May 26, 2022
NCLT approves scheme of amalgamation and rejects tax department’s objection on loss of tax revenue and invocation of GAAR
Recently, the National Company Law Tribunal, Chandigarh Bench (“NCLT”) approved the Scheme of Amalgamation (“Scheme”) between Panasonic India Private Limited (“Transferor”) and Panasonic Life Solutions India Private Limited (“Transferee”) (collectively referred as “Petitioner Companies”).1 The Income Tax Department (“ITD”) made certain representations before the NCLT inter-alia stating that the Scheme is not at arm’s length, the main objective is to take benefit of the carry forward of losses of Transferor and the provisions of the General Anti-avoidance Rule (“GAAR”) should be invoked. However, the NCLT did not find substance in the representations made by the ITD and approved the Scheme (“Ruling”).
The Transferor and the Transferee filed an application praying for sanctioning of the Scheme before the NCLT. As per provisions of the Companies Act, 20132 and directions of the NCLT, notice of hearing was served upon (a) Ministry of Corporate Affairs, (b) Competition Commission of India, (c) Registrar of Companies, (d) Official Liquidator and (e) ITD. All the authorities (except the ITD) did not have any adverse observations in respect of the Scheme. However, the ITD made certain observations, which have been detailed below.
Representations and Responses
Representations by the ITD
Response by the Petitioner Companies
The NCLT approved the Scheme and observed the following:
Indian tax authorities have challenged scheme of arrangements by alleging applicability of GAAR at NCLT level, in the past as well. The Ruling is a positive signal to taxpayers considering that the NCLT noted that as long as the conditions specified under ITA for tax neutrality and carry forward and set off of losses are satisfied, the interest of revenue can be considered to be protected.
GAAR provisions under the ITA came into effect from April 1, 2017.13 The GAAR provisions enable tax authorities to declare an arrangement to be an Impermissible Avoidance Arrangement (“IAA”) and provide broad powers to tax authorities to determine tax consequences by disregarding any structure, reallocating or recharacterizing income, denying treaty relief, etc.14 Since the introduction of GAAR, taxpayers have been concerned regarding aggressive approach which may be taken by tax authorities, however, until recently, GAAR provisions were not been invoked by the tax authorities under the ITA.15
The Central Board of Direct Taxes (“CBDT”) clarification on implementation of GAAR provides that where NCLT has explicitly and adequately considered the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement.16 In the instant case, while the NCLT had considered tax implications of the Scheme under the ITA, it did not discuss whether the Petitioner Companies were fulfilling these conditions. Therefore, one may argue that NCLT has not explicitly and adequately considered the tax implication of the Scheme. This also seems to be in line the NCLT observation that issues with respect to carry forward of losses and GAAR etc. will come for consideration before the AO in the course of the assessment proceedings.
Having said this, it is important for tax authorities to be mindful that GAAR provisions cannot be invoked merely to protect the interest of revenue (as alleged by the ITD in the instant case). As per the provisions of the ITA, GAAR can be invoked only when the main purpose of an arrangement is to obtain tax benefit17 and it satisfies one of the four tainted element tests.18 The scope of ‘primary’ or ‘main’ purpose in the context of GAAR has been examined in several international judicial precedents. For instance, the Federal Court of Appeal in Canada, in The Queen v. Spruce Credit Union,19 has observed that a mere fact that tax implications played an important role does not lead to the conclusion that the primary purpose is to obtain a tax benefit and that such transaction should be characterized as an avoidance transaction. In order to ensure tax certainty and stability, the threshold for invoking GAAR should be high and it should be invoked in cases where there is no apparent commercial rationale for undertaking the transaction.
Another important aspect to be considered by taxpayers is the interplay of specific anti-abuse rules (“SAAR”) and GAAR provisions. The CBDT has clarified that the provisions of GAAR and SAAR can co-exist as SAARs may not address all situations of abuse. Therefore, in addition to satisfying the existing SAARs under the ITA, it is important to have considerable commercial substance and justification (corroborated by appropriate documentation) to ensure that there is sufficient ground to challenge application of GAAR (if invoked by tax authorities).
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1 Panasonic India Private Limited and Panasonic Life Solutions India Private Limited, CP (CAA) No.8/Chd/Hry/2021
2 Section 230(5) read with Section 232(1) of the Companies Act, 2013
3 In this regard, the ITD placed reliance on the NCLT Mumbai bench’s decision in case of Gabs Investment and Ajanta Pharma (CSP No.995 and 996 of 2017 and CSA No.791 and 792 of 2017) wherein the NCLT Mumbai did not sanction the amalgamation of Gabs Investment into Ajanta Pharma primarily based on the objection from the ITD that huge tax liability was avoided and the scheme was not in the public interest.
4 Section 47(vi) of the ITA exempts 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
5 Section 47(vii) of the ITA exempts any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if— (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and (b) the amalgamated company is an Indian company
6 Section 72A of the ITA read with Rule 9(C) of the Income Tax Rules, 1962.
7 Section 96 of the ITA.
8 Vodafone International Holdings B.V. Vs. Union of India & Anr. (41 ITR 1).
9 Supra note 3
10 Wiki Kids Ltd. and Ors. Vs. Regional Director, South East Region and Ors. in Company Appeal (AT) No.285 of 2017 decided on 21.12.2017.
11 Section 79 of the ITA provides that the accumulated business losses of a company may not be carried forward and set off, if on the last day of the previous year, pursuant to a change in shareholding, shares representing at least 51% of the voting power of the company are no longer beneficially held by persons who beneficially held shares representing 51% of the voting power of the company on the last of day of the year in which the losses were incurred.
12 Section 144BA provides for procedure for invoking the GAAR:
13 Chapter X-A of the ITA (Section 95 to 102 of the ITA)
14 Section 98 of the ITA.
15 Recently, the Approving Panel has approved the invocation of GAAR in a case as per section 96(1)(d) and a Writ Petition against such approval has been admitted before the Telangana High Court (Writ Petition No 21210 of 2022)
16 Response to question no. 8 in Circular no. 7 of 2017.
17 Section 102(10) of the ITA defines the term ‘tax benefit’ inter-alia includes a reduction or avoidance or deferral of tax or other amount that would be payable under the ITA, or an increase in refund of tax or other amount under the ITA, or a reduction in total income or an increase in loss
18 Section 96 of the ITA
19 2014 FCA 143
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