Amalgamation of group companies is not necessarily a tax evasion tool

Facts of the Case:

Panasonic India Pvt. Ltd. (Transferor) & Panasonic Life Solutions India Pvt. Ltd. (Transferee) filed an application before NCLT praying for sanctioning scheme of amalgamation.
Effective ownership of the Transferor & Transferee was held by Panasonic Corporation Japan.
On the application for sanctioning the scheme of amalgamation, notice of hearing was served upon various stakeholders including Income Tax Department (ITD) and none of the authorities/stakeholder had any adverse observation except ITD

Contention of the ITD:

ITD submitted that the Transferor Company had accumulated losses. Hence, the main object of the Scheme was to enable the transferee company to take benefit of these accumulated losses and set them off against the profits of the Transferee Company in future periods after amalgamation.
Department also contended that if the scheme were allowed, it would result in a substantial loss to ITD on account of potential non-payment of capital gains tax by the shareholders of the Transferor Company upon sale of shares of the Transferee Company in future, since the shareholders would be entitled to benefits under India-Netherlands and India-Singapore tax treaties.
It is further stated that the merger is nothing but a vehicle to transfer accumulated losses, which would attract General Anti Avoidance Rules and the provisions of Section 96(1) of the Income Tax Act, 1961.

Contention of the Assessee:

The Assessee submitted that the rationale for the amalgamation, as provided in the Scheme, was reduction in operating and marketing costs, increased value to customers, offering holistic customer solutions, besides enhancing shareholders’ value.
It is submitted that the non-resident shareholders of the Transferor Company would anyway have had no obligation to pay capital gain taxes subject to relief under India’s Tax Treaty with the Netherlands and Singapore on the transfer of shares of the Transferor Company if the transaction had not taken place.
It is further stated that Section 72A & 79 of the Income Tax Act, 1961, and Rule 9(C) of the Income Tax Rules, 1962 laid down certain conditions that the Transferor and Transferee Co. have to fulfill those condition in order to qualify for carrying forward and set off unabsorbed business losses and depreciation in hands of Transferee Co.

Decision of the NCLT:

The NCLT rejected the contentions of the ITD and sanctioned the Scheme. While doing so, NCLT relied upon the Apex Court judgment in Vodafone International Holdings B.V. [TS-23-SC-2012], where the Court had held that so long as the sole motive of the transaction was not to avoid tax, which otherwise did not lack commercial substance, the same cannot be interfered with.
NCLT noted that the ITD would be free to invoke GAAR provisions in accordance with the procedure under the IT Act during assessment proceedings, if it believed that the transaction was an impermissible avoidance agreement.

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