TMI Blog2012 (7) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies with the Transferee Company, and to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax - Under the Scheme the only difference is that the Promoter will now hold shares directly in the Transferee Company. It is correctly submitted by the Transferee Company that there is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection of the Objector that the Scheme is a tax avoidance device and ought not to be approved, stands rejected. Scheme shall become null and void and be of no effect if the same is not sanctioned by this Court by March 31, 2012 - Held that:- Transferor Companies and the Transferee Company have passed resolutions on 01st May, 2012 and 9th May, 2012 respectively, extending the time for securing the sanction of this Court in respect of the Scheme to May 31, 2012 and on 11th May, 2012 and 12th May, 2012 respectively, passed further resolutions extending the cut off date from May 31, 2012 till the time the Scheme is sanctioned by appropriate Court and filing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any that by virtue of Regulation 3(1)(i) of the "SEBI Takeover Regulations 1997" and Regulation 10(1)(d) of the SEBI (Substantial Acquisitions and Takeover) Regulations, 2011, the provisions thereof do not apply to the acquisition of shares under a scheme of arrangement or merger - there is nothing illegal, unlawful, dubious or colourful in the Scheme and the same is a perfectly legitimate Scheme, which is permissible in law - decided against objector. - co. scheme petition nos. 670 to 675 of 2011, CO. SUMMONS FOR DIRECTION NOs. 598 to 603 OF 2011 - - - Dated:- 12-7-2012 - S.J. KATHAWALLA, J. JUDGMENT 1. By the above Company Scheme Petitions, sanction of this Court is sought under Sections 391 to 394 read with Sections 80, 100 to 103 of the Companies Act, 1956, to the scheme of arrangement whereunder the five Companies AVM Capital Services Private Limited (ACPL); Chevy Capital Services Private Limited (CCSPL); PM Capital Services Private Limited (PCSPL); Pranit Trading Private Limited (PTPL); and Viramrut Trading Private Limited (VTPL) (the Transferor Companies) are sought to be merged with Unichem Laboratories Limited (ULL) (the Transferee Company). Pursuant to the Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that "avoidance of tax was unethical and if a transaction is a device to avoid tax, it should not be permitted". The Objector has pointed out that the learned Judge in this context, also referred to the decision of the Gujarat High Court in the case of Wood Polymer Limited [1977] 47 Comp. cases 597 (Guj) in which case, the learned Single Judge of the Gujarat High Court refused to sanction a scheme which was found to be a device to evade tax. The Objector has also submitted that the decision of the Hon'ble Supreme Court in the case of Union of India and Anr., v. Azadi Bachao Andolan and Anr. [2004] 10 SCC 1 (SC) is per in curium as it is contrary to the decision of the Constitutional Bench in McDowell's case ( supra ). 4. The Objector has relied on the decision of the Authority for Advance Ruling (AAR) in the case of Groupe Industrial Marcel Dassault (AAR No. 846 and 847 of 2009) which according to him, should be followed since it correctly lays down the law on tax avoidance. The AAR appears to have held that the decision of the Supreme Court in the case of Azadi Bachao Andolan ( supra ) is not good law and the correct law is as laid down in McDowell's case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court or to hold that any decision of the Hon'ble Supreme Court is not correct law. It is also submitted that the decision of the AAR is not binding on this Court. 7. As regards the submission of the Objector that this Court should direct the Transferee Company to implead the Income Tax Authority as a necessary party, it is submitted on behalf of the Transferee Company that it is not at all necessary to implead the Income Tax Authority in the present proceedings and infact, it is held by this Court in Jindal Iron Steel Company Limited (JISCO) v. ACIT (Company Application No. 123 of 2004 connected with Company Petition No. 76 of 2004) that the income tax department has no locus to intervene in the proceedings under Section 391-394 of the Companies Act, 1956. The learned Senior Advocate appearing for the Petitioner has submitted that the primary assets of the Transferor Companies, comprise of equity shares in the Transferee Company and the cash balance to meet the expenses in relation to the Scheme. The merger of Transferor Companies with the Transferee Company would help in consolidating and streamlining the Promoter holding in the Transferee Company. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Arrangement between Balkrishna Industries Limited and Balkrishna Paper Mills Limited and Balkrishna Synthetics Limited (Company Petition No. 713 of 2007 connected with Company Application No. 771 of 2007) (Bom). It is therefore, submitted on behalf of the Petitioners that the submissions advanced by the Objector, that the Scheme be rejected on the ground that it is a colourable device to evade tax, be rejected. 10. I have considered the main charge of the Objector that the Scheme is a device for avoidance of tax, and have also considered the submissions advanced on behalf of the Petitioners in response to this charge. In the case of Azadi Bachao Andolan ( supra ), the Supreme Court has explained the scheme in McDowell's case. Paragraphs 147 to 149 of the said judgment are relevant and are reproduced hereunder : - "147. We may in this connection usefully refer to the judgment of the Madras High Court in M.V. Valliappan v. ITO which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice Chinnappa Reddy, J., dismissed the observations of J.C. Shah, J., in CIT v. Raman Co. AIR 1948 SC 49 based on the Westminster principle by saying "we think that the time has come for us to depart from the Westminster principle as emphatically as the British courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere". 14. In paragraph 46 of the decision in McDowell's case, Ranganath Mishra, J., speaking for the majority has observed "on this aspect, one of us, Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree". In the case of Azadi Bachao Andolan ( supra ), the respondents therein, therefore strenuously argued that the decision in McDowell has changed the concept of fiscal jurisprudence in this country and any tax planning which is intended to and results in avoidance of tax must be struck down by the Court. It was urged that McDowell has taken a new look at fiscal jurisprudence and the ghost of Fisher (1926 AC) 395 at P.412 and Westminster ( supra ) have been exorcised in the country of its origin. The Hon'ble Supreme Court declined to read or comprehend the majority J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution Bench of the Supreme Court in the case of Mathuram Agarwal v. the State of Madhya Pradesh [1999] (8 SCC 667) wherein the Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT [1940] (8 ITR 522) (PC) quoting with approval the observations of Lord Russel of Killowen in IRC v. Duke of Westminster and the observations of Lord Simonds in Russell v. Scoot . At Para 154 of the Azadi Bachao case, the Supreme Court has stated that "it thus appears to us that not only is the principle in Duke of Westminster alive and kicking in England but it also seems to have acquired the judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell". 16. The Hon'ble Supreme Court in paragraph 166 of its decision in Azadi Bachao Andolan, therefore, held as follows: - "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". 17. In the case of Vodaphone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance - these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal". 19. In view of the above observations of the Hon'ble Supreme Court in the Vodaphone decision, the submission of the Objector herein that he is fortified by the decision in McDowell's case, and that the decision in Azadi Bachao Andolan is per in curium or is contrary to the decision in McDowell's case is rejected. The decision of the Gujarat High Court in the case of Wood Polymer Limited ( supra ) is no longer good law, in view of the decision of the Supreme Court in the case of Azadi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-394 of the Companies Act, 1956 (emphasis supplied)". 22. The Objector has also raised a grievance that the shares of the Transferee Company held by the Transferor Companies which are purely tradable and transferable without any restrictions cannot be transferred through the present Scheme of Arrangement. As submitted on behalf of the Petitioners, the Promoters are not looking for an exit from the Transferee Company through divestment and have adopted one of the available methods for reorganizing their shareholding. In the case of scheme of arrangement between Tata Services Limited and Tatanet services Limited, wherein a commercial division of Tata Services Limited was proposed to be transferred, the Regional Director had objected that the transfer could be achieved through compliance of the provisions of Section 293(1)(a) of the Companies Act, 1956. This Court dealing with the said objection has held that if the Petitioners have adopted an elaborate route to achieve the objective, they cannot be faulted for the same. A similar view was taken by this Court in the Scheme of Arrangement between Balkrishna Industries Limited ( supra ). 23. In the present case, as submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed further resolutions extending the cut off date from May 31, 2012 till the time the Scheme is sanctioned by appropriate Court and filing the Court order with the Registrar of Companies for the Scheme to become otherwise effective. Therefore, the submission of the Objector that the Scheme has become null and void, cannot be accepted. 26. The Objector has further contended that the Company Secretary of the Transferee Company Mr. K. Subharaman, was not authorized to file the Affidavit in Rejoinder. In response, my attention is drawn to Exhibit N, page 535 of the Company Scheme Petition No. 675 of 2011, wherein a certified true copy of the resolutions passed at the Board Meeting of the Transferee Company held on 14th May, 2011 is annexed. By one of the said resolutions, the Company Secretary Mr. K. Subharaman is interalia authorized to file Affidavits in this Court in connection with the Scheme. In view thereof, this objection also stands rejected. 27. The Objector has further submitted that the Transferee Company in its Affidavit filed before the Regional Director, has failed to disclose certain proceeding where prosecution was launched against the Transferee Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Banker on the Valuation Report of N.A. Shah Associates, which Fairness Opinion was secured in terms of Clause 24 of the Listing Agreement. In view thereof, the submission of the Objector that the share valuation is not proper, lacks merit and is rejected. 30. The Objector has further submitted that the Transferee Company has hidden the civil proceeding for damages and breach of Trademark against it and not provided for any contingent liability in its balance sheet. It is pointed out on behalf of the Transferee Company that there are no pending cases for infringement of Trademark or Patent filed against the Transferee Company and as such there is no question of providing any contingent liability. 31. It is lastly contended by the Objector that since there is reduction in the capital of the Transferee Company to an extent of over 15%, the Securities and Exchange Board of India (Substantial Acquisitions and Takeover) Regulations, 1997 ("SEBI Takeover Regulations 1997") is triggered. It is correctly submitted on behalf of the Transferee Company that by virtue of Regulation 3(1)(i) of the ("SEBI Takeover Regulations 1997") and Regulation 10(1)(d) of the Securities and Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X
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