2010 (1) TMI 46 - AAR - Income Tax

Amalgamation Tax Avoidance - Consolidation of 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 accordance with the share exchange ratio arrived at by a professional valuation report question 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 and their share holders held that - 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. - 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. - . 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 - that no tax liability arises under the Income Tax Act in respect of the transfer of assets/shares pursuant to and as a part of the terms of amalgamation.

Summary

Issues Involved:
1. Tax liability under the Income Tax Act, 1961, due to the amalgamation of non-resident foreign companies with an Indian company.
2. Applicability of exemptions under Sections 47(vi) and 47(vii) read with Section 2(1B) of the Income Tax Act.
3. Allegations of tax avoidance by the Revenue.
4. Validity and genuineness of the amalgamation scheme.

Issue-wise Detailed Analysis:

1. Tax Liability Under the Income Tax Act, 1961:
The primary issue is whether the amalgamation of the non-resident foreign companies (STEL, SAML, and SAR) with Star India Private Limited (SIPL), an Indian company, results in any tax liability under the Income Tax Act, 1961, for the applicants and their shareholders. The applicants argue that no taxable income arises from the merger, invoking specific exemptions provided by Section 47(vi) and Section 47(vii) read with Section 2(1B) of the Income Tax Act.

2. Applicability of Exemptions Under Sections 47(vi) and 47(vii) Read with Section 2(1B):
Section 47(vi) exempts any transfer of a capital asset by the amalgamating company to the amalgamated company in a scheme of amalgamation if the amalgamated company is an Indian company. Section 47(vii) exempts any transfer by a shareholder in a scheme of amalgamation of shares held by them in the amalgamating company if the transfer is made in consideration of allotment of shares in the amalgamated company, which is an Indian company. The Authority for Advance Rulings (AAR) concluded that the conditions stipulated in Section 47(vi) and Section 47(vii) read with Section 2(1B) are satisfied. Thus, the transfer of assets and shares pursuant to the amalgamation is exempt from capital gains tax.

3. Allegations of Tax Avoidance by the Revenue:
The Revenue contends that the amalgamation scheme is a facade to evade capital gains tax and recover outstanding taxes from the transferor companies. The Revenue's counsel characterizes the scheme as a make-believe one with no legitimate purpose apart from tax evasion. However, the AAR rejects this plea, stating that the ruling is sought on the assumption that the scheme of amalgamation would be sanctioned by the High Court. The AAR emphasizes that the ruling provisions can be invoked even for a proposed transaction.

4. Validity and Genuineness of the Amalgamation Scheme:
The Revenue raises doubts about the genuineness of the amalgamation scheme, suggesting it is designed to avoid tax liability. However, the AAR finds that the amalgamation has a definite business purpose, such as achieving synergies of operation, enhanced operational flexibility, and creating a stronger base for future growth. The AAR notes that the non-Indian language channels have already been sold, and the amalgamating companies are left with Indian language channels. The AAR concludes that the amalgamation cannot be dismissed as a mere device for tax avoidance, especially when the stated business purpose appears rational and plausible.

Conclusion:
The AAR rules that the benefit of Section 47(vi) and Section 47(vii) of the Income Tax Act cannot be denied to the applicants. The transfer of assets and shares pursuant to the amalgamation is exempt from capital gains tax, provided the scheme of amalgamation is approved by the High Court of Bombay. The ruling is given and pronounced on January 21, 2010.