Authority For Advance Rulings
Star Television Entertainment Ltd. & Ors., In Re
Section 2(1B), 47(vi), 47((vii), 245N(a), 245R(2), proviso
P.V. Reddi, J., Chairman; J. Khosla, Member
AAR Nos. 805 to 810 of 2009
21st January, 2010
Counsel Appeared :
S.E. Dastur with Porus F. Kaka, Sunil Agarwal, Abhinav Ashwin, Frank D’souza & Jaideep S. Kulkarni, for the Applicant : T.N. Chopra, Shivendra Kumar Singh & I.C.S. Kaushik, for the CIT concerned
Ruling
P.V. Reddi, J., Chairman :
These six applications are filed under s. 245Q(1) of the IT Act, 1961 (hereafter referred to as the “IT Act”). Three applications viz., Appln. Nos. 805, 807 and 809 of 2009 have been filed by three non-resident foreign companies. They are : (1) Star Television Entertainment Ltd. (STEL), (2) Star Asian Movies Ltd. (SAML) and (3) Star Asia Region FZLLC (SAR). The first two companies (applicants in Appln. Nos. 805 and 807) are the companies incorporated under the laws of the British Virgin Islands (BVI). The third company was incorporated under the laws of UAE. The first company viz., STEL owns Star Plus TV channel. The second company viz., 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 (P) Ltd. (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 Ltd., a BVI company. 1.1 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 shareholders of the amalgamating companies (applicants) in accordance with the share exchange ratio arrived at by a professional valuation report.
It may be stated here that the shares in SIPL—amalgamated company, are held by two Mauritius based companies. The holding of those shareholders of SIPL would stand reduced to 51.09 per cent of the post-merger equity. The proposed merger, it is stated, would be effectuated through a scheme of amalgamation as per the provisions of ss. 391 and 394 of the Companies Act, 1956, and such a scheme of amalgamation has already been filed in the Bombay High Court and the same is pending approval by the High Court. 1.2 According to the scheme (vide para 5), with effect from the appointed date i.e., 1st April, 2009 the transferred companies shall stand amalgamated with the transferee company (SIPL) and all the properties, assets, outstandings, liabilities, duties and obligations concerning the transferor companies shall stand transferred to and vested in the transferee company. The transfer and vesting of the properties and assets of the transferor companies shall be subject to the existing charges and encumbrances, if any. Para 13 of the scheme deals with issuance of shares by the transferee company. In para 13.5, it is specifically mentioned that the shares of the transferor companies held by their equity shareholders shall without any further application, act or instrument, be deemed to have been automatically cancelled without any requirement to surrender the share certificates. According to para 13.7, the new shares in the transferee company to be issued to the members of the transferor companies shall be subject to the articles of association of the transferee company and such shares shall rank pari passu with the existing equity shares in the transferee company.
2. The question which has been formulated in Appln. Nos. 805, 807 and 809 for seeking advance ruling of this Authority is : “Whether the amalgamation, as defined under s. 2(1B) of the IT Act, 1961, of STEL, SAML and SAR with Star India (P) Ltd., an Indian company, will result in any liability under the IT Act in the hands of the applicants and their shareholders ?”
3. Application Nos. 806, 808 and 810 are filed by three companies based in British Virgin Island and Bermuda. The applicant in Appln. No. 806 is the sole shareholder of STEL, the applicant in Appln. No. 808 is the sole shareholder of SAML and the applicant in Appln. No. 810 is the sole shareholder 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 s. 2(1B) of the IT Act, 1961 of STEL, SAML and SAR with Star India (P) Ltd., an Indian company, will result in any liability under the IT Act in the hands of the applicants.”
4. 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 s. 47(vi) r/w s. 2(1B) of the IT Act. As regards the shareholders application, s. 47(vii) is also invoked by the applicants.
5. The relevant provisions of law in the IT Act are quoted below : “47. Transactions not regarded as transfer.— Nothing contained in s. 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; (vii) 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 allotment to him of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company.” 5.1 Sec. 45 is the charging section in respect of the profits and gains arising from the transfer of capital asset which obviously includes shares. ‘Transfer’ in relation to a capital asset includes the extinguishment of any rights therein. Here, the transfer of capital assets take place pursuant to a scheme of amalgamation. 5.2 Sec. 2(1B) reads thus : “2(1B) ‘amalgamation’, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that— (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company.” 5.3 Sec. 2(17) defines a ‘company’ to mean an Indian company or a body corporate incorporated under the laws of a country outside India. 5.4 As per s. 394(4)(b) of the Companies Act, 1956, “transferor company” includes any body corporate whether a company within the meaning of the Act or not.
6. 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 shareholder 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 s. 2(1B) of the IT Act, are exempt from the capital gains tax in India. All the requisite conditions for attracting s. 47(vi) r/w s. 2(1B) of the IT Act are satisfied, in as much 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 shareholding) become shareholders of the amalgamated company i.e., SIPL by virtue of the amalgamation; and (3) The amalgamated company is an Indian company. 6.1 Viewed from the point of view of shareholders of the amalgamating company, the conditions stipulated in cl. (vii) of s. 47 are satisfied because the transfer of shares (in the sense of extinguishment of rights therein) held by the shareholder in the amalgamating company is in the course of or pursuant to a scheme of amalgamation and such transfer is in consideration of allotment of shares in the amalgamated company, which is an Indian company.
7. The Revenue does not dispute the fact that going by the scheme of amalgamation and considering the nature of the transaction, ex facie, the transfer of capital asset in the instant case, falls within the four corners of the exemption provided for by s. 47 r/w s. 2(1B) of the IT Act. However, the stand of the Revenue is that the entire scheme of amalgamation and the transaction as a whole has to be disregarded as it has been devised only to defeat the payment of capital gains taxes and the recovery of outstanding taxes from the transferor companies. The learned counsel appearing for the Revenue has gone to the extent of characterizing the scheme as a make believe one having no legitimate purpose apart from tax evasion and avoidance. It is contended that the scheme which is opposed to public interest cannot receive due legal recognition. The Director of IT (International Taxation), Mumbai has commented that the applicants “have taken resort to the scheme of amalgamation for the mere purpose of availing the benefit of exemption under s. 47 by putting on the mantle of amalgamation on transfer of shares of channel companies to the Indian companies”. It is also urged by the learned counsel for the Revenue that it is desirable to keep the applications on hold till the scheme is sanctioned by the High Court as the IT Department proposes to intervene and present its case of adverse financial repercussions to the Revenue in the event of approval of scheme. In order to substantiate its stand, the Revenue has projected certain points which according to it would throw doubts on the genuineness and bona fides of the proposed scheme.
8. As regards the plea of the Revenue’s counsel to decline the ruling at this stage in view of the pendency of the proceedings under the Companies Act, we have no hesitation in rejecting the same. If the suggestion of the counsel is accepted, it would practically amount to the statutory Authority refusing to exercise 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 s. 245N (a)]. 8.1 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 amalgamated Indian company. The scheme provides for takeover of liabilities by the amalgamated company which obviously includes income-tax dues recoverable as a sequel to the order that may be passed by the Settlement Commission. Prima facie, there is no material to reasonably conclude that the prospect of recovery of arrears would be better if the corporate status and structure of the amalgamating foreign companies is kept intact. The applicant’s counsel submits that the Department will be in a better position to lay hands on the assets of the amalgamated Indian company for recovering the tax dues, if any. In any case, as the Department is going to intervene in the proceedings before the High Court, it is certainly open to them to request the Hon’ble Court to give appropriate directions regarding the payment of income-tax arrears presently due or as per the determination of the Settlement Commission. Further, it is always open to the Court to consider whether the amalgamation, if sanctioned, would have an irretrievable impact on the recovery of the statutory dues and the Court has undoubted power to safeguard the interests of Revenue by imposing appropriate conditions. With these various possibilities wide open, it is not permissible for this Authority to draw an inference at this stage that the amalgamation is only a ruse or a deliberate plan to evade the payment of income-tax arrears.
9. The next question is whether the amalgamation is a pure and simple design to avoid the capital gains tax, as contended by Revenue. Clause (iii) of the proviso to s. 245R(2) ordains that the Authority shall not allow the application where the question raised in the application relates to a transaction or issue which is designed prima facie for the avoidance of income-tax. Normally, the stage at which a finding in terms of cl. (iii) of the proviso to s. 245R(2) has to be given is at the stage of consideration of the application under s. 245R(2). The consideration contemplated by s. 245R(2) is for the purpose of admission of the application. The proviso would come into play at this stage. No objection was taken nor the plea of tax avoidance was raised by the Revenue at that stage. It was only after the application was posted for hearing on merits under s. 245R(4) and the application was partly heard that this objection came to be raised for 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. 9.1 The above argument, put in a nutshell, comes to this : The applicant instead of resorting to amalgamation ought to have straightaway 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 cls. (vi) and (vii) of s. 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 receives the seal of approval of the High Court on a consideration of the objections of all concerned including the IT Department. Be that as it may, the premise on the basis of which the Revenue has built-up its argument that amalgamation is just a colourable device or subterfuge to avoid the tax liability on account of capital gains and there is no other business purpose or expediency behind the purported amalgamation, is not, in our view, sound and acceptable. 9.2 While testing the validity of the above argument, we may recall the dictum laid down by House of Lords in England in the case of IRC vs. Duke of Westminster (1936) AC 754 : “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the IRCs or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”
This passage was quoted with approval by the Supreme Court of India in the cases of CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC) and Madhuram Aggarwal vs. State of MP (1989) 8 SCC 667 (decided by a Constitution Bench). To the similar effect is the view taken by the Privy Council in the case of Bank of Chettinad Ltd. vs. CIT (1940) 8 ITR 522 (PC). 9.3 In Raman & Co., J.C. Shah, J. speaking for the Supreme Court stated the same proposition in the following words : “Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the IT Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented.” 9.4 Such a view expressed in Duke of Westminster (supra), A. Raman & Co. (supra) etc. was not endorsed by Chinnappa Reddy, J. who wrote a separate but concurring opinion in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). However, the Supreme Court, in the case of Union of India vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) after having reviewed the various cases, reiterated the observations in Duke of Westminster (supra), while commenting on the separate opinion of Chinnappa Reddy J. in the following words : “With respect, therefore, we are unable to agree with the view that Duke of Westminster case is dead, or that its ghost has been exorcised in England……… In our view, the principle in Duke of Westminster’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. A. Raman are very much relevant even today.”
It was further observed at p. 762 (of ITR) : “Having anxiously scanned McDowell 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 p. 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 Westminster’s case, to Bank of Chettinad’s case to Mathuram’s case, despite the hiccups of McDowell’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 estmerely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.” 9.5 Earlier, the Supreme Court approvingly quoted the “classic words” of Lord Sumner in IRC vs. Fisher’s Executors (1926) AC 395 at 412, which are as under : “My Lords, the highest authorities have always recognized that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.” 9.6 In CIT vs. Sakarlal Balabhai (1968) 69 ITR 186 (Guj), a Division Bench of Gujarat High Court aptly observed : “Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the assessee as in a case falling within s. 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within s. 44E or assume diverse other forms…..But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income-producing asset, so that the right to receive income arising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability; no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise.” This passage shall of course be read in conjunction with the observations made in Azadi Bachao Andolan case (supra).
10. It is in the light of this legal position expounded by the Supreme Court and the High Courts on the subject of tax avoidance that the approach to the interpretation of the words in cl. (iii) of the proviso to s. 245R(2) has to be channelled. The expression “transaction designed to avoid income-tax” cannot be understood to mean that in the course of entering into a transaction, the taxpayer is precluded from taking into account the tax 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 cl. (iii) of the proviso to s. 245R(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 Ltd., In re (1977) 109 ITR 177 (Guj) (rendered by D.A. Desai, J.) furnishes a typical illustration of a deliberate design aimed only at tax avoidance by taking recourse to amalgamation. 10.1 In that case, sanction to a scheme of amalgamation was refused by the Gujarat High Court exercising the jurisdiction under s. 391(2) of the Companies Act on the ground that the judicial process was sought to be used to escape from the tax net by adopting a dubious device or subterfuge and that the scheme was plainly opposed to public interest. The following facts stated by the Court are to be noted : “The scheme of amalgamation must have some purpose or object to achieve. It was repeatedly inquired what purpose or object was to be achieved by a scheme of amalgamation offered for Court’s sanction. It was said that the property belonging to the transferor company will be available to the transferee company. Now, the property belonging to the transferor company is situate in Calcutta. The transferor company is having its factory at Billimora. The transferor company appears to have not done any business except acquiring capital asset from its parent company of which it was a subsidiary company and got it revalued so that by the process of revaluation, the equity shareholders of the transferor company can get large number of shares of the transferee company by the exchange ratio prescribed in the scheme of amalgamation. No apparent understandable purpose or object behind the scheme is discernible. The purpose and the only purpose appears to be to acquire capital asset of the DOC (P) Ltd. through the intermediary of the transferor company which was created for that very purpose to meet the requirement of law, and in the process to defeat tax liability that would otherwise arise. If such be the scheme of amalgamation and if such is the use made of the transferor-company by those controlling it, it can never be said that the affairs of the transferor-company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset, through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background, and the machinery of judicial process is sought to be utilized for defeating public interest and the Court would not lend its assistance to defeat public interest, namely, tax provision.” “It must be confessed that it is open to a party to so arrange its affairs so as to reduce its tax liability. The assessee or party can arrange its affairs so that he or it may not incur any tax liability. But it must be within the power of the party to arrange its affairs. If the party seeks assistance 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 p. 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.” 10.2 The facts of that case are not at all comparable to the fact situation in the present case. It is the case of the applicants that the amalgamation and the consequent organizational restructuring of the group companies have a definite business purpose. The non-Indian language channels have already been sold out by the applicants prior to start of amalgamation process. The amalgamating companies are therefore left with Indian language entertainment channels i.e., Star Plus, Star Gold and Star One and Star Utsav. In order to achieve synergies of operation, enhanced operational flexibility and to create a stronger base for future growth of the amalgamated entity, the consolidation of the transferor companies and the transferee company has been contemplated (vide para 4.1.2 of the scheme). Various other reasons are set out in paras 4.1.3 and 4.1.4 as well. The “background and rationale for the scheme” has been explained in detail at para 4 of the amalgamation scheme submitted to the High Court. Thus, the stated business purpose being to concentrate the Indian language channels into SIPL-the amalgamated company, it has to be taken due note of especially when it seems to be rational and plausible and there are no strong and substantial reasons to discredit the said version of the applicants. The amalgamation cannot therefore be brushed aside by characterizing the same as a mere device with the sole objective of avoiding the capital gains tax. At any rate, we have no material before us to reach such conclusion. None of the points which have been highlighted by the Department in its comments would militate against the avowed business purpose. In fact, most of the points raised by the Revenue in the comments at para 11 etc., have some bearing on the share exchange ratio/swap ratio which is not really relevant for the purpose of examining whether the scheme of amalgamation should be treated as a manipulated colourable device with the sole objective of avoiding the tax.
11. Before we conclude the discussion on the subject, we may advert to the specific points raised by the Revenue in (i) to (iv) of para 11 of Director of IT’s comments. It is submitted by the Revenue that the proposed amalgamation is a well thought-out plan to artificially inflate the profits and reduce the liability of the three foreign amalgamating companies in the financial year immediately preceding the date of merger. It is further submitted that the three amalgamating foreign companies have been stripped off of whatever 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. 11.1 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., 1st April, 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 Director of IT, if the position as on 31st March, 2009 is maintained, the NAV per share of SAR would actually work out to (-) Rs. 4,31,749 whereas the NAV shown by the applicant is + ve Rs. 5,793. In making this comment, apparently, the Director of IT has not taken into consideration an amount of US $ 58 millions which was inducted by the existing shareholders of SAR. These shareholders were subsequently allotted 2,12,860 shares in lieu thereof as seen from pp. 376 and 379 of the paper book containing the financial statements for the year ending Mach, 2009. This point has been clarified in the reply to the comments furnished by the applicant. 11.2 Then, an objection has been raised to the adoption of discounted cash flow method in valuing the assets. It is described by the Revenue as an unusual method. It is not possible to accept the Revenue’s argument that discounting cash flow method is irrelevant or obsolete method of valuation. The discounted cash flow method is a recognized method of valuation, vide the decision of Supreme Court in Dr. (Mrs.) Renuka Datla vs. Solvay Pharmaceutical B.V. & Ors. (2004) 265 ITR 435 (SC). Moreover, we are not concerned here with the correctness of computation of share value and the exchange ratio. The swap ratio is really not relevant to consider whether the amalgamation as such, has any business purpose or a mere sham/colourable device. 11.3 The bald assertion of the Director of IT that the realizable value of the entire gross assets of the amalgamating companies would be lower than book value, lacks factual basis. Moreover, it is not demonstrated as to how the method of share valuation has an inextricable bearing on the point under consideration i.e., whether the amalgamation should be ignored and treated as non est in the eye of law. 11.4 It is then pointed out that the net result of amalgamation is that post-merger, the two Mauritius companies presently holding 100 per cent of the shares in the Indian company SIPL would be left with only 51.09 per cent of the shareholding and the balance would stand transferred to the foreign companies holding the shares of the amalgamating companies (vide para
10.6). Then, it is commented : Whether any consideration has passed between the present shareholders (Mauritius companies) and the new shareholders of the amalgamated Indian company for this transfer is not known. It is possible that this transaction might attract tax liability for the transfer of 49.91 per cent of the shares (vide para
10.3). This suggestion is based on a surmise that has been emphatically denied by the applicant. Moreover, the doubt expressed has no bearing on the question which we are called upon to decide. Thus, viewed from any angle, we are of the view that the benefit of ss. 47(vi) and (vii) of the IT Act cannot be denied to the applicants on the ground that the transfer of shares pursuant to amalgamation is a legally impermissible step adopted by the applicants only with a view to avoid or evade the income-tax without there being any commercial or business purpose.
Hence, the question in each of the applications is answered in the negative and it is ruled that no tax liability arises under the IT Act in respect of the transfer of assets/shares pursuant to and as a part of the terms of amalgamation. This ruling, however, is subject to the observations made in para 8 supra in regard to the approval of the scheme of amalgamation by the High Court of Bombay.
[Citation : 321 ITR 1]
