9911796707
TMI Blog2010 (12) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... the transferee company has also approved the scheme by a resolution dated September 21, 2007. 3. The scheme envisages the demerger of the passive infrastructure assets of each of the transferor companies. Upon sanction of the scheme, the Passive Infrastructure Assets of the transferor companies will be transferred from each of the transferor companies and shall vest in the transferee company. 4. By an order dated July 8, 2009, in Company Application No. 254 of 2009 this court has dispensed with the requirement of holding meetings of the shareholders, secured creditors and the unsecured creditors of the petitioner-company, for the purpose of considering, and if thought fit, with or without modification, approving the scheme. On substantive petition having been filed by the petitioner before this court, this court has admitted the petition on August 11, 2009 and notice was issued to the Central Government to be served through the Regional Director, Ministry of Corporate Affairs, Mumbai. Notice was also issued to the official liquidator for examination of the affairs of the petitioning company. The official liquidator was at liberty to engage a chartered accountant for such purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n March 31, 2009, were filed along with the company petition. The latest unaudited financial statements of the petitioner-company as on September 31, 2009, are placed on record along with this affidavit. With regard to the second issue raised by the Regional Director, it is submitted that the petitioner-company is a mobile telecommunication service provider and holds a Unified Access Services License for the Gujarat Service Area, with effect from October 20, 2008, issued by the Department of Telecommunications. The petitioner-company is not transferring the license to the transferee company pursuant to the scheme, hence condition No. 6.3 of the license is not applicable. The petitioner-company shall continue to hold its license and to provide the licensed telecommunications services even after the completion of the demerger. Therefore, there is no requirement for the petitioner-company to seek approval of the Department of Telecommunications for the scheme. Lastly it is submitted that the transferee company is registered as an infrastructure provider category-1 by the Department of Telecommunications which permits the transferee company to establish and maintain passive infrastruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o issues similar to previous assessment year. Moreover the objector upon going through the scheme submitted to it, is of the view that the same is, inter alia, for the purpose of evasion of tax and is against public interest. He has further submitted that the Income-tax Department opposes the scheme on the ground stated in its objections which are without prejudice to each other and other grounds raised during the course of hearing. 10. Mr. Thakore further submitted that under section 391 of the Act, the jurisdiction of this court can be invoked only for sanction of the scheme of compromise or arrangement. The present scheme is neither arrangement nor a compromise as contemplated under section 391. He has further submitted that under the present scheme the passive infrastructure assets are sought to be transferred without any corresponding liabilities and free from all encumbrances to the transferee company without any consideration. There is also no provision under the scheme of any allotment of shares to the members of the petitioner-company. Post the demerger, the transferee company is sought to be amalgamated/merged to Indus Towers Ltd. However, it is further contemplated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such purposes is to transfer the said assets to the transferee company for enabling it to claim benefit under various provisions of Chapter VIA of the Income-tax Act, as and when available, once again on the same assets on which the petitioner-company has already claimed and exhausted the benefit. This would be clearly against the public interest. He has further submitted that the facts further reveal that the petitioner-company is trying to evade the liability under the Income-tax Act, 1961, which would occasion if the said assets are transferred directly from the petitioner-company to the company in which the transferee company is sought to be finally merged. Reliance is placed on the decision of this court. In the case of Wood Polymer Ltd., In re [1977] 109 ITR 177 (Guj.), this court has held that if the only purpose discernible behind the amalgamation is defeating tax by creating a paper company and transferring an asset to such company which can without consequence be amalgamated with another company to whom the capital asset was to be transferred so that on amalgamation it may pass on to the amalgamating company, it would distinctly appear that the provisions for such a sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id assets in its hands. This would reduce the taxable profit in the hands of the petitioner-company in the succeeding years. On the other hand, the books of the transferee company would show exorbitant and inflated income and since the same is infrastructure company, it may ultimately claim deductions under various provisions of Chapter VIA of the Income-tax Act on its inflated profits, leading to great loss of revenue to the exchequer. Moreover, pursuant to the scheme, the petitioner-company will be required to pay access charges or some other charges to the transferee company for using the said assets, which it is not paying before the scheme. This would further reduce the taxable profit of the petitioner-company. By transferring the said assets at the book value, the petitioner-company is trying to evade the capital gain which otherwise would be payable at the market value. He has further submitted that the sanction of the scheme is sought to be taken by misrepresenting the same to be a scheme of demerger with the ulterior motive to foist the same on the Income-tax Department and claim the benefit under the Income-tax Act. For the purpose of the Income-tax Act, the present schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores as on March 31, 2009. As against this, the alleged tax liabilities of the petitioner-company cited by the objector to stall this restructuring are in a cumulative amount of approximately Rs. 327 crores only. He has, therefore, submitted that the petitioner-company is more than able to meet any liability towards the Income-tax Act. 15. Mr. Joshi further submitted that the transferor companies are part of the Vodafone Essar group of companies, one of the largest telecommunication service providers in the country. The Vodafone Essar group of companies is a part of the larger group of mobile companies controlled by Vodafone group which is among the fifteen largest companies in the world. The companies in the Vodafone group have invested billions of dollars in developing mobile telecommunication services in India. It, therefore, seems incongruous for the Income-tax Department to allege that the transferor companies have proposed the present scheme to evade an alleged tax liability of approximately Rs. 327 crores. He has further submitted that the Vodafone Essar group of companies hold licenses issued by the Department of Telecommunications to establish, install, maintain and oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing demerged into an entity within the Vodafone Essar Ltd., group, it is proposed that the transferee company shall not be required to issue any shares or pay any consideration to any of the transferor companies or their respective shareholders. Accordingly, upon the scheme of demerger, the relevant capital assets of the transferor companies will be transferred to the transferee company for "nil" consideration. Such a transfer is exempt from payment of capital gains tax under section 47 sub-section (iii) read with section 45 of the Income-tax Act. Mr. Joshi further submitted that the Income-tax Department fails to identify the relevant provisions of the Income-tax Act, the Central Sales Tax Act or the Gujarat Value Added Tax Act upon which it relies to support its allegation that the scheme results in the "evasion" of capital gains tax or any other tax referred to above. He has, therefore, submitted that these provisions have no application to the transfer of Passive Infrastructure Assets. 17. With regard to the objector's allegation about loss of revenue Mr. Joshi submitted that the petitioner-company is entitled to arrange its affairs in any legitimate manner permitted under law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department of Telecommunication which recommended sharing of passive infrastructure assets by mobile operators. He has further submitted that the Income-tax Department has not considered the fact that the mobile telecommunication operators in India have begun the demerger of their respective passive infrastructure assets into separate entities to enable the segregation and development of a vital infrastructure asset. The sharing of passive infrastructure assets among telecommunication operators will, among other benefits, reduce the unnecessary replication of passive infrastructure by mobile telecommunication operators and facilitate investment in developing such infrastructure in rural areas. He has further submitted that the objective sought to be achieved, inter alia, is to segregate the passive infrastructure assets and transfer these assets to a separate entity which is in the specific business of providing developing and operating telecommunication infrastructure services. Upon receiving these assets, the transferee company will be in a position to offer infrastructure services to all mobile telecommunication operators. He has further submitted that the demerger of the passi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in capital gains. Therefore the scheme in any case is not for the purpose of avoiding capital gains. The fact that it is presently under contemplation by Bharti, Idea and Vodafone to merge the tower infrastructure assets into a JV-Indus Towers Ltd., has no bearing on the issue of taxability under the present scheme. 22. Mr. Joshi further submitted that the transferee company is ineligible to claim deductions under section 80-IA, which is also accepted by the Department, but the objection is taken on the basis that in the event there is an amendment to the Act in future based on the recommendations of the working group, such benefit may become available. Such an objection is ex facie unsustainable. 23. Mr. Joshi further submitted that payment of minimum alternate tax under section 115JB is subject to an assessee preparing its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 and therefore if any entry is not in accordance with the provisions, the effect of the same would be denied. In any case the objection regarding reduced MAT overlooks the revenue neutrality, since tax credit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot raised any objection to the scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot be said that the scheme has no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly sought to be evaded is not established on facts. 26. Reliance is placed on the decision of this court in the case of Banyan & Berry v. CIT [1996] 222 ITR 831/84 Taxman 515 (Guj.), for the proposition that every Act which results in tax deduction, exemption of tax or not attracting tax authorised by law cannot be treated as a device of tax avoidance and the real question to be asked is whether the act of the assessee falls in the category of a colourable device, a dubious method or subterfuge which the judicial process may not accord approval. 27. Reliance is also placed on the decision of the apex court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/132 Taxman 373, for the proposition that McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 (SC) cannot be read as laying down that every transaction or arrangement perfectly p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an arrangement under section 394, the objection that the scheme is outside the ambit of section 391 is mis-conceived. 33. Reliance is placed on the decision of South African Supply and Cold Storage Co., In re [1904] 2 Ch. D 268, for the proposition that reconstruction involves substantially the same business being carried on and substantially the same persons carrying it on and it is immaterial whether the liabilities are taken over by the new company or not. 34. Reliance is also placed on the decision of this court in the case of Idea Cellular Ltd., In re (supra), the decision of the Delhi High Court in the case of Bharti Airtel Ltd. In re (supra), In re and decision of the Bombay High Court in the case of Reliance Telecom Infrastructure Ltd., In re, the decision of the Calcutta High Court in the case of Vodafone Essar East Ltd., In re, (supra) decision of the Bombay High Court in the case of Vodafone Essar Ltd., In re and decision of the Madras High court in the case of Vodafone Essar Cellular Ltd., In re. 35. Mr. Joshi further submitted on behalf of the petitioner that the scheme is an "arrangement" between the company and its shareholders since it involves a bifurcation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal has held in favour of the petitioner ; a sum of Rs. 11.89 crores for assessment year 2007-08 and Rs. 14.39 crores for the assessment year 2008-09 regarding non-deduction of TDS on roaming and prepaid commission which orders were received on March 15, 2010 and appeals have been filed in this court ; and a sum of Rs. 20.95 crores for the assessment year 2005-06 which has been set aside by the Tribunal by its order dated March 18, 2010. Therefore the outstanding demand in respect of issues which have not been settled is Rs. 54.94 crores against which the petitioner has given bank guarantee of Rs. 32.55 crores and is entitled to refund of Rs. 9.38 crores for amounts paid against demand of tax in respect of issues decided in favour of the petitioner. 38. The next objection of the Income-tax Department with regard to transfer of assets under the scheme of arrangement is void under section 281 and therefore the scheme cannot be sanctioned, Mr. Joshi submitted that the transfer of assets during the pendency of any proceedings under this Act is not void or ineffective at the time of transfer and the legal consequences of the transfer, namely, divesting the owner of title and vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extraordinary general meeting of the company held later on the same day and therefore the proposal being void ab initio, the same could not be sanctioned by the court, relying on Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corpn. of India [1963] 33 Comp Cas 420 (SC) and Oceanic Steam Navigation Co. Ltd., In re [1939] 1 Ch. D 41. While dealing with this objection Mr. Joshi submitted that a scheme of arrangement cannot be equated merely with the giving of a gift since such transfer is an incident of the reconstruction of the company by bifurcating its businesses. Since reconstruction of the company is a statutory right under the Companies Act, 1956, there is no requirement of any specific power in the memorandum for this purpose. Alternatively it is contended that the transfer of passive infrastructure assets which have been set up by the petitioner is even otherwise contemplated under the main objects in the memorandum of association as (A2) ; would also be covered under (B40) as being necessary, suitable or proper for the accomplishment of the main business or the attainment of the main objects of the company. It is also alternatively contended that the resolution of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding on all the members and also on the company and legal consequences ensue including those provided under section 394. The contention that the approval/acceptance of the scheme by the members constitutes an agreement, which then must be held to be void in the absence of consideration, overlooks the statutory provisions in relation to arrangements under the Companies Act, 1956 and is misconceived. 44. Without prejudice to the above, Mr. Joshi submitted that the "agreement" between the company and its members is not without consideration. Consideration is defined under section 2(d) of the Indian Contract Act, 1872 and is equated with valuable consideration in the sense of the law which may consists either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other Chidambara Iyer v. P. S. Renga Iyer, AIR 1966 SC 193. Even the most trifle benefit can be consideration so as to avoid the impact of section 25. There is no requirement of monetary consideration and even a promise to induce the company to carry on its business has been treated as sufficient consideration in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfy that the present scheme is one that can be sanctioned under section 391 is upon the petitioner-company. The petitioner-company has pleaded that the transaction is without consideration and is in the nature of a gift. It is further claimed that the scheme is a restructuring of assets and therefore is an arrangement with the members. The instant transaction does not fall within the expression "make arrangement with members", as sought to be claimed, for at least two reasons, which are independent of each other : (a) The expression restructuring is not used anywhere in section 391 or 394. Further restructuring of assets is not the same as reconstruction of any company or companies. Therefore also restructuring of assets is not contemplated under section 391 or 394. Assuming that restructuring is treated as reconstruction, which expression is used under section 394(1)(a), even then the instant case is not reconstruction as recognised by courts. The important criterion for restructuring being that same persons carry on the same business. In the present case it is an admitted position that the passive infrastructure company (transferee company) will be merged with Indus Towers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and, since the scheme was one which no member voting in the interests of members as a whole could reasonably approve, the petition would be dismissed. (ii) South African Supply & Cold Storage Co., In re (supra), the court held that neither "reconstruction" nor "amalgamation" has any definite legal meaning. Each word is a commercial and not a legal term, and even as a commercial term has no exact definite meaning. Where an undertaking is being carried on by a company, and is in substance preserved and transferred, not to an outsider, but to another company, consisting substantially of the same shareholders, with a view to its being continued by the transferee company, that is a reconstruction ; and it is nonetheless a reconstruction because all the assets do not pass to the new or resuscitated company, and all the shareholders of the transferor company are not shareholders in the transferee company, and the liabilities of the transferor company are not taken over by the transferee company. 48. It is also the major contention of the Income-tax Department that the gift or an agreement to gift by its very nature cannot be contemplated to be covered within rigours of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng into force an agreement which can be legally enforceable even against the dissenting minority. 50. It is also the contention of the Income-tax Department that the response of the petitioner is completely fallacious, misleading and untenable in law and contrary to its own admission especially when it claims that there exists a consideration for the company law purpose for sanctioning the scheme while for availing the income-tax exemption there is no consideration and is gift under section 47(iii). The petitioner cannot, therefore, be allowed to blow hot and cold at the same time. 51. The third objection raised by the Department is that, assuming that the said scheme is one which is considered as arrangement and falls within the four corners of section 391, then also it fails since it is not approved by the statutory majority of creditors. It is not the members who are affected since they continue to enjoy the assets, but instead it is the creditors whose rights are confiscated and are vitally affected as only the assets are being sought to be transferred without any consideration. Substantial assets available to effectuate recovery of debts are lost. Some of the other transfero ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ationship with subsidiaries while in the present case the transferor and transferee companies are not holding or subsidiary companies. Further B(40) even otherwise does not provide any specific power to gift. The argument is merely an eyewash and the petitioner-company had no power to gift is clear from the very fact that it was required to carry out an amendment of its memorandum to provide for the power to gift which is clear from the resolution passed and the explanatory statement attached to the form. (ii) Further the argument that no power under the memorandum is specifically required to float a scheme of demerger in the light of it being statutory power under section 391, is contrary to basic tenets of company law that the company can only perform what it is empowered under its memorandum and in the manner stated therein. In the entire petition and in the scheme, the petitioner has claimed the proposed scheme to be a scheme of demerger and relied upon clause B(15) for the same. Clause B(15) clearly contemplates a scheme of demerger only if it satisfies two conditions cumulatively (i) it is the demerger of the entire unit, and (ii) it is with consideration. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recommendation is for sharing of the present urban infrastructure, it nowhere suggests the transfer of the existing passive infrastructure assets into a separate company much less that the same should be done by way of a scheme under section 391 as a demerger or by a transaction of gift. (iv) Further even if the present scheme is, for the sake of argument, considered to be floated to achieve the recommendation, no objective or recommendation is achieved by the said scheme. The transfer of passive infrastructure assets under the scheme is not achieving the purpose of having common infrastructure since transferee company is not a commonly owned entity of different operators. It may only happen upon the passive infrastructure assets being transferred to common pool of different operators in a company like INDUS, which is not happening as a consequence of this scheme. Like in this scheme creating common pool of assets in different circles between companies having license of different circles will not achieve the policy objective nor will it lower the cost of infrastructure usage. None of transferor companies will reduce cost by such sharing pursuant to the scheme as all of them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion may be held to be void under section 281 of the Income-tax Act and if it is so, the court will not exercise its jurisdiction, if any, to sanction a transaction which is pointed out to be void under law. Thus the scheme appears to be a camouflage to circumvent the mandatory provisions of the Income-tax Act. The judgments relied upon by the petitioners pertain to pre-amendment of 1975. The present section does not require any proceedings to be initiated by the Department for the transaction to be declared as void. The section is a self declaratory one. 57. Since no liabilities are transferred including the employees relating to the passive infrastructure assets, the expenses will continue to be borne by the transferor companies which would artificially deplete the taxable profit and will not give a true and fair view of the accounts, thus affecting adversely the taxable profits. 58. The entire tax payable on the market value of the assets to be transferred to Indus is sought to be evaded by the present scheme. Had the transaction been done directly with Indus, the same would not be exempt as it would have been at market value for exchange of consideration and since the liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the decision of Wood Polymer Ltd.'s case (supra), and McDowell & Co. Ltd.'s case (supra). 62. The next contention raised on behalf of the Income-tax Department is the scheme is against public interest and policy inasmuch as that it is ultra vires the company's memorandum, void under section 25 of the Indian Contract Act and section 281 of the Income-tax Act. Further, the scheme is nothing but a device and a conduit having the sole purpose of avoiding and evading taxes including income-tax, stamp duty, registration charges and VAT. The purpose being tax avoidance is explicit from the facts that different accounting treatments are accorded to transferor companies having a positive net worth in comparison to ones which have negative net worth with an intention to maximise tax avoidance. Further the explanatory statement note 2 annexed to Form No. 21 clearly state that the systematic amendment in the memorandum is also done for treating it as gift solely for tax purposes. Further the conduct shows that nowhere in the original petition, the fact that it is a transaction of gift was mentioned. It was only after objections were filed by the present objector that for the first time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Idea, Bharti and Reliance is "No" whereas in the case of the petitioner is "Yes". 64. The next contention raised on behalf of the Income-tax Department is that the petition shall be dismissed for suppression and misrepresentation of material details from the court. The following instances are pointed out : (1) In the entire petition the scheme is sought to be shown as a scheme of demerger. Only after the objections were filed that for the first time the argument of gift was sought to be canvassed. (2) That the power of gift was conferred after amending the memorandum and articles consequent to the resolution passed by the board of directors. This fact was suppressed in the petition and was further not disclosed during the course of hearing even after the said suppression was specifically pointed out by the objector during the arguments. (3) The memorandum of association of the transferor company and the transferee company and the balance-sheet of the transferee company is not annexed with the petition, though the same were filed with the company application. (4) That the transaction stated to be with or without consideration, as was argued during hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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