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TMI Blog2010 (1) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ., SAML owns Star Gold. The third company owns Star One and Star Utsav. These three companies which broadcast the said entertainment channels are within the same group. Hereafter, these three companies are referred to as "amalgamating companies". Star India Private Limited (SIPL) is a company incorporated in India engaged inter alia in the business of marketing of the channels in the course of which it derives subscription and advertisement revenues. This Indian company will be referred to hereafter as the "amalgamated company". Prior to making the application, STEL and SAML sold their non-Indian language channels viz., Star World and Star Chinese Movies respectively to Star International Movies Limited, a BVI company. 2. The applicants state that for commercial reasons, it has been decided to consolidate Indian language channels viz., Star Plus, Star Gold and Star One/Star Utsav into the Indian Company - SIPL and accordingly, it has been resolved that STEL, SAML and SAR together with its assets and liabilities should be amalgamated with and merged into SIPL, the Indian company. SIPL will in turn issue shares to the share holders of the amalgamating companies (applicants) in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in Appn. No.810 is the sole share holder of SAR. A similar question has been framed in these three Applications as well for the purpose of seeking advance ruling. The question is: "Whether the amalgamation, as defined under Section 2 (1B) of the I.T. Act, 1961 of STEL, SAML and SAR with Star India Private Limited, an Indian company, will result in any liability under the I.T. Act in the hands of the applicants". 6. It is the case of the applicants that no taxable income arises on account of the merger and that the tax under the head 'capital gains' is not attracted by reason of the specific exemption provided for by Section 47 (vi) read with Section 2 (1B) of the I.T. Act. As regards the share holders' application, Section 47 (vii) is also invoked by the applicants. 7. The relevant provisions of law in the I.T. Act are quoted below: "Section 47(vi) "Transactions not regarded as transfer. 47. Nothing contained in section 45 shall apply to the following transfers:- ............................ (vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company;" Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferor company" includes any body corporate whether a company within the meaning of the Act or not. 12.. Having regard to the aforementioned provisions, it admits of no doubt that the transfer of assets from the amalgamating foreign company to the amalgamated Indian company and transfer of shares held by the share-holder in the amalgamating company in consideration of the allotment to it of the shares in the amalgamated company pursuant to the 'amalgamation' as defined in Section 2(1B) of the I.T. Act, are exempt from the capital gains tax in India. All the requisite conditions for attracting Section 47 (vi) read with Section 2(1B) of the I.T. Act are satisfied, inasmuch as, 1) All the property as well as the liabilities of the amalgamating company immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; 2) Shareholders having not less than three-fourth of the value of the shares of the amalgamating company (after excluding common share holding) become shareholders of the amalgamated company i.e. SIPL by virtue of the amalgamation; and 3) The amalgamated company is an Indian company. 13. Viewed from the point of view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise the jurisdiction vested in it by law. In this context, we would like to observe that the ruling is sought on the assumption and on the basis that the scheme of amalgamation would be sanctioned by the High Court in due course. If for any reason, the proposed amalgamation does not take effect by reason of an adverse order passed by the High Court or for some other reason, it is obvious that this ruling would become inoperative and infructuous. However, nothing precludes the applicant to seek the ruling in advance in order to have a firm idea of the tax implications arising out of the proposed amalgamation. In fact, the advance ruling provisions can be invoked even in respect of a proposed transaction (vide Section 245 N (a)). 16. The next argument that the scheme of amalgamation, if given effect to, might lead to evasion of the tax due presently from the amalgamating companies on account of the various assessments made from the years 2000-01 upto 2006-07 or the prospects of recovery would be in jeopardy, cannot be accepted. The fact remains that the amalgamating companies are merging into an Indian company and the net worth of those companies will be a value addition to the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the first time. Notwithstanding this aspect, we are still inclined to consider prima facie whether a case has been made out that the whole purpose and object of the transaction i.e. amalgamation is to avoid income tax. According to the Revenue, no other business purpose or commercial reason excepting the avoidance of capital gains is discernible and the whole exercise in the name of amalgamation is only a facade to avoid the capital gains tax. 18. The above argument, put in a nut shell, comes to this: The applicant instead of resorting to amalgamation ought to have straight away transferred the shares to the amalgamated Indian company and offered to pay the tax due on capital gains. Thus, the transfer of assets/shares as such is not being objected to, but, according to the Revenue, such transfer ought not to be done in the garb of amalgamation. In other words, the Revenue wants to deny the applicants the benefit of exemption under clauses (vi) and (vii) of Section 47 by urging this Authority to ignore the process of amalgamation. However, the Revenue's counsel has no answer to the query as to what would happen if the amalgamation is given legal recognition and the scheme receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dead, or that its ghost has been exorcised in England......... In our view, the principle in Duke of Westminister's case is very much alive and kicking in the country of its birth and as far as this country is concerned, the observations of Shah J. in CIT vs. Raman are very uch relevant even today". It was further observed at page 762 (of ITR): "Having anxiously scanned Mc Dowell's case, we find no reference therein to having dissented from or overruled the decision of the Privy Council in Bank of Chettinad's case. If any, the principle appears to have been reiterated with approval by the Constitutional Bench of this court in Mathuram's case at page 12. We are, therefore, unable to accept the contention of the respondents that there has been a very drastic change in the fiscal jurisprudence, in India, as would entail a departure. In our judgment, from Westminister's case, to Bank of Chettinad's case to Mathuram's case, despite the hiccups of Mc Dowell's case, the law has remained the same." In conclusion, it was stated: "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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implications involved and to minimize its tax burden. It is within the legitimate freedom of the contracting parties to enter into a transaction, which has the effect of extending to the party the benefit of exemption under the taxation statute. The contracting party is not bound to enter into a transaction in such a way that it results in tax liability while foregoing the benefit of exemption under law. A design to avoid the tax within the meaning of clause (iii) of the proviso to Section 245 R(2) apparently covers such of the transactions which are sham or nominal or which would lead to the inescapable inference of a contrived device solely with a view to avoid the tax. The corollary thereto is that there is no real and genuine business purpose other than tax avoidance behind such transaction. For instance, the decision of Gujarat High Court in the case of Wood Polymer Ltd7., (rendered by D.A. Desai, J) furnishes a typical illustration of a deliberate design aimed only at tax avoidance by taking recourse to amalgamation. 25. In that case, sanction to a scheme of amalgamation was refused by the Gujarat High Court exercising the jurisdiction under Section 391(2) of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance of the court only to reduce tax liability, the court should be the last instrument to grant such assistance or judicial process to defeat a tax liability, or even to avoid tax liability. If the party has so arranged its affairs, as to reduce or even avoid tax liability and the taxing authority disputes it, and the matter is brought before the court, the court would adjudicate upon the dispute between the revenue and the assessee on the rival contentions. That is not the situation here." The observations at page 198 are also relevant: "If the only purpose discernible behind the amalgamation is defeating certain tax and prior to the amalgamation, a situation was brought about by creating a paper company and transferring an asset to such company which can without further consequence be amalgamated to another company to whom the capital asset was to be transferred so that on amalgamation it can pass on to the amalgated company, it would distinctly appear that the provision for such a scheme of amalgamation was utilized for the avowed object of defeating tax." 26.The facts of that case are not at all comparable to the fact situation in the present case. It is the case of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver income earning assets these companies had before the proposed date of merger. It is rightly pointed out by the applicants' counsel that there is a contradiction in saying that the liabilities of the amalgamating companies have been reduced and profits increased and at the same time, the companies have been denuded of the income earning assets. If income earning assets have been 'stripped', it is difficult to understand at the same time as to how the profits could be artificially inflated. Secondly, the comment in para 11 (ii) is based on the assumption that the entire business of the amalgamating companies relating to TV broadcasting channels has been disposed of prior to merger. As noted earlier, it is only the business of non-Indian language channels which has been disposed of. 28. The other comment is that the capital of one of the amalgamating companies i.e. SAR has been increased after the appointed date i.e. 1.4.2009, so as to show higher artificial net worth and also to create cash to swap for the shares of the amalgamated companies. According to the DIT, if the position as on 31.3.2009 is maintained, the NAV per share of SAR would actually work out to (-) Rs.4,31,749/- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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