In the last few years, mergers of
companies (undertaken through schemes of arrangement that require the approval
of the High Court) have been subject to greater scrutiny by the tax
authorities. One example of a merger that was strongly objected to by the tax
authorities is the case involving Vodafone Essar Gujarat Limited (discussed here),
although the scheme was sanctioned on appeal to a division bench of the Gujarat
High Court.
companies (undertaken through schemes of arrangement that require the approval
of the High Court) have been subject to greater scrutiny by the tax
authorities. One example of a merger that was strongly objected to by the tax
authorities is the case involving Vodafone Essar Gujarat Limited (discussed here),
although the scheme was sanctioned on appeal to a division bench of the Gujarat
High Court.
More recently, the manner of
raising objections before the court have been streamlined
through a circular of the Ministry of Corporate Affairs (MCA) dated January 15,
2014, which provides that the Regional Director (RD) functioning under the MCA
ought to consolidate all objections from various governmental authorities that
may have a view on the scheme. A specific mention has been made to the Income
Tax Department (ITD) whereby the RD is required to notify the ITD of a scheme
and to incorporate the ITD’s comments in the report filed before the court
considering the scheme. However, the MCA circular specifically states that “if
no response from the [ITD] is forthcoming, it may be presumed that the [ITD]
has no objection to the action proposed …”.
raising objections before the court have been streamlined
through a circular of the Ministry of Corporate Affairs (MCA) dated January 15,
2014, which provides that the Regional Director (RD) functioning under the MCA
ought to consolidate all objections from various governmental authorities that
may have a view on the scheme. A specific mention has been made to the Income
Tax Department (ITD) whereby the RD is required to notify the ITD of a scheme
and to incorporate the ITD’s comments in the report filed before the court
considering the scheme. However, the MCA circular specifically states that “if
no response from the [ITD] is forthcoming, it may be presumed that the [ITD]
has no objection to the action proposed …”.
In order obviate any doubt and to
ensure that the ITD’s voice is heard by the court, the Central Board of Direct
Taxes (CBDT) has issued a letter
dated April 11, 2014 requesting all Chief Commissioners of Income Tax to ensure
that the ITD places all comments relating to a scheme before the court,
especially when schemes have adverse tax implications to the revenue. Referring
to the receipt of notice from the RD, the letter emphasizes the role of the
ITD:
ensure that the ITD’s voice is heard by the court, the Central Board of Direct
Taxes (CBDT) has issued a letter
dated April 11, 2014 requesting all Chief Commissioners of Income Tax to ensure
that the ITD places all comments relating to a scheme before the court,
especially when schemes have adverse tax implications to the revenue. Referring
to the receipt of notice from the RD, the letter emphasizes the role of the
ITD:
It is emphasised that
this is the only opportunity with the Department to object to the scheme of amalgamation
if the same is found prejudicial to the interest of Revenue and therefore, it
is desired that the comments/objections of the Department are sent by the
concerned CIT to Regional Director, MCA for incorporating them in its response
to the Court, immediately after receiving information about any scheme of
amalgamation or reconstruction, etc.
this is the only opportunity with the Department to object to the scheme of amalgamation
if the same is found prejudicial to the interest of Revenue and therefore, it
is desired that the comments/objections of the Department are sent by the
concerned CIT to Regional Director, MCA for incorporating them in its response
to the Court, immediately after receiving information about any scheme of
amalgamation or reconstruction, etc.
Although this new development is
largely procedural in nature, it represents an effort on the part of the ITD to
ensure that its objections are properly placed before the court. From an
M&A structuring perspective, the taxation aspects would therefore have to
be dealt with clearly so as to withstand scrutiny by the tax authorities, as Lubna
Kably also analyzes.
largely procedural in nature, it represents an effort on the part of the ITD to
ensure that its objections are properly placed before the court. From an
M&A structuring perspective, the taxation aspects would therefore have to
be dealt with clearly so as to withstand scrutiny by the tax authorities, as Lubna
Kably also analyzes.
Further, as previously
discussed, this procedural position may change substantially under the
section 230(5) of the Companies Act, 2013 once that provision is brought in
force because it requires the company to directly provide notice of a scheme to
various government departments (including the income tax authorities) without
requiring any intermediation on the part of the RD.
discussed, this procedural position may change substantially under the
section 230(5) of the Companies Act, 2013 once that provision is brought in
force because it requires the company to directly provide notice of a scheme to
various government departments (including the income tax authorities) without
requiring any intermediation on the part of the RD.