TaxTMI 
TaxTMI 
2019 (12) TMI 1043
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....any No. 3) moved joint petition under Sections 230-232 of the Companies Act, 2013, seeking sanction of the Composite Scheme of Arrangement amongst 'Reliance Jio Infocomm Limited' and 'Jio Digital Fibre Private Limited' and 'Reliance Jio Infratel Private Limited' and their respective shareholders and Creditors ("Composite Scheme of Arrangement"). 2. The Petitioner Companies (Respondents herein) filed Company Application seeking dispensation of the meeting of Equity Shareholders of the Petitioner Company No.2 and the Petitioner Company No.3 by seeking directions to convene and hold meetings of Secured Creditors (including Secured Debenture Holders), Unsecured Creditors (including Unsecured Debenture Holders), Preference Shareholders and Equity Shareholders of the Petitioner Company No.1. 3. By order dated 11th January, 2019, passed in Company Application, the National Company Law Tribunal ("Tribunal" for short), Ahmedabad Bench, ordered dispensation of the meeting of the Equity Shareholders of the Petitioner Company No.2 and the Petitioner Company No.3, directing for holding and convening the meetings of the Secured Creditors (including Secured Debenture....
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.... payment of taxes. The structure of proposed composite scheme adopted by the Respondents was a permissible method of tax planning or is a tool to avoid and evade payment of taxes. 10. The main thrust of the argument was that by scheme of arrangement, the transferor company has sought to convert the redeemable preference shares into loans i.e. conversion of equity into debt which is not only contrary to the well settled principles of company law as well as Section 55 of the Companies Act, 2013 but also would reduce the profitability or the net total income of the transferor company causing a huge loss of revenue to the Income Tax Department. 11. According to the Appellants, the scheme seeks to do indirectly what it cannot do directly under the law. By way of the composite scheme, there is an indirect release of assets by the demerged company to its shareholders which is used to avoid dividend distribution tax which would have otherwise been attracted in light of Section 2(22) (a) of the Income Tax Act. 12. It was further submitted that the composite scheme also does not fulfil the requirements of Section 2(19AA) which defines the meaning of 'demerger' under the Comp....
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....of the Scheme has been highlighted by 1st Respondent- 'Reliance Jio Infocomm Limited', as follows: (i) Reliance Jio Infocomm Limited and Ors. previously had separate units/divisions housing its optic fiber and tower infrastructure undertakings. Each of these units had distinct assets and liabilities and were involved in separate business. (ii) The Composite Scheme of Arrangement was entered into between 'Reliance Jio Infocomm Limited', 'Jio Digital Fibre Private Limited' and 'Reliance Jio Infratel Private Limited'. The rationale of the Scheme was that since the businesses and markets in which they operated were distinct, segregation and unbundling of these undertakings would enable enhanced focus on exploiting opportunities, attracting different sets of investors, de-leveraging RJIL's balance sheet and unlocking the value of the undertakings for the shareholders. (iii) The scheme provided for: (a) demerger of the optic fiber undertakings of 'Reliance Jio Infocomm Limited' to 'Jio Digital Fibre Private Limited', i.e., all assets, properties and liabilities of the undertaking were demerged to the ....
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....ter the appointed dated under the Scheme, which was 31st March, 2019) (iii) Final hearing was conducted on 18th March, 2019, on which date Appellant chose to remain unrepresented. The order was reserved on this date and pronounced on 20th March, 2019. The impugned order notes in detail the submissions of the IT Department and issues the directions sought in the same. (iv) Appellant is now effectively suggesting that the matter should have been adjourned and the scheme recast solely on the basis that the NCLT should have unquestioningly acceded to its request for an adjournment, which request it did not even see fit to advance through counsel on the date of hearing. This is ex facie an absurd suggestion. The plea that that Appellant was not heard prior to passing of the impugned order is therefore contrary to the record of the case unsustainable. 20. It was submitted that in its letters dated 14th February, 2019 and 6th March, 2019 written to the Tribunal, the Appellant did not seek adjudication of the issues raised by it, but only sought issuance of appropriate directions protecting the interests of revenue, i.e., by reserving the right of the Appellant to init....
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....y preference shares which are irredeemable. (2) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed: Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: Provided further that- (a) no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of....
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....this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. Explanation.-For the purposes of sub-section (2), the term ''infrastructure projects'' means the infrastructure projects specified in Schedule VI." 27. Whether clause B (iv) is against Section 55, is not a subject matter for determination by the Income Tax Department. It can be noticed and objected by the Competent Authorities i.e., Regional Director, North Western Region and the Registrar of Companies. 28. Pursuant to order dated 11th January, 2019, the Regional Director, North Western Region, made a representation vide letter dated 13th March, 2019 making certain observations. (i) The first observation relates to non-convertible debentures of the Applicant Company No.1. (ii) The second observation relates to placing on record the relevant facts regarding clause 4.2 of the Composite Scheme of Arrangement. (iii) The third observation relates to modification of the Composite Scheme of Arrangement. (iv) The fourth observation relates to approvals to be taken from the c....
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....itioner Companies modified the composite scheme of arrangement to the effect that the Resulting Company and the Transferee Company shall provide an option to the shareholders of the Demerged Company and to the Transferor Company, at their discretion, to receive a part of the consideration in the form of preference shares, for the demerger of Demerged Undertaking and transfer of the Transferred Undertaking respectively. It is further submitted that the aggregate consideration envisaged under the Composite Scheme of Arrangement does not undergo any change pursuant to the aforesaid amendment. It is further submitted that a notice of this modification was published in Indian Express, all editions in English and a Gujarati translation thereof in Divya Bhaskar on 13.02.2019. The modifications were also explained by the Chairperson of the respective meetings of the Secured Creditors (including Secured Debenture holders), Unsecured Creditors (including Unsecured Debenture holders), Preference Shareholders and Equity Shareholders of the Petitioner Company No. 1 at their meetings convened and held for approving the Composite Scheme of Arrangement. In the said meetings, the Composite Scheme o....
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.....1 is placed on record. As regards the second observation is concerned, the Petitioner Company No. 1 has submitted letter dated 05.03.2019 with the office of the Regional Director and the Registrar of Companies, for reply to letter dated 29.11.2018 of Municipal Commissioner, Thane Municipal Corporation, clarifying that there is no proposal of merger between the Petitioner Company No.1 and Reliance Communications Limited. So far as the third observation is concerned, it is stated that the Petitioner Company No.1 has submitted a letter dated 07.02.2019 with the office of the Registrar of Companies clarifying the issues and that there is no further observation received from the office of Registrar of Companies. There are no other observations made by the Regional Director and the Registrar of Companies." 30. Though no specific argument was advanced on behalf of the Income Tax Department (Appellant), however, the Tribunal dealt with the representations of the concerned Income Tax Department and observed: "15. In response to the representations of concerned Income Tax Department, the Petitioner Companies have filed affidavit dated 15.3.2019 with this Tribunal. This ....
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.... ** ** ** 21. In so far as the observations of Income Tax Department made in Para 15 are concerned, considering the response of the Petitioner companies, it is hereby made it clear that the Income Tax Department will be free to examine the aspect of any tax payable as a result of the sanction of the Scheme and in case it is found that the Scheme of Arrangement ultimately results in tax avoidance or is not in accordance with the demerger provisions of the Income Tax Act, then the IT Department will be a liberty to initiate appropriate course of action as per law. It is further clarified that any sanction to the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 shall not adversely impact the rights of the Income Tax Department for any past, present or future proceedings. The department shall be at liberty to take appropriate action as per law in case of an event of any tax-avoidance or violation of Income Tax Law or any other similar issue." 31. We have noticed the representations made by the Income Tax Department dated 14th February, 2019 wherein following comments were made in respect to issues relating to cancellation of preference sha....
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....ually agreed between demerged and transferor company and holders of preference shares which is a future event whereas the details of the same should have been given in the scheme itself Even in the case of M/s. Reliance Jio Infocomm Ltd. these details are missing. It is also mentioned that there will be no reduction in authorized share capital of demerged/ transferor company whereas what is relevant is reduction/ change in the paid up capital and securities premium. • The names of preference shareholders are not made available. However, since M/s. Reliance Jio Infocomm Ltd. is closely held company and from plain reading of the scheme, it may be assumed that the preference shareholders would be closely related to the management or the equity shareholders. This assumption can be made from the information that huge amount of securities premium (Rs. 52,000 Cr.) is being converted into loan in favour of these shareholders. In this background, this part of scheme is apparently designed to unduly favour the preference shareholders. Further, the decision to convert Preference Share to Loans is detrimental to the Transferor Company (i.e. M/s. Reliance Jio Infocomm Limi....
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....34. However, in the end of comments, asking for such liberty, it was observed that the Composite Scheme of arrangement amongst 'M/s. Reliance Jio Infocomm Limited', 'M/s. Digital Fibre Pvt. Ltd.' and 'M/s. Reliance Jio Infratel Pvt. Ltd.' and their respective shareholders and creditors is giving undue favour to the shareholders of the company and also the overall scheme of arrangement results into tax avoidance. 35. The Income Tax Department in one hand asked that it is entitled to examine the aspect of any tax payable as a result of the Scheme and the Scheme of Arrangement ultimately results in tax avoidance or not, on the other hand, without any basis, it comes to a conclusion that the Composite Scheme of Arrangement amongst the Petitioner Companies and their shareholders and creditors is giving undue favour to the shareholders of the company and also the overall scheme of arrangement results into tax avoidance. 36. Without going to the record and without placing any evidence or substantiate the allegation by appearing before the Tribunal, it was not open to the Income Tax Department to hold that the Composite Scheme of Arrangement amongst the Petiti....
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....ther growth and maximize value in each of the business; improved quality of services to customers by establishing high service standards and delivering services in an environment friendly manner; increase in the speed of role out and efficiency through sharing of infrastructure, converting the PI assets from non-revenue generating assets; improved network quality and greater coverage etc. It is required to be noted that various telecommunication companies in this country have adopted the business policy of segregation of telecommunication services and telecommunication infrastructure business as per the global trends prevailing as on today. During the course of hearing it has been pointed out that the working group under the Planning Commission has recommended sharing of infrastructure. Keeping the said object in mind if the Scheme has been framed and is approved by the shareholders in their wisdom, in our view, it cannot be said that the Scheme itself is floated with the sole criteria of tax avoidance simply because it may have effect and result into avoidance tax. If the Scheme is evolved by way of an arrangement and with an object of converting the PI assets from non-revenue gen....
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....ransfer them to the transferee company. The transferor companies and the transferee company are wholly owned and subsidiary of transferee company viz. Vodafone Essar Mobile Services Limited. One of the objects for framing of the Scheme is segregation of passive infrastructure business and telecommunication services business is to enable further growth and maximize value in each of the businesses. It is required to be noted that in the case of Nirmay Properties P. Ltd. reported in (2009) 150 Comp Cases 538 (Gujarat), this Court was dealing with the Scheme for amalgamation of five subsidiary companies with the holding company. In the said case also there were no secured creditors. No objection was raised to the petitions even after the publication. The Official Liquidator in his report has stated that the auditors appointed for the purpose of scrutiny and investigation of the books of account and affairs of the company had in their report pointed out violation of the provisions of the Companies Act, 1956 and Accounting Standards and evasion of stamp duty and income-tax. The learned Company Judge held that the objections raised by the auditors would not affect the scheme and ....
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....tlements constituted in themselves 'capital assets' within the meaning of Section 2(14) of the Income Tax Act, 1961. According to the High Court, VIH acquired the CGP share with other rights and entitlements whereas, according to the appellant, whatever VIH obtained was through the CGP share. The decision of the High Court was called in question in SLP before the Honourable Supreme Court. The Honourable Supreme Court held that the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. In para 45 it has been held that the tax planning may be legitimate provided it is within the framework of law. In ....
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....t the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of section 90 of the Income Tax Act, 1961, even if they derogate from the provisions of the Income Tax Act, it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised, the whole purpose of the DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income Tax Act. In our view, therefore, the principle of piercing the veil of incorporation can hardly apply to a situation as the one before us. 164. If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the real motive of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o-the-wis....
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....er the scheme as a whole having regard to the general conditions, background, and object of the scheme and the present day conditions, and atmosphere in the State where the companies are going to function. Court cannot take a pedantic and strict view of each and every clause in the scheme and speculate as to its future, feasibility and possibility at this stage. It is for the collective wisdom of the shareholders who are primarily businessmen and investors guided by the directors of a company to determine the course of business they choose. The principles are so well-known and even repeated by all the counsels appearing for both the parties that I need not discuss the same threadbare and it will be sufficient for me to hold that I accept the arguments and contentions of Mr. S. C. Sen, Mr. R. C. Nag and Mr. S. B. Mukherjee on this question which I have set out before. It is premature for the court to judge now whether the business envisaged by the scheme of amalgamation to be carried on in future would become profitable and a success. The court is only to see whether it is feasible having potentiality in the facts and circumstances of this case. In my view, prima facie, I am satisfi....
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....as been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held. 2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-Section (2). 3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391 Sub-section (1). 5. That all the requisite material contemplated by the proviso of Sub-section (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same. 6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary t....
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....nction of the Scheme. However, while sanctioning the Scheme it is observed that said sanction shall not defeat the right of the Income Tax Department to take appropriate recourse for recovering the existing or previous liability of the transferor company and the transferor company is directed not to raise any issue regarding maintainability of such proceedings in respect of assets sought to be transferred under the proposed Scheme and the same shall bind to transferor and transferee company. The pending proceedings against the transferor company shall not be affected in view of the sanction given to the Scheme by this Court. In short, the right of the Income Tax Department is kept intact to take out appropriate proceedings regarding recovery of any tax from the transferor or transferee company as the case may be and pending cases before the Tribunal shall not be affected in view of the sanction of the Scheme." 39. The aforesaid decision of the Hon'ble Gujarat High Court in "Vodafone Essar Gujarat Ltd." (Supra) was affirmed by the Hon'ble Supreme Court in "Department of Income Tax v. Vodafone Essar Gujarat Limited ─ [2015] 16 SCC 629" wherein the Hon'ble Supreme....
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....atel Private Limited is a company Incorporated under the provisions of the Companies Act, 1956, having its registered office at Office -101. Saffron, Nr. Centre Point, Panchwati & Rasta, Ambawadi, Ahmedabad, Gujarat 380 000 (hereinafter referred to as the "Transferee Company") The Transferee Company shall carry on the business of setting up, operating and managing the tower infrastructure undertaking RATIONALE OF THE SCHEME (0 B (4) The Demerged Transferor Company has inler ala the digital services undertaking, the optic fibre cable undertaking and the tower infrastructure undertaking. Each of the above undertakings have a differentiated strategy, different industry specific risks and operate inter alia under different market dynamics and growth trajectory. The nature and competition involved in each of the businesses is distinct from the others and consequently each business or undertaking is capable of attracting a different set of investors, strategic partners, lenders and other stakeholders (44) The transfer and vesting of the Demerged Undertaking (as defined hereinafter) and the Transferred Undertaking ....