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.
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 …”.
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:
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.
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.
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.