2012 (8) TMI 747 - AAR - Income Tax

Multiparty Option Agreement - an outstanding obligation on the part of Mahindra-British Telecommunications Ltd. (now, Tech Mahindra) to allot shares to SBC Services Incorporated, a US company (now AT&T Limited) would have stood in the way of Tech Mahindra making a public issue - public issue - denial of ruling - Held that - If the right to exercise the option remained outstanding, there could not have been a public issue. So the share purchase agreement dated 23.6.2005 was entered into between Tech Mahindra and the applicant providing for investment by the applicant in Tech Mahindra and for getting shares allotted in its name. The shares to be allotted was of the numbers considered adequate to meet the obligation incurred by Tech Mahindra to AT&T in exercise of its option. The applicant as adopted process did not result in any avoidance of tax. If it had been a case of allotment of shares by Tech Mahindra to AT&T as per the option available to AT&T, that allotment would not have attracted capital gains tax since an allotment by a company was not a sale of shares. Hence, the constitution of the applicant had no motive of tax avoidance. The issue of capital gains has now arisen only because the applicant after getting the allotment of shares is selling them resulting in a gain giving rise to a question of chargeability to tax of that gain. The aim was to speed up the public issue. The public issue by Tech Mahindra was in the year 2006. If the route now adopted had not been adopted, Tech Mahindra would have had to wait till the year 2010 before it could come out with a public issue. The object of the Guideline 2.6.1 SEBI (Disclosure and Investor Protection) Guidelines, 2000 as relied is clearly to protect the investing public by ensuring that while a company makes a public issue, it is not burdened with any outstanding financial instruments or a right which would entitle the existing promoters or shareholders any option to receive equity share capital after the initial public offering, thus on such a transaction, it does not appear to be proper for this Authority to give a ruling on the basis that this Authority is not concerned with public interest or violation of a provision over which another authority would alone have jurisdiction to take penal action.

Summary

Issues:
1. Interpretation of joint venture agreement between Indian and UK companies.
2. Analysis of software and professional services agreement between Indian and US companies.
3. Examination of multiparty agreement involving Mauritius company and Indian entities.
4. Consideration of SEBI Guidelines for public issue of shares.
5. Assessment of circumvention of SEBI Guidelines in share allocation process.
6. Evaluation of tax implications in share transactions.
7. Determination of Authority's jurisdiction in ruling on transactions violating public interest guidelines.

1. Joint Venture Agreement:
The judgment delves into the joint venture agreement between an Indian company and a UK company to establish a company in India for information technology and telecommunications services. The shareholding structure, initial capital, and subsequent changes in ownership are detailed, leading to the evolution of the company into a public limited entity.

2. Software and Professional Services Agreement:
The analysis involves a software and professional services agreement between the Indian company (now Tech Mahindra) and a US company (now AT&T Limited). The agreement outlines services to be provided by Tech Mahindra to AT&T, without an obligation for AT&T to acquire shares in Tech Mahindra based on business levels.

3. Multiparty Agreement:
The judgment scrutinizes a multiparty agreement involving a Mauritius company, Indian entities, and Tech Mahindra. It discusses the shareholding structure, agreements for share issuance, and the role of various parties in the transaction, highlighting the complexities of the share allocation process.

4. SEBI Guidelines Compliance:
The judgment explores the compliance of Tech Mahindra with SEBI Guidelines for public share issuance. It assesses the implications of outstanding obligations on share allotment and the impact on the company's ability to conduct a public issue of shares as per regulatory requirements.

5. Circumvention of SEBI Guidelines:
The judgment critically examines the circumvention of SEBI Guidelines through a series of transactions involving the applicant, Tech Mahindra, and AT&T. It highlights the shift of share issuance obligations to the applicant to facilitate a public share issue, potentially violating public interest guidelines.

6. Tax Implications:
The judgment addresses the tax implications arising from the share transactions, emphasizing the motive behind the chosen route to expedite the public share issue and the resulting capital gains tax implications due to subsequent share sales.

7. Authority's Jurisdiction:
The judgment deliberates on the Authority's jurisdiction in ruling on transactions that potentially violate public interest guidelines. It discusses the discretion of the Authority to refuse a ruling in cases where transactions are structured to circumvent regulatory guidelines issued in public interest, emphasizing the importance of upholding public interest in financial transactions.