On 7th of September, the NCLT Mumbai bench, rejected the scheme of amalgamation and arrangement between Gabs Investments Pvt Ltd (Gabs) – the TRANSFEROR Company and Ajanta Pharma Ltd (Ajanta Pharma) – the TRANSFEREE Company and their respective shareholders on the grounds of General Anti Avoidance Rules (GAAR).
Facts and background
- Gabs Investment is a private limited investment company and Ajanta Pharma is a listed, pharmaceutical company.
- While the entire shareholding of Gabs Investments is held by Agrawal Family Members (Promoters), both Gabs Investments and Agrawal Family Members are shareholders and promoters of Ajanta Pharma.
- In the present Scheme, Gabs Investments was proposed to be merged into Ajanta Pharma, with shares to be allotted to the shareholders of Gabs Investments.
- Gabs Investment Pvt Ltd(Gabs) is the group holding company and primarily holds 9.53% stake in Transferee company. Consequently, the shareholding of Gabs Investments in Ajanta Pharma would have been cancelled.
- Pre and Post amalgamation, the promoters of Gabs would continue to hold the same percentage of shares in Ajanta. Effectively, pursuant to the proposed Scheme, individual Promoters would have received proportionate shares in Ajanta Pharma.
- The financial position of Ajanta will remain same post-merger.
The income tax department after considering the facts, the family tree of Agarwal Family, background of the scheme, salient features of the scheme, consideration payable, accounting treatments in the books of Ajanta Pharma as per the scheme, financials of Gabs, financial implication of the scheme, has made the following observations:
- As on 31st July 2017, 61.17% of shares of Ajanta Pharma are held by Agrawal Family Members. The Shareholding of Gabs is controlled by Agrawal Family Members only.
- Gabs being a private limited company has to be considered as a separate entity and any “assets” of the Pvt Ltd company cannot be transferred and distributed directly without tax implications. The company has to pay the Dividend Distribution Tax (DDT) @ 20% and accordingly the DDT will be Rs 134.16 Crores. This DDT of Rs 134.16 Crores will be lost if this amalgamation scheme is approved.
- The total cost of acquisition of shares of Ajanta by Gabs is Rs 48.73 Crores. As per MOA of Gabs, the investment and dealing in equity shares is the business of the company and once the equity is sold in the market the business profit will be acquired by Gabs and the amount will be Rs 958.34 Crores (Rs 1007.07 Crores – Rs 48.73 Crores). On this business profit tax @30% is payable and accordingly an income tax liability of Rs 287.50 Crores will arise to the company. Further, in case the applicability of MAT u/s 115JB @20% should be kept in mind, in case the Gabs adopts another method of computation of income. This tax of Rs 287.50 Crores will be lost if this amalgamation scheme is approved by NCLT Mumbai.
- Therefore, there will be a total loss of Rs 421.66 Crores to the revenue, if this amalgamation scheme is approved.
- The Scheme was a deliberate measure to avoid a tax burden by using the via-media of NCLT, and that it was nothing but round-trip financing, which included a transfer of funds among the parties to the arrangements through a series of transactions. In view of the GAAR, the Scheme should be construed as an Impermissible Avoidance Agreement (IAA) and, thus, should not be allowed by the NCLT.
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