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TMI Blog2019 (12) TMI 1043X X X X Extracts X X X X X X X X Extracts X X X X ..... ice S.J. Mukhopadhaya, Chairperson, A.I.S. Cheema, Judicial Member And Kanthi Narahari, Technical Member Zoheb Hossain, Sr. Standing Counsel, Piyush Goyal, Sagar Suri and Ms. Lakshmi Gurung, Advs. for the Appellant. Dr. A.M. Singhvi, Ramji Srinivasan, Jehangir N. Mistry, Ritin Rai, Sr. Advs. K.R. Sasiprabhu, Biju P. Raman, Raghav Shankar, Tushar Bhardwaj, Aabhas Kshetrapal, Avishkar Singhvi and Ms. Sylona Mohapatra, Advs. for the Respondent. JUDGMENT Sudhansu Jyoti Mukhopadhaya, J. 'Reliance Jio Infocomm Limited'- Demerged/ Transferor Company (Petitioner Company No.1), 'Jio Digital Fibre Private Limited'- Resulting Company (Petitioner Company No.2) and 'Reliance Jio Infratel Private Limited'- Transferee Company (Petitioner Company No. 3) moved joint petition under Sections 230-232 of the Companies Act, 2013, seeking sanction of the Composite Scheme of Arrangement amongst 'Reliance Jio Infocomm Limited' and 'Jio Digital Fibre Private Limited' and 'Reliance Jio Infratel Private Limited' and their respective shareholders and Creditors ( Composite Scheme of Arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner of Income Tax (OSD), Circle (3)(3)-1, Mumbai and the income Tax Officer, Ward 3(3)-1, Mumbai have preferred these appeals. 7. According to the Appellants, the Tribunal has not adjudicated upon the objections raised by the Appellant- Income Tax Department at the threshold before granting any sanction to the proposed composite scheme of arrangement. 8. It was submitted that the Tribunal has not dealt with specific objection that conversion of preference shares by cancelling them and converting them into loan, it would substantially reduce the profitability of Demerged Company/ 'Reliance Jio Infocomm Limited' which would act as a tool to avoid and evade taxes. 9. It was submitted that the proposed composite scheme of arrangement amounts to reduction in profitability would also bring down the payment of dividend distribution tax which is again a way to avoid payment of taxes. The structure of proposed composite scheme adopted by the Respondents was a permissible method of tax planning or is a tool to avoid and evade payment of taxes. 10. The main thrust of the argument was that by scheme of arrangement, the transferor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86 of the Companies Act, 2013, this would amount to interest of ₹ 782.2 Crores per annum which would reduce profitability of company as this interest would reduce Respondent's tax by ₹ 258.16 Crores (approx.) each year. The reduction in the profitability is clearly resulting into tax evasion. 16. Learned counsel for the Appellant relied on the decision of the Hon'ble Supreme Court in Vodafone International Holdings BV v. Union of India and Another ─ [2012] 6 SCC 613 wherein the Hon'ble Supreme Court has frowned upon such artifice which leads to tax avoidance. 17. Referring to the Scheme, learned counsel for the Appellant submitted that the Scheme envisages cancellation of preference shares and discharge by constructive payment to the holders of preference shares and a constructive receipt of an equivalent amount as loan from the holders of preference shares to the demerged company, which is not permissible under the law. 18. Overview of the Scheme has been highlighted by 1st Respondent- 'Reliance Jio Infocomm Limited', as follows: (i) Reliance Jio Infocomm Limited and Ors. previously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loans from 'Reliance Industries Ltd.' to 'Reliance Jio Infocomm Limited' (7,822 crore), 'Jio Digital Fibre Private Limited' (45,342 crore) and 'Reliance Jio Infratel Private Limited' (11,836 crore). 19. It was submitted that the opportunities of hearing granted to the Appellants, as detailed below: (i) Notice dated 17th November, 2019 was issued by 'Reliance Jio Infocomm Limited' to the Appellant pursuant to the NCLT's order dated 11th January, 2019. Pursuant to this, letters dated 14th February, 2019 and 6th March, 2019 were written by the Appellant to NCLT setting out their comments/ observations on the proposed Scheme. (ii) Further Notice dated 7th March, 2019 was issued by 'Reliance Jio Infocomm Limited' to the Appellant notifying that the final hearing in the matter was fixed for 18th March, 2019. Appellant vide letter dated 15th March, 2019 informed NCLT that it was a very busy period for the Department, so the matter may be adjourned to some date in April 2019 (i.e., after the appointed dated under the Scheme, which was 31st March, 2019) (iii) Final hearing was condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Department to initiate appropriate proceedings under the Income Tax Act in regard to each of the aspects mentioned in its letters dated 14th February, 2019 and 6th March, 2019. 24. It was also contended that the Appellant is approbating and reprobating in submitting before the Tribunal that it would take necessary steps to examine under the Income Tax Act the specific issues identified by it in appropriate proceedings, while it now contends that these were the threshold issues that the Tribunal should have determined as precursor to according sanction to the Scheme. 25. The main grievance of the Appellant is against clause B of the Composite Scheme of Arrangement and part of Clause C, which relates to 'preference shares' and 'cancellation of the preference shares and reduction of the Preference Share Capital', as shown below: 26. Section 55 of the Companies Act, 2013 relates to 'issue and redemption of preference shares', as follows: 55. Issue and redemption of preference shares ─ (1) No company limited by shares shall, after the commencement of this Act, issue any prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. Explanation.-For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. (4) The capital redemption rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Scheme filed by them, relevant of which reads as follows: 13.1 With regard to first observation, it is submitted that the non-convertible debentures of the Petitioner Company No.1 are listed on BSE Limited and the National Stock Exchange of India Limited. Regulation 59 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribe prior approval of the stock exchanges where the non-convertible debentures are listed for any material modification in the structure of the aforesaid debentures in terms of coupon, conversion, redemption, or otherwise. It is further submitted that as there is no change in the structure of non-convertible debentures in terms of coupon, conversion, redemption, or otherwise pursuant to the Composite Scheme of Arrangement, no prior approval is necessary. 13.2 With regard to second observation, it is submitted that the amount of Preference Share Capital and the corresponding securities premium apportioned to Loan 1, Loan 2 and Loan 3 (as defined in the Composite Scheme of Arrangement) are based on expenditure incurred in respect of the optic fibre cable undertaking, tower infrastructure undertaking and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent applicable. 13.7 With regard to seventh observation, it is submitted that the Petitioner Company No.1 shall submit the list of assets pertaining to the Demerged Undertaking and the Transferred Undertaking with the registry to be annexed as part of the order sanctioning this Composite Scheme of Arrangement. Since the Appointed Date is a prospective date, the Petitioner Company No.1 shall identify all the liabilities of the Demerged Undertaking and the Transferred Undertaking as on the Appointed Date and the same shall also be duly transferred along with the respective undertakings. 13.8 With regard to eighth observation, it is submitted that the Petitioner Companies shall pay the requisite legal fees/cost to the Central Government as may be directed by this Tribunal. 13.9 With regard to the ninth observation which is in relation to representation of Registrar of Companies, it is submitted that the Petitioner Company No. 1 has submitted letter dated 08.02.2019 with the office of the Regional Director and the Registrar of Companies, for reply to letter dated 17.12.2018 of Birbhum Highway Division-II, stating that the Composite Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Scheme and in case it is found that the Scheme of Arrangement ultimately results in tax avoidance or is not in accordance to the demerger provisions of the Income Tax Act, then the Department will be at liberty to initiate appropriate course of action as per law. 10. It is further requested that the right of the Income Tax Department should remain intact to take out appropriate proceedings regarding rising of any tax demand against the demerged company at any future date and these rights should not be adversely affected in view of sanction of the Scheme. 11. It is reiterated that any sanction to the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 should not adversely impact the rights of the Income Tax Department for any past, present or future proceedings. The department should be at liberty to take appropriate action as per law in case of an event of any tax-avoidance or violation of Income Tax Law or any other similar issue. In response to this, the Petitioner Companies have affirmed that the sanctioning of the Composite Scheme of Arrangement will not adversely impact the rights of the Income Tax Department f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit therefore the conversion will result in lesser taxable profit in the hands of company which pays interest and would be against the interests of Income Tax Department. The security premium amount can only be used for the following purpose. a. When money is lying and is not used. b. For issuing bonus. c. For payment of dividends The cancellation of preference share is not related/ connected with demerger/ transfer of an undertaking. The conditions laid down in section 66(1) of Companies Act, 2013 are not satisfied while making cancellation of preference shares. The conversion of securities premium into loan results into release of assets and may be taxable u/s 2(22a) of Income Tax Act, 1961. The reasons being, a. In the case of securities premium there is no liability on the company to pay to anyone whereas conversion of the same into loan creates liability on the company and ultimately company has to pay these loans along with interest. This results into release of the assets. The complete details of treatment given to preference share capital and security p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiate the appropriate course of action as per law. (ix) The Income Tax Department will be free to examine the aspect of any tax payable as a result of the Scheme and in case it is found that the scheme of Arrangement ultimately results in tax avoidance or is not in accordance to the demerger provisions of the Income Tax Act, then the Department will be at liberty to initiate the appropriate course of action as per law. (x) It is further requested that the rights of the Income Tax Department should remain intact to take out appropriate proceedings regarding raising of any tax demand against the demerged company at any future date and these rights should not be adversely affected in view of the sanction of the Scheme. (xi) It is further being mentioned that, as per the scheme of demerger the valuation of the assets and liabilities in the case of M/s. Reliance Jio Infocomm Limited shall be done on 31/03/2019. Hence, it would be not possible to comment on the valuation of the assets and liabilities at this point of time. 33. Comments show that liberty was sought for to allow the Income Tax Department to examine the aspect of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Vodafone Essar Gujarat Ltd. v. Department of Income Tax [2013] 176 Com Cas 7 (Guj) while rejecting the similar objection of the Income Tax Department held: 42. The main contention of the Income Tax Department is that the Scheme is floated with the sole object to avoid tax liability. Except the Income Tax Department no objections were raised by anyone against sanctioning the Scheme. In this connection, it is submitted by Mr Mihir Thakor, learned Counsel for the Department that the transaction in question is nothing, but a transaction of assets of passive infrastructure of the transferor company into Indus, but the said transaction is given colour by an artificial device and with a view to save income-tax liability two stages are created by the appellant group i.e. Vodafone i.e. introducing a pre-ordained devise/ conduit in the form of a new Company (the present Transferee Company) and transferring by way of Gift to this new Company and thereafter amalgamating this new Company into Indus. Both the stages are done under the guise of scheme u/s 391 to legitimise the same by obtaining the seal of the Hon'ble Court and evade payment of Income Tax, stamp duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax purportedly sought to be evaded is not established on facts. Further, similar scheme of arrangement proposed by other telecommunication companies to achieve the aforesaid objectives have been sanctioned by different High Courts. In our considered view, this Court cannot refuse the sanction on the aforesaid ground by coming to the conclusion that the only object of the Scheme is to avoid taxes. 43. It is, no doubt, true as argued by Mr Thakor that in case the Scheme is sanctioned, it may result into tax avoidance on the part of the appellant, but it is required to be noted that even if the ultimate effect of the Scheme may result into some tax benefit or even if it is framed with an object of saving tax or it may result into tax avoidance, it cannot be said that the only object of the Scheme is tax avoidance. Considering the various clauses of the Scheme it is not possible for us to come to a conclusion that the Scheme is floated with the sole object of tax avoidance. In its commercial wisdom if the Company has decided to have a particular arrangement by which there may be even benefit of saving income-tax or other taxes, that itself cannot be a ground for coming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a company resident for tax purposes in the Cayman Islands (CI, for short), vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was acquisition of 67% controlling interest in HEL being a company resident for tax purposes in India which is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited (HEL). According to the appellant, CGP held indirectly through other companies, 52% shareholding interest in HEL as well as options to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI norms. The Revenue sought to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets. The High Court upheld the jurisdiction of the Indian tax authority to impose capital gains tax on VIH as a representative assesse after holding that the transaction between the parties attracted capital gains in India. Applying the 'natural character of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a whole. In S.P. Jain v. Kalinga Cables Ltd. : (1965) 2 SCR 720, this Court held that agreements between non-members and members of the Company will not bind the company, but there is nothing unlawful in entering into agreement for transferring of shares. of course, the manner in which such agreements are to be enforced in the case of breach is given in the general law between the company and the shareholders. A breach of SHA which does not breach the Articles of Association is a valid corporate action but, as we have already indicated, the parties aggrieved can get remedies under the general law of the land for any breach of that agreement. In the case of Union of India Another v. Azadi Bachao Andolan And Another, (2004) 10 SCC 1 the Supreme Court was considering the question as to whether offshore companies incorporated and operating from Mauritius and liable to tax in that country were entitled to benefits of Indo-Mauritius Double Taxation Avoidance Convention, 1983 or not. The Honourable Supreme Court has held as under: 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s discretion in a technical sense but is a matter to be decided on evidence -- Test being whether it is for the interest of future commercial interest of the company, court cannot substitute its own views for the directors and experts. Unanimous opinion of directors is a relevant factor. He rightly submitted that predominant combined holdings of shares by directors are irrelevant consideration for the court. In paragraph 54 of the said decision, it has been held as under: 54. Regarding the question of the scheme being unfair on merits, hypothetical, conditional, etc., I do not find any substance in the same save and except such contentions as have been raised relying on various decisions which are entirely on different background and different facts having no relevancy whatsoever in the facts and circumstances of the case. All of the said decisions relate to taking over or amalgamation of a company with an existing company, whereas, here, a new company has been incorporated for the purpose of the said amalgamation. As such, the principles relied on by the opposing group of shareholders cannot have any application whatsoever in the facts of the case, as, admittedly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined of the management of their company by its directors so far and suddenly they cannot have any reasonable and bona fide grievances against the said management and the scheme. It is true that names of eminent, well-known industrialists and respectable persons of integrity and honesty have been referred as prospective directors of the amalgamated company and they have not yet signified their consent of acceptance of such office but that in my view is not required at this stage, being premature. But the suggestion and intention as shown by the petitioners to appoint respectable, reliable and honest persons of high reputation as directors is enough for me at this stage to take into consideration the bona fide intention and object of the petitioner-companies. (emphasis supplied) 49. Both the learned counsel have relied upon the decision of the Supreme Court in the case of Miheer H Mafatlal v. Mafatlal Industries Limited (1996) 87 CompCas 792 (SC). In the said case it has been held by the Honourable Supreme Court that the sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction. The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a Scheme of Compromise and Arrangement are not exhaustive but only broadly illustrative of the contours of the courts jurisdiction. ** ** ** 55. In view of the approval accorded by the equity shareholders, secured and unsecured Creditors of the petitioner and the Regional Director, W ..... X X X X Extracts X X X X X X X X Extracts X X X X
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