Recently, Chandigarh Bench of National Company Law Tribunal (‘NCLT’) approved the scheme of arrangement (‘Scheme’) between Panasonic Group Companies under section 230-232 of the Companies Act, 2013 which provided for the amalgamation of the entities based on commercial rationale and factors like reduction in operating and marketing cost, economies in procurement, increased value to customers, offering holistic customer solution, besides enhancing the shareholders’ value. The Scheme was accepted by Registrar of Companies, Competition Commission of India and Official Liquidator, however Income-tax Department (‘ITD’) raised objections to it.

 

While disagreeing with the objections and the precedents quoted by ITD against the Scheme, the NCLT held that those cases involved simplification and reduction of shareholding tiers to streamline the shareholding of the promoter group. However, the present Scheme had provided for a commercial rationale leading to operational synergies between the entities. The NCLT also noted that the Scheme was for the business consolidation and the tax arrangement was merely a consequential fallout of the implementation of the Scheme.

 

The order of NCLT is a welcome step and an affirmation that a taxpayer has every right to arrange its affairs in a tax efficient manner provided that the sole objective behind the transaction is not to obtain a tax benefit, though consequential benefit may arise. The consequential tax benefit should not be considered as a sole determinative factor to reject a Scheme if it is demonstrated that there are bonafide and commercial rationale for implementing a Scheme and the order affirms the proposition that a Scheme of arrangement should not be rejected unless it is demonstrated that there is some illegality or fraud involved in the Scheme.

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