January 28, 2010 :  IN A ruling that will provide great relief to corporates planning to restructure their businesses, the Authority for Advance Ruling (AAR) held that restructuring of businesses cannot be construed as an exercise for avoiding tax in India.

    AAR, a quasi judicial body for settling tax disputes involving foreign entities, in an order last week on an application filed by the Star Group companies, held that any tax benefit resulting from the restructuring of businesses cannot be a ground for income-tax (I-T) authorities to conclude that the entire exercise was for avoiding tax. The parties that applied before AAR were Star Television Entertainment (STEL), the entity which owns Star Plus TV channel, and Star Asian Movies (SAML), which owns Star Gold, and Star Asia Region, the owners of Star Utsav and Star One. While STEL and SAML are based in British Virgin Islands, Star Asia Region is based in the United Arab Emirates (UAE). These three companies have been amalgamated with the Indian company Star India with effect from April 1, 2009.

    These companies’ rationale for the amalgamation was based on business and commercial grounds. The group had told AAR that with this amalgamation, all the three overseas entities’ assets as well as liabilities would be transferred to the Indian company.

    This ground was acceptable to AAR, which held that it is within the legitimate right of the parties to enter into transactions that would help them access the benefits given under the tax statute. The AAR also observed that the contracting parties are not expected to do transactions in a way that would entail any tax liability.

    The three foreign entities had moved the AAR in relation to the tax benefits resulting from the amalgamation. The AAR’s ruling is binding on the company paying taxes and the I-T department.

    The I-T authorities did not dispute the fact that its laws provided exemption from capital gains tax on such cases. However, despite admitting that transfer of capital asset is entitled to exemption provided under Section 47 with Section 2 IB of the I-T Act, the tax authorities held that since the entire exercise was driven by a motivation to avoid tax, the amalgamation should not be accepted by the AAR. It is this argument the AAR had declined to accept.

    M Lakshminarayanan, national tax leader, Deloitte India, said “this order will benefit cross-border M&A transactions”.

    The department held the view that the amalgamation was just an exercise to avoid capital gains tax and, therefore, any scheme that is opposed to the public interest cannot receive legal recognition. Further, the I-T department had told the AAR that the latter should not make any decision until the high court decides on the application for amalgamation filed by the group. The I-T department had proposed to intervene in this application and present its case of adverse revenue implications in the event of the approval of the scheme.

    The AAR, however, observed that since the amalgamation includes taking over all assets and liabilities, which also included tax recoverable, tax avoidance cannot be seen as the objective of the Star Group. Besides, the department is proposing to intervene in the matter in the high court, it is free to request for appropriate direction for recovery of the I-T arrears.