TaxTMI 
TaxTMI 
TaxTMI 
2019 (12) TMI 1043
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....ctions 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 holders), Unsecured Creditors (including Un....
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....cheme 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 Companies Act, 2013 and it could only be referred to as a purporte....
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....focomm 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 resulting company at the values appearing in the books of 'Reliance Jio Infocomm Limited' (b....
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....lant 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 initiate proceedings under the Income Tax Act in regard to past, present or future liability arising out of or in relation to the Scheme. The Appellant nowhere sought....
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.... 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 this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of....
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....structure 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 concerned Regulatory Authorities. (v) The fifth observation is regarding sufficiency of authorised share capital to issue and allot new equity shares of the Transferee Company to the shareholders of the Demerged/ Transferor Company upon sanction of the Composite Scheme of Arrangement. (vi) The sixth observa....
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....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 of Arrangement, as amended, was approved by the requisite majority of the Secured Creditors (including Secured Debenture holders), Unsecured Creditors (including Secured Debenture holders), Preference Shareholders and Equity Shareholders of the Petitioner Company No. 1. 13.4 With regard to fourth observation, it is submitted that the approvals and permissions, as ma....
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....ions 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 Tribunal perused the representations of the Income Tax Department and the affidavit filed by the Petitioner Companies in response thereto. This Tribunal notes that though in its initial report, the IT Department had some reservations in the Scheme, later on, after receipt of clarifications from the Petitioner Companies, the IT Department, in its last report, has raised only two issues viz. valuation of the assets under slum....
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.... 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 shares: "(iv) Issue related to Cancellation of Preference Share:- * As per the scheme the preference shares having face value of 13000 crores along with securities premium of 52,000 crores are cancelled and converted into loan as mentioned in page 8 para 7b of the scheme. Generally, share premium cannot be cancelled or returned back. The security premium once received does not belong to the person who has paid the premium but to all the shareholders of the company irresp....
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.... 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 Limited) This would adversely affect the Income Tax Department also because interest on these converted loans would be claimed as expenditure by the concerned companies and the same would result in lesser taxable profit." 32. In the said comments, the Income Tax Department also noticed the note on the page 9 of the Scheme and made following comments: "(vii) It is clear that all pending proceedings against the Demerged Company shall be continued against the Resulting Company. Therefore, the Scheme should be without prejudice to the rights of the Income Tax Department and the Income-tax Department is free....
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....her 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 Petitioner Companies 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. 37. The Income Tax Department, which sought for liberty, while accepted by the Petitioner Companies (Respondents herein) and the Tribunal while approving the Composite Scheme of Arrangement has granted liberty. Such liberty to the Income Tax Department to enquire into the matter, if any part of the Composite Scheme of Arrangement amounts to tax avoidance or is against the provisions of the Income Tax and is to let it take appropriate steps if so required. 38. Mere ....
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....ing 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 generating assets; improved network quality and greater coverage etc. Moreover the segregation of telecommunications services and telecommunications infrastructure business reflects the global trend and has been adopted by telecommunication companies in India without objection. In fact, the Working Group under the Planning Commission has recommended sharing of infrastructure, and the present Scheme reserves flexibility to it for easing such process when required. It may be relevant to note that even the Central Government has not raised any objection to the Scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot....
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....editors. 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 that sanction to the scheme would not absolve the companies from any liability that may arise in future on violation of any statutory provisions or that the Scheme would not affect proceedings pending either before the civil or criminal courts and the liability that may be inflicted upon the petitioners or their Directors, would not be affected simply by virtue of the Scheme of Amalgamation. In the case of Vodafone International Holdings B.V. v. Union of India and Another, (2012) 1 Comp LJ 225 (SC), the Honourable Supreme Court has considered the provisions of Section 195 of the Income Tax Act. The aforesaid matter concerned a tax dispute involving the Vodafone group with the I....
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....ferment/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 the latter part of para 45, it held that colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. The following observations of the Honourable Supreme Court in the aforesaid case are relevant for our purpose: "64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in Association. The essential purpose of the SHA is to make provision....
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....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-wisp. 166. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. 167. In the result, we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that the Circular No.789 dated 13-4-2000 is valid and efficacious. In the case of United Bank of India Limited v. United India Credit and Development Company Limited, 1977 Company Cases 689 (Cal.), the Calcutta High Court has observed that fairness or u....
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....nts 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 satisfied that in the present set up and conditions, particularly as it appears from the Report of the Banking Commission, the relevant articles of which I have quoted before, that there is nothing wrong or objectionable in the scheme of amalgamation being put through. In fact, the State of West Bengal appearing before me through Mr. D. P. Gupta is supporting the said scheme so also the Life Insurance Corporation of India and other statutory bodies. I have no hesitation in holding that the business of the amalgamated company is highly potential and conducive to the economy and development of the State of West Bengal in the present set up, when funds are urgently needed for the growth and development of existing and new enterprises. Further, the shareholde....
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....ion (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 to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the sche....