Is revenue activism on retrospective applicability of GAAR the way ahead?

1. Is revenue activism on retrospective applicability of GAAR the way ahead? Panel Members Mr. Vispi Patel, Vispi T. Patel & Associates, Chartered Accountants Mr. Uday Ved, Partner, KANV & Co, Chartered Accountants Mr. Padamchand Khincha, H C Khincha & Co Ms. Swapna Marathe, Executive Editor, Taxsutra Mr. Vishal Saraiya, Ajanta Pharma

2. Key rulings for discussion • AVM Capital Services (Bom HC) • Ajanta Pharma & Gabs Investment (NCLT Mum) • NIIT Technologies Ltd (NCLT Del) and Vodafone Essar (Del HC) as referred to in NIIT • Alta Energy (Tax Court of Canada)

3. AVM Capital Services[TS-512-HC-2012(Bom)] Facts Merger of 5 companies (Transferor Companies) with ULL (transferee company) One of the shareholders having 0.001% holding in transferee company objected to scheme • Key objections • Scheme, a ‘colourable device’ to avoid capital gains tax • Seeks a direction to Transferee company to implead Income-tax authority as a necessary party. • Bombay HC observations • Gujarat HC decision in Wood Polymer Limited [(1977)47 Comp. cases 597 (Guj)] not good law, considering Azadi and Vodafone rulings of Supreme Court • A tax payer can always arrange his affairs to reduce tax liability. • Income tax authority is not required to be heard while sanctioning Scheme under Section 391 -394 of the Companies Act, 1956, relies upon Jindal Iron and Steel ruling (Company Application No.123 of 2004 connected with Company Petition No.76 of 2004)

4. Ajanta Pharma & Gabs Investment [LSI-314-NCLT-2018(MUM)] Promoters • Revenue’s contentions • Arrangement to avoid tax (tax loss of over Rs. 400 Cr) • Tax on business income on sale of shares to promoters • DDT on dividend • Impermissible Avoidance Arrangement (IAA) under GAAR • Round trip financing Equity shares issue 100% More than 60% GABS Investment Ajanta Pharma Merger 9.54% • NCLT observations • Promoter would get shares of Ajanta of approx. Rs. 1477 Cr without paying any tax • Scheme benefits only common promotors and not in public interest • ‘Deliberate measure to avoid tax’ and misuse/abuse of IT Act provisions • Observes, “it would be advisable to settle the crucial issue of huge tax liability before sanctioning the scheme….”

5. NIIT Technologies Ltd. [LSI-490-NCLT-2018(NDEL)] Family Trust 1 Family Trust 2 • Revenue’s contentions • Scheme solely benefited family trusts and amalgamating/ amalgamated companies • Purpose not to simplify structure, but to avoid tax liability • Misuse of provisions of Sec 47 of Income-tax Act • Scheme’s appointed date fixed on March 31, 2017 to avoid implication u/s 56(2)(x) applicable from April 1, 2017 Equity shares issue PIPL GSPL Merger Merger NIIT

6. NIIT Technologies Ltd. [LSI-490-NCLT-2018(NDEL)] • NCLT observations • The onus to prove tax avoidance is on tax authorities. Taxpayers can arrange their affairs to reduce tax burden in lawful manner. • AVM Capital (Bom HC) and Vodafone Essar Ruling (Del HC) relied upon • No change in shareholding, NIIT’s shares not proposed to be transferred, but to be held by the existing promoters directly, instead of through private Companies • Tax authority unable to demonstrate any tax avoidance based on appointed date, NCLT cannot alter such appointed date without sufficient reasons. • Role of Income-tax Department limited as compared to Central Government or Regional Director. Its role is to point out if scheme is simply an instrument for abject misuse of provisions of Companies Act, 2013 for evading income tax • Sanctions scheme subject to that Revenue’s interest with respect to transactions preceding and subsequent to sanction

7. Vodafone Essar Ltd [TS-151-HC-2011(DEL)] Delhi HC decision was relied in NIIT case Demerger of passive infrastructure assets without corresponding liabilities • Segregation of telecommunication services and telecommunication infrastructure business reflects global trend and has been adopted by telecommunication companies in India • Simply because tax payable under adopted structure which assessee is otherwise entitled to adopt in law, is reduced, does not, ipso facto, make such adoption illegal or impermissible. • Scope of objections that may be raised by Central Govt/Regional Director larger - for tax authorities, it is confined to question of revenue • Right of Revenue to recover its outstanding dues irrespective of the sanction of the scheme protected. Pending proceedings against the Taxpayer shall not be affected in view of the scheme being sanctioned. • SLP against Delhi HC was dismissed. • Gujarat HC division bench also upheld the scheme rejecting income-tax Department’s submissions

8. Alta Energy (Canadian Tax Court) Alta Resources LLC (USA) and another US Co • Alta Energy Luxembourg SARL (Taxpayer) transferred shares of Alta Energy Partners Canada (Alta Canada) • Alta Canada owned right to explore, drill hydrocarbons from DuvernayFormation • Taxpayer claimed capital gains not taxable in Canada under Article 13(5) of Canada- Luxembourg Treaty Taxpayer (LUX) Sale of holding Alta Canada (CAN) Purchaser Article 13(4) provides taxability in Canada if shares principally derives value from immovable property. However there is exclusion if business of corporation is carried on in such immovable property (‘carve out’ not found in OECD model) Revenue applied GAAR to deny treaty benefit claiming that Taxpayer was created and became owner of shares of Alta Canada to take treaty benefit by prior restructuring (Prior to restructuring shares were owned by another US LLC )

9. Alta Energy (Canadian Tax Court) Canadian Tax Court conclusion • GAAR does not apply to preclude Taxpayer from claiming Treaty benefit under Article 13(5) • There was nothing in treaty to indicate that single purpose holding corporation resident in Luxembourg cannot avail treaty benefit • Rejects Revenue’s 'treaty shopping' contention noting that Canada hasn't adopted comprehensive anti-treaty shopping rules similar to USA-Canada treaty in treaty under consideration • ‘Excluded property carve out’ - deviation from OECD Model - Court cannot disturb bargain between treaty partners in this regard. • Regarding gains not being taxable in Luxembourg, Court held that Canada could have bargained that treaty benefit under Article 13(5) can be availed only when such capital gains are taxable in Luxembourg

10. Thank you!!