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TMI Blog2010 (12) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... ir J. Thakore, Nitin K. Mehta and Ms. Ritu Dalal for the Appearing Parties. JUDGMENT K.A. Puj, J. The petitioner-company has filed this petition to obtain the sanction of this court to a scheme of arrangement under sections 391 to 394 and other applicable provisions of the Companies Act, 1956, whereby passive infrastructure assets of the petitioner-company together with the passive infrastructure assets of other companies shall vest in and become the right, property and assets of Vodafone Essar Infrastructure Ltd., the transferee company. 2. The board of directors of the petitioner-company has approved the scheme by resolution passed in a meeting held on September 21, 2007 and further modified by a resolution dated April 30, 2008. The board of directors of the transferee company has also approved the scheme by a resolution dated September 21, 2007. 3. The scheme envisages the demerger of the passive infrastructure assets of each of the transferor companies. Upon sanction of the scheme, the Passive Infrastructure Assets of the transferor companies will be transferred from each of the transferor companies and shall vest in the transferee company. 4. By an ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore this court at the time of hearing and that the petitioner-company may also be directed to obtain necessary approval of the concerned regulatory authorities of the Ministry of the Telecommunications in respect of the present scheme of arrangement if applicable and that the Regional Director had received a letter dated September 7, 2009, from the Assistant Commissioner of Income-tax, Ahmedabad on tax aspects in respect of the petitioner-company wherein it is stated that they are going to represent the same before the High Court of Gujarat through their advocate. 8. In response to these objections and observations, an affidavit is filed on behalf of the petitioner-company and submitted that the latest audited financial statement of the petitioner-company for the financial year ended on March 31, 2009, were filed along with the company petition. The latest unaudited financial statements of the petitioner-company as on September 31, 2009, are placed on record along with this affidavit. With regard to the second issue raised by the Regional Director, it is submitted that the petitioner-company is a mobile telecommunication service provider and holds a Unified Access Services Lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 out of which Rs. 87,99,42,566 is pending recovery. To the extent of the said demand raised and confirmed by CIT(A), the petitioner has preferred an appeal before the ITAT, in which stay has been granted against recovery on the condition of the petitioner depositing Rs. 30 crores. Further, the objector has raised a penalty demand of Rs. 210,33,19,341 for the year 2005-06 which entirely is pending recovery. Accordingly, sum of around Rs. 326,98,54,277 is pending recovery from the petitioner. The aforesaid claim shall further be increased on addition of interest recoverable on the aforesaid amount. Mr. Thakore further submitted that for the assessment years 2007-08 and 2008-09 the assessments are pending finalisation and the objector apprehends demand amounting to hundred of crores, pursuant to issues similar to previous assessment year. Moreover the objector upon going through the scheme submitted to it, is of the view that the same is, inter alia, for the purpose of evasion of tax and is against public interest. He has further submitted that the Income-tax Department opposes the scheme on the ground stated in its objections which are without prejudice to each other and other grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic interest. 11. Mr. Thakore further submitted that the sole purpose of the scheme is to defraud and usurp the right of the Income-tax Department by diluting the assets available to it for recovering the said demand without in any manner consulting the Income-tax Department. He has further submitted that the judicial process and the assistance of the court are being used to approve the proposed scheme to defeat the provisions of law, in particular the provisions of the Income-tax Act. He has further submitted that hidden agenda and the apparent corporate purpose of the scheme appears to defeat and evade tax liabilities including that payable to the Income-tax Department on the transaction by camouflaging it under the proposed scheme and legalising it by obtaining the sanction of this court. One of such purposes is to transfer the said assets to the transferee company for enabling it to claim benefit under various provisions of Chapter VIA of the Income-tax Act, as and when available, once again on the same assets on which the petitioner-company has already claimed and exhausted the benefit. This would be clearly against the public interest. He has further submitted that the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 utilised for defeating public interest and the court would not lend its assistance to defeat public interest. The court would, therefore, not sanction the scheme of amalgamation. 12. Mr. Thakore further submitted that there exists substantial liabilities in the books of the petitioner-company, part of which are relatable to the assets under transfer. Since liabilities of the said assets would remain with the petitioner-company there would be a continuous charge of interest and other liabilities with respect to the said assets in its hands. This would reduce the taxable profit in the hands of the petitioner-company in the succeeding years. On the other hand, the books of the transferee company would show exorbitant and inflated income and since the same is infrastructure company, it may ultimately claim deductions under various provisions of Chapter VIA of the Income-tax Act on its inflated prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and will not be demerged pursuant to the approval of the scheme as such, and hence the alleged outstanding tax liabilities will remain unaffected by the approval of the scheme. He has further submitted that the scheme contemplates the restructuring of the passive infrastructure assets of all the transferor companies and for the vesting of such assets in the transferee company. The scheme, therefore, involves several entities in the Vodafone Essar group of companies other than just the petitioner-company. He has further submitted that the estimated net worth of the transferor companies even after the completion of the demerger, will be approximately Rs.10,078 crores as on March 31, 2009. The estimated net worth of the petitioner-company after the completion of the demerger will be approximately Rs.2,476 crores as on March 31, 2009. As against this, the alleged tax liabilities of the petitioner-company cited by the objector to stall this restructuring are in a cumulative amount of approximately Rs. 327 crores only. He has, therefore, submitted that the petitioner-company is more than able to meet any liability towards the Income-tax Act. 15. Mr. Joshi further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that section 47 of the Income-tax Act provides that section 45 of the Income-tax Act will not apply to certain transactions. Section 47(iii) says that, nothing contained in section 45 shall apply to any transfer of capital asset under a gift or will or an irrevocable trust. He has, therefore, submitted that the scheme is intended to restructure the holding of certain capital assets of the transferor companies within the group of companies held by Vodafone Essar Ltd., the transferor company No. 1 and does not involve any movement of assets or liabilities to any company outside the Vodafone Essar Ltd., group. The transferee company and all the transferor companies, except transferor companies Nos. 5 and 6 are wholly owned subsidiaries of Vodafone Essar Ltd. Since the capital assets of the transferor companies are being demerged into an entity within the Vodafone Essar Ltd., group, it is proposed that the transferee company shall not be required to issue any shares or pay any consideration to any of the transferor companies or their respective shareholders. Accordingly, upon the scheme of demerger, the relevant capital assets of the transferor companies will be transferred to the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferee company, on the other hand, does not qualify as an "eligible undertaking" for the purpose of section 80-IA of the Income-tax Act. Accordingly, while profits generated by the transferee company from the use of passive infrastructure assets will be taxable in the hands of the transferee company. The petitioner-company would be eligible to claim deduction in respect of such profits if such transfer is not effected. He has, therefore, submitted that the proposed transfer does not result in any loss of revenue to the exchequer. 19. With regard to the objector's objection about the scheme being contrary to public interest, Mr. Joshi submitted that the scheme is consistent with the report of the working group on the telecom sector for the Eleventh Five Year Plan (2007-2012) prepared by the Government of India through the Department of Telecommunication which recommended sharing of passive infrastructure assets by mobile operators. He has further submitted that the Income-tax Department has not considered the fact that the mobile telecommunication operators in India have begun the demerger of their respective passive infrastructure assets into separate entities to enable the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Department on March 3, 2010 and even by Mr. Thakore at the time of hearing of this petition, Mr. Joshi has dealt with the same at great length. With regard to the objection and/or allegation of the Income-tax Department about the sole object of the scheme of arrangement is of defeating tax and as per the ratio of Wood Polymer Ltd.'s case ( supra ), such a scheme ought not to be sanctioned, Mr. Joshi submitted that there is no liability for payment of tax on capital gains since there would be a transfer of capital asset under a gift as envisaged under section 47(iii), which excludes application of section 45. There is a clear rationale for nil consideration since the petitioner, transferor company and the transferee company are both wholly owned subsidiaries of Vodafone Essar Ltd. Even a transfer at book value would not have resulted in capital gains. Therefore the scheme in any case is not for the purpose of avoiding capital gains. The fact that it is presently under contemplation by Bharti, Idea and Vodafone to merge the tower infrastructure assets into a JV-Indus Towers Ltd., has no bearing on the issue of taxability under the present scheme. 22. Mr. Joshi further su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esses ; improved quality of services to customers by establishing high service standards and delivering services in an environment friendly manner ; increase in the speed of role out and efficiency through sharing of infrastructure ; converting the passive infrastructure assets from non-revenue generating to revenue generating assets ; improved network quality and greater coverage, etc. Moreover the segregation of telecommunication services and telecommunication infrastructure business reflects the global trend and has been adopted by telecommunication companies in India without objection. In fact the working group under the planning commission has recommended sharing of infrastructure, which is presently under contemplation by Vodafone and the present scheme reserves a flexibility to it for easing such process when required. The Central Government has not raised any objection to the scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot be said that the scheme has no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio of N. F. U. Development Trust Ltd ., In re [1972] 1 WLR 1548 (Ch. D), nor could it be said to be reconstruction since only assets were being transferred, Mr. Joshi submitted that the scheme is for reconstruction of the company since it contemplates the carrying on of the business in an altered form, by dividing the telecommunication services business and the telecommunication infrastructure business being carried on by the petitioner, in a manner that the telecommunication infrastructure business would be carried on by the transferee company. The said business will be continued and carried on by substantially the same persons who are presently carrying on the consolidated business since both the transferor and the transferee companies are wholly owned subsidiaries of Vodafone Essar Ltd., which will continue to carry on the businesses. Since reconstruction of this nature is statutorily recognised as an arrangement under section 394, the objection that the scheme is outside the ambit of section 391 is mis-conceived. 33. Reliance is placed on the decision of South African Supply and Cold Storage Co. , In re [1904] 2 Ch. D 268, for the proposition that reconstruction involves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the contention has no basis since the petitioner would continue to be profitable after the demerger of passive infrastructure assets and its net worth after giving effect to the same would be Rs. 2,476 crores. On the other hand the outstanding demand as per the Department is Rs. 604.59 crores, which comprises of a sum of Rs. 233.16 crores for the assessment year 2007-08 which issue has been decided in favour of the petitioner for assessment year 2005-06 ; a sum of Rs. 87.99 crores for the assessment year 2006-07 which issue has been decided in favour of the petitioner as stated above ; a sum of Rs. 28.65 crores for the assessment year 2005-06 which was decided against the petitioner by the Tribunal against which appeal has been admitted by the Gujarat High Court and bank guarantee of Rs. 32.55 crores has been furnished by the petitioner ; a sum of Rs. 1.67 crores for the assessment year 2004-05 which is now refundable since the Tribunal has held in favour of the petitioner ; a sum of Rs. 11.89 crores for assessment year 2007-08 and Rs. 14.39 crores for the assessment year 2008-09 regarding non-deduction of TDS on roaming and prepaid commission which orders were received on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bombay High Court in the case of Gangadhar Vishwanath Ranade (No. 1) v. ITO [1989] 177 ITR 163, for the proposition that section 281 either before or after its amendment merely has the character of an expression of an intention to treat the transfers as affected by section 281 as void and therefore not standing in the way of recovery proceedings to be taken by the Tax Recovery Officers. This judgment has been approved by the Supreme Court in the case of Tax Recovery Officer v. Gangadhar Vishwanath Ranade [1998] 234 ITR 188/100 Taxman 236. 42. The next objection of the Income-tax Department was that the resolution of the board of the petitioner approving the scheme of arrangement on September 21, 2007, is ultra vires since the scheme of arrangement is essentially giving of a gift, which object was not enlisted in the memorandum of association of the petitioner at that time but was subsequently inserted as clause 9(A) vide special resolution passed at the extraordinary general meeting of the company held later on the same day and therefore the proposal being void ab initio, the same could not be sanctioned by the court, relying on Dr. A. Lakshmanaswami Mudaliar v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs can conceivably be divided into different classes. It may happen that certain class of members approve the scheme while others do not. Even within the class certain members may agree to the scheme while others do not and it is only if the scheme is approved by the requisite majority under section 391(2) that it can be placed for sanction of the court. The assent of all the members or the requisite majority thereof to the scheme does not result into an agreement between the parties as contemplated under the Indian Contract Act, 1872. It remains a scheme which has been approved by the statutory majority which then can be placed for sanction of the court. It has no other legal effect or consequence apart from being qualified for the purpose of seeking sanction of the court. The terms of the arrangement cannot be enforced by or against the company or its members even if many of them have agreed to the scheme. It is only upon the sanction of the scheme, that the same becomes binding on all the members and also on the company and legal consequences ensue including those provided under section 394. The contention that the approval/acceptance of the scheme by the members constitutes an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered their rival submissions in the light of the provisions contained in the Companies Act, 1956 and decided case law on the subject and having carefully examined the provisions of the scheme of arrangement by demerger, the court is of the view that there is enough force in the objections raised by the Income-tax Department and that the explanations given and/or submissions made on behalf of the petitioner-company are not convincing so as to accord the court's sanction to the scheme. The main thrust of the arguments canvassed on behalf of the Income-tax Department is that the petitioner-company has to invoke the jurisdiction of this court under section 391 of Companies Act, 1956, which contemplates not all kinds of schemes but only the schemes that are either a compromise or an arrangement with creditors or members or any class of them. Thus, if the present scheme is not falling within the parameters of section 391, the same cannot be sanctioned as a scheme under section 391. The onus to satisfy that the present scheme is one that can be sanctioned under section 391 is upon the petitioner-company. The petitioner-company has pleaded that the transaction is without consideration a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e without consideration. In the present case there being admittedly no consideration and therefore no give and take between the parties, the same is not an arrangement under section 391 and therefore not a reconstruction capable of being sanctioned under section 391. Further the claim in the petition and in the scheme made by the petitioner is that it is the scheme of arrangement and thus even otherwise it needs to satisfy the test of being an arrangement. Reliance is placed on the following decisions. ( i ) In the case of N. F. U. Development Trust Ltd., In re ( supra ), the court held that although a majority of three-fourths in value members in favour of the scheme as required by section 206(2) of the Companies Act, 1948 had been obtained, nevertheless the section dealt with a "compromise" or "arrangement" between a company and its members which implied accommodation on both sides and could not apply to the present scheme whereby members rights were totally surrendered without compensation and, since the scheme was one which no member voting in the interests of members as a whole could reasonably approve, the petition would be dismissed. ( ii ) South African Supply Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the prescribed statutory majority of 75 per cent. Thus the scheme is required to be approved by all the concerned parties being (i) the transferor company, (ii) members and/or creditors of the transferor company, (iii) the transferee company, and (iv) the members and/or creditors of the transferee company. Thus the scheme is nothing but a composite agreement between all the above concerned parties to transfer the passive infrastructure assets without consideration by the transferor company to the transferee company. Further the agreement embodied in the scheme is an executory agreement and not a concluded contract. The present scheme being an agreement admittedly without consideration may be held to be void under section 25 of the Indian Contract Act, 1872. Thus, the court would not exercise its jurisdiction to sanction an agreement which may otherwise be held as void in law and non-enforceable between the parties. Moreover it runs contrary to the purpose of section 391 which is enacted to bringing into force an agreement which can be legally enforceable even against the dissenting minority. 50. It is also the contention of the Income-tax Department that the response of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scheme is void : ( i ) The reliance placed during the argument on the clause A(2) and B(40) of the memorandum to show the power of gift are an after thought and baseless. The clause A(2) relates to an object to undertake BOLT (build, operate, lease and transfer) contract which essentially contemplates a pre-existence of another party with whom or for whom the BOLT contract is executed. The word transfer used in clause A(2) is preceded with words build, operate, lease and is further connected to them with conjunction "and". Thus, in the present context in which the word transfer is used, it does not contemplate a transfer without consideration in nature of gift. The memorandum being a commercial document and the petitioner-company not being a section 25 company running for no profits, the phrase BOLT has to be given a meaning which is commercially known to the industry and which has a commercial implication unlike gifts. Clause B(40) is not applicable to the present transaction as it deals with the relationship with subsidiaries while in the present case the transferor and transferee companies are not holding or subsidiary companies. Further B(40) even otherwise does not prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legitimate right to recover its dues out of the assets of the transferor companies. The court's seal cannot be obtained to legitimise a devise to evade tax. It is also the contention of the Department that the purpose of the scheme allegedly being to fulfil the Government policy based on the recommendations by working committee is nothing but an eyewash. The kind and nature of the present scheme is not contemplated by any Government policy and the scheme is nothing but a conduit for tax evasion which is sought to be passed under the garb of Government policy. It is distinctly pointed out that : "( i ) The recommendation of the working committee is with respect to rural expansion and penetration at lower cost and not transfer of urban infrastructure. ( ii ) The recommendation further relates to pooling of future infrastructure which are to be rolled out by infrastructure service providers. It does not suggest pooling of existing past infrastructure of the existing players. ( iii ) Assuming that the recommendation is for sharing of the present urban infrastructure, it nowhere suggests the transfer of the existing passive infrastructure assets into a separate company much le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et from the asset block as deferred revenue expenditure which is then amortised and therefore there is again a write off of the entirety of the value of the assets, though spread over a period of time, depressing the taxable income. ( iii ) The transferee company will take depreciation on the same block of passive infrastructure assets, so transferred to it, which is being taken as deduction under treatments A or B above, as the case may be. Hence it is resulting in double deduction. The petitioner made an attempt to convince this court that it does not result in double deduction. The court is, however, not convinced with the explanation." 55. The transferee company shall be claiming benefit under section 80IA once again on the same set/block of assets, on which the transferor companies have already claimed the benefit under section 80-IA, in future once it becomes "eligible undertaking", which is likely to happen in the light of the recommendations in the working committee report. 56. The transaction may be held to be void under section 281 of the Income-tax Act and if it is so, the court will not exercise its jurisdiction, if any, to sanction a transaction which is poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger under section 391, the stamp duty shall be paid at 1 per cent. and thus avoiding legitimate payment of stamp duty to the extent of 5 per cent. (6 per cent. 1per cent.) on the amount of Rs. 15,000 crores being the conservative estimate of the market value of passive infrastructure assets being transferred. 60. No VAT shall be payable on the movable assets transferred under the scheme if the same is sanctioned under section 391 which otherwise would have been payable. 61. Considering all these aspects, it is foregone conclusion that the avoidance of tax is taking place only if the present scheme is sanctioned by the court, otherwise not. The transferee company is nothing but a paper company being only intermediate for transferring the passive infrastructure assets from the transferor companies to Indus for the purpose of tax evasion. This is clear from the fact that it has only paid-up capital of Rs. 5 lakhs especially when it is to hold assets worth Rs. 15,000 crores post sanction of the scheme. Reliance is placed on the decision of Wood Polymer Ltd.'s case ( supra ) , and McDowell Co. Ltd.'s case ( supra ). 62. The next contention raised on behalf of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholding pattern of its own shareholders but not to the shareholders of the demerged company. The answer in the case of Idea is "No", since the transferee company is 100 per cent. subsidiary of the transferor company. (iii) As to whether there is transfer of debts, liabilities or obligations of transferor company to transferee company, the answer in the case of Idea is "No", since the liabilities remain with Idea. The answer in the case of Bharti is "Yes", except loans taken for acquisition of assets. The answer in the case of the petitioner is "No", since the liabilities including contingent liabilities remain with the transferor company. In the case of Reliance it is not specified. (iv) Whether the employees of the transferor companies become the employees of the transferee company, the answer in the case of Idea and the petitioner is "No" whereas in the case of Bharti and Reliance the answer is "Yes". (v)Whether objection raised by the Income-tax Department are dealt with by the courts sanctioning the scheme, the answer in the case of Idea, Bharti and Reliance is "No" whereas in the case of the petitioner is "Yes". 64. The next contention raised on behalf of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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