenue will become a revenue generating asset, and that the enormous maintenance and installation expenditure required to keep such an asset in working condition will be reduced for the transferor companies. Furthermore, this arrangement is in line with the policy of the Government of India. 44. The petitioners relied on Larson & Toubro Ltd., In re [2004] 121 Comp. Cas. 5231 (Bom.), paragraph 58 thereof, to show that although the expression 'arrangement' has not been defined in the Companies Act, 1956, yet it has been held to be of wide scope, including the reorganization of shares and share capital of a company, among other things. Further reliance was placed by the petitioners on Guardian Assurance Co., In Re [1917] 1 Ch. 431, t....
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....s confiscatory, this objection does not survive. 46. The second objection raised by the Income-tax Department was regarding the accounting treatment prescribed in the Scheme. Admittedly, the accounting treatment of the transactions in relation to the demerger is vital for determining the tax treatment of the same. According to the Income-tax Department, by proposing to transfer assets at book value, the petitioners were trying to evade payment of capital gains tax, which would otherwise have been payable if the assets were to be transferred at market value. Further, according to the Department, it was for this reason that the petitioners had not provided any valuation in respect of the passive infrastructure assets that are proposed to be demerged in terms of the Scheme. Admittedly the transfer of assets by the transferor companies to the transferee company for no apparent or real consideration is in the nature of a gift. The permissibility of such a transfer has been established in the discussion above. However, counsel for the objectors submitted that in view of the faulty accounting treatment prescribed in the Scheme, the petitioners would succeed in evading payment of tax liab....
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....ld agree on what constituted a fair price among themselves. However, notwithstanding that there was no requirement in law to provide a valuation of assets proposed to be transferred pursuant to sanction of a Scheme by a Company Court, with a view to establishing the petitioners' bona fide, the net book value of the passive infrastructure assets proposed to be transferred, as on 31-3-2009, have been disclosed to this Court by the petitioners and placed on record vide written submissions which were handed over in Court in response to the objections of the Income-tax Department. 49. Counsel for the petitioners also categorically stated that if the Income-tax Department had any objection with regard to the accounting methodology, it would remain open to the tax authorities to proceed against the transferor companies and/or the transferee company after the demerger is effected. It was also stated on behalf of the petitioners that before the tax authorities, they would not take the stand that the issue of taxability cannot be gone into by reason of the order sanctioning the Scheme. The Bombay High Court in Reliance Communications Infrastructure Ltd., In re [2009] 94 SCL 219, sanctioned ....
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....ition, was rejected. It was held by the Court that deviation from accounting standards, per se, cannot be a ground for rejection of the Scheme. 52. Moreover, since the question of tax treatment of the transactions arising out of the Scheme, which are obviously based on the financial statements and accounts of the petitioners, is being left open, I see no reason why sanction to the Scheme should be withheld only on this ground. 53. Another ancillary issue raised with respect to the issue of the accounting treatment was that the petitioners would then have the benefit of 'double depreciation', to which the petitioners' response was that the Scheme envisages depreciation being claimed by the transferor companies only on the assets that remain with them after the demerger takes effect, while the transferee company shall claim depreciation on the assets it receives after the demerger, and therefore, by this method, there was no question of the petitioners' claiming double depreciation. However, since the objection regarding valuation of those assets, which is necessary to determine the depreciation claimed, has already been discussed above and since it has been made clear that the Inc....
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....anding tax liability payable by the companies at present, and that if any tax liabilities were found payable after the demerger, the transferor companies and the transferee company would continue to generate revenue from their operations and meet the same. Admittedly, the ability of the petitioners to meet tax demands can only be assessed by the revenue stream that they are able to generate. Counsel for the petitioners argued that, even if it were assumed for the sake of argument that the post-demerger net worth of the transferor companies would become negative, even in that situation, each transferor company would be generating sufficient revenue from its telecom operations to meet its tax demands. According to the petitioners, the transferor companies will be more than able to meet all alleged tax claims that were mentioned in the objections filed by the Income-tax Department, if found ultimately payable by the petitioners. According to the petitioners themselves, the estimated net worth of the transferor companies, as at 31-3-2009, was Rs. 14,058 crores, and after demerger, the net worth of all the transferor companies, would be approximately Rs. 10,078 crores. Details of income....
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....e its colour and content from the context in which it is used. The context in which the expression "public interest" is used should permit the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the context of the satisfaction of the court whether its affairs have not been carried on in a manner prejudicial to public interest. That is the colour and content of the expression "public interest" as used in section 394(1), second proviso, and the facts of this case will have to be examined keeping in view the colour and content of the expression "public interest"." 59. In reply, the petitioner's counsel referred to Union of India v. Ambalal Sarabhai Enterprises Ltd. [1984] 55 Comp. Cas. 623 (Guj.), where Wood Polymer's case (supra) was also considered by a Division Bench of the Gujarat High Court which distinguished it on facts and further explained it as follows : "In the case of Wood Polymer [19....
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....erefore, the shareholders of both the companies were not in a position to make an informed decision with regard to the fairness and adequacy of the consideration which was to ultimately pass from the transferee company to the transferor company. It was in these circumstances that the Calcutta High Court held that so long as there is no allegation of violation of any provisions of the Companies Act, 1956, and so long as there was compliance with sections 391, 392 and 394 of that Act, the objection raised by the Central Government regarding avoidance of capital gains was not material and that these were commercial matters best left to shareholders, and that this objection could not per se invalidate the scheme for the alleged reason of avoidance of tax liability since it would, in any case, attract the provisions of the Income-tax Act, as a company cannot escape from its tax liabilities. [See also, Jindal Iron & Steel Co. Ltd. v. Asstt. CIT 2003 (154) ELT 380 (Bom.)] 62. Simply because the tax payable under the business structure adopted by the assessee, which he is otherwise entitled to adopt in law, is reduced, does not, in my view, ipso facto, make such adoption illegal or imperm....
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.... Department to the Schemes filed in this Court and in the Gujarat High Court. 65. Certain additional submissions were also made on behalf of the tax authorities. The first was that the Income-tax Department must be permitted to retain its recourse for recovery in respect of any existing or future tax liabilities of the transferor companies or the transferee company, in respect of the assets sought to be transferred under the proposed Scheme, and that this protection must be made explicit by this Court in its final order and has to bind all the parties to the Scheme, particularly the transferor and transferee companies. I am in agreement with this. As already noted in the preceding paragraphs, there can be no limitation on the powers of the Income-tax Department for recovery, including imposition of penalties etc. 66. The second submission was as regards the tax treatment accorded to the various transactions referred to in the Scheme. The Department's stand was that the approval of the Scheme should in no manner affect the tax treatments of the transactions under the Income-tax Act, 1961 or any other applicable taxing statute, nor would sanction of the Scheme or the effect thereof....
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....e, and the Income-tax authorities are free to move against any of the parties concerned, in case they are of the belief that there has been any impermissible evasion of payment of tax by the petitioners. 70. In my view, if the Court is indeed to sanction the Scheme, the powers of the Income-tax Department must remain intact. The authorities relied on by the petitioners also support this proposition, with the only exception being a situation where the Scheme itself has only one purpose, which is to create a vehicle to evade the payment of tax, rather than mere avoidance of tax. It is also true that the scope of objection that may be raised by the Central Government and the Regional Director is larger, and that of the tax authorities is confined to the question of revenue. It is not open to this Court, in the exercise of company jurisdiction, to sit over the views of the shareholders and Board of Directors of the petitioner companies, unless their views were against the framework of law and public policy, which, as discussed above, is not the conclusion reached here. It is purely a business decision based on commercial considerations. 71. No objection has been received to the Schem....