I-T dept reverses stance on NCLAT's proposed demerger order of Reliance Jio

Within eight months of challenging the National Company Law Tribunal’s (NCLT’s) order giving a green signal to Reliance Jio Infocomm’s proposed demerger, the income-tax (I-T) department is learnt to have found merit in the appellate tribunal’s December ruling, which dismissed the I-T petition.

The tax department shared its opinion and the rationale in a communique to the law ministry 10 days ago, where it sought the ministry’s legal opinion on the matter to decide further course of action, said an official privy to the development.

The National Company Law Appellate Tribunal (NCLAT) had dismissed the I-T department’s petition objecting to the proposed demerger of Jio’s tower and fibre optic network assets into two infrastructure trusts.

According to sources, the department is of the view that the NCLAT order, which had cited multiple verdicts by the Supreme Court, including the Vodafone-Essar tax avoidance case, needs to be taken into consideration. “Some of the instances quoted in the appellate order apply to the Jio case as well. So an appeal against the existing verdict may not stand legal scrutiny in the apex court,” said a tax official.

The final decision on whether to challenge the appellate tribunal order in the Supreme Court would, however, depend on the law ministry’s response, which is expected in two weeks, said an official.

An email sent to the Reliance group did not elicit any response.

The NCLAT in its December 20 order dismissed the objection raised by the I-T department over the approval granted to Reliance Jio Infocomm’s scheme by the NCLT, Ahmedabad, to reduce debt by transferring the telecom tower and the fibre businesses into two separate entities. The I-T department had raised concerns over avoidance and evasion of taxes.

“Mere fact that a scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same… We are not inclined to interfere with the scheme of arrangement as approved by the tribunal. Both the appeals are dismissed,” the appellate tribunal had said in the final order. The NCLAT had also questioned the basis of the tax department interference in the scheme of arrangement when approved by the NCLT.

“While sanctioning the scheme, it is observed that the said sanction shall not defeat the right of the income-tax department to take appropriate recourse for recovering the existing or previous liability of the transferor company,” it had said in the order.

The appellate tribunal quoted the Supreme Court order in the Vodafone-Essar case, where it stated, “We are not inclined to entertain the special leave petitions… I-T is entitled to take out appropriate proceedings for recovery of any tax statutorily due from the transferor or the transferee company or any other person who is liable for payment of such due,” the NCLAT said.

The tribunal also quoted the legal standpoint of the Gujarat High Court in a similar objection by the tax department where it had stated that "it cannot be said that the scheme has no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly sought to be evaded is not established on facts”.

The tax department contested the scheme of arrangement following the NCLT order granting permission to the composite scheme of arrangement, through which two companies – Jio Digital Fibre and Reliance Jio Infratel -- proposed to be demerged.

According to the proposed scheme, the transferor company, Reliance Jio Infocomm, had sought to convert the redeemable preference shares into loans. The I-T department was of the view that such conversion of equity into debt would reduce the profitability of the transferor company which could result into revenue loss to the tax department.

Further, it would also bring down the payment of dividend distribution tax, which is again a way to avoid payment of taxes. The structure of the proposed composite scheme adopted by the respondent (Jio) was a permissible method of tax planning or is a tool to avoid and evade payment of taxes.

The department had also alleged the proposed scheme did not identify the interest rate payable on the loan, which will be a charge on the profits of the company, Reliance Jio Infratel.

Even if a 10 per cent interest rate is considered, this would amount to annual interest of Rs 782 crore, which would reduce Jio’s tax by about Rs 258 crore each year, the I-T had said. To this, the NCLAT said this particular issue had already been addressed by the NCLT.