The Gujarat High Court on Monday allowed Vodafone Essar Gujarat Ltd to go ahead with its plan to demerge ‘passive infrastructure assets’ (PIAs), which include mobile communication towers, into group company Vodafone Essar Infrastructure Ltd.
A division bench of Justice P B Majmudar and Justice Mohinder Pal approved the dermerger scheme under section 391/394 of the Companies Act, 1956. The scheme was opposed by the Income-Tax (I-T) department on various grounds including evasion of tax and non-conformity with essential elements of the sections of the Companies Act.
The court was hearing an appeal filed by Vodafone Essar Gujarat against an order by a single judge of the high court, which had rejected the demerger plan. “In view of the approval accorded by the equity shareholders, secured and unsecured creditors of the petitioner and the regional director, Western Region, to the proposed scheme of arrangement, as well as the submissions of the I-Tax department, there appears to be no further impediments to the grant of sanction to the scheme of arrangement,” the court observed in its judgement.
However, the court has kept the right of the I-T department intact to take appropriate proceedings regarding recovery of any tax from Vodafone Essar Gujarat or Vodafone Essar Infra as the case may be. The court also directed Vodafone Essar Gujarat not to raise any issue regarding maintainability of proceedings by the I-T department in respect of assets sought to be transferred under the proposed scheme.
Petitions seeking similar sanction by the company in the Mumbai, Kolkata, Chennai and Delhi High Courts have already been approved.
The demerger plan was a consolidated scheme by seven Vodafone companies transferring their PIAs to Vodafone Essar Infra out of which only one transfer company is situated in Gujarat.
The I-T department had opposed the demerger on the ground that the scheme was against public interest and was contrary to the company’s memorandum. It had further alleged the scheme was nothing but conduit to evade taxes such as I-T, stamp duty, registration charges and value added tax.
According to the I-T department, the approximate market value of the cumulative assets of all seven transferor companies would entail stamp duty evasion of approximately Rs 900 crore, assuming the rate of stamp duty is six per cent, those were transferred in a simple manner.
In December 2010, while rejecting Vodafone Essar Gujarat’s petition seeking sanction of demerger, the court had held the scheme of arrangement proposed by the firm did not fall within the parameters of Section 391 of the Companies Act.
The I-T department had taken objection to sanctioning the scheme on various grounds including that such a transaction was in form of gift and hence was beyond the scope of the provision of section 391 of Companies Act, 1956.
Vodafone Essar Gujarat’s counsel had argued the scheme could not be equated merely with the giving of a gift since it was reconstruction of the company by bifurcating its businesses.
The court disagreed saying since no liabilities were transferred including the employees relating to the PIAs, the expenses will continue to be borne by the transferor companies, which would artificially deplete the taxable profit and will not give a true and fair view of the accounts, thus affecting adversely the taxable profits.
The court was of the view that there was enough force in the objections raised by the I-T department and that the explanations on it given by Vodafone Essar Gujarat were not convincing so as to accord the its sanction to the scheme.
