Executive summary - EY

1 EY Tax alert Ahmedabad Tribunal permits resulting company to claim credit of advance tax, TDS and MAT credit pertaining to the demerged undertaking 18 February 2016 Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Executive summary This Tax alert summarizes a recent ruling of the Ahmedabad Income Tax Appellate Tribunal (Tribunal) in the case of Adani Gas Ltd.

2 [1] (Taxpayer), where the issue before the Tribunal was the eligibility of the resulting company to claim minimum alternate tax (MAT) credit and credit of tax deducted at source (TDS) and advance tax paid by the demerged company. The Tribunal, after observing the relevant clauses in the Scheme of Arrangement as approved by the Gujarat High Court (HC) under the Indian Corporate Laws (ICL), held that the resulting company would be entitled to claim credit of TDS and advance tax paid by the demerged company from the Appointed Date.

3 The Tribunal held that the eligibility of the resulting company to claim credit of such taxes would be restricted to the amounts that are relatable to the demerged undertaking. The Tribunal also held that the proportionate MAT credit relatable to the demerged undertaking can be claimed by the resulting company. [1] [TS-54-ITAT-2016(Ahd)] Background Under the ICL, a business division can be transferred from one company to another company by way of a Scheme of Arrangement to be approved by the High Court under Sections 391 to 394 of the Companies Act, 1956.

4 The transfer of division, as aforesaid, would be treated as a demerger for the purposes of the Indian Tax Laws (ITL), provided the conditions of Section 2(19AA) of the ITL are satisfied. Subject to satisfaction of the prescribed conditions, the transfer of the business division by way of demerger is tax neutral and does not trigger any income tax liability for the demerged/transferor company, resulting/transferee company and the shareholders of the demerged/transferor company. The transfer of the business division from the demerged/transferor company to the resulting/transferee company is operative from the Appointed Date as specified in the Scheme of Arrangement.

5 Where there is a time lag between the Appointed Date and the date of approval of the High Court ( , the Effective Date), the demerged/transferor company is deemed to have operated the demerged undertaking on behalf of the resulting/transferee company from the Appointed Date. The profits or gains arising from the operations of the demerged undertaking, after the Appointed Date, are considered to be the profits and gains of the resulting/transferee company. The resulting/transferee company is liable to pay income tax on the profits or gains of the demerged undertaking after the Appointed Date.

6 In the absence of specific provisions in the ITL, a question often arises as to whether the resulting/transferee company can claim MAT credit or credit of TDS or advance tax paid by the demerged/transferor company, after the Appointed Date but before the Effective Date, in relation to the profits or gains of the demerged undertaking. Facts The gas distribution division (Demerged Undertaking) of Adani Energy Ltd. (Demerged/Transferor Company) was transferred by way of demerger to the Taxpayer (Resulting/Transferee Company).

7 The demerger involved transfer of all assets and liabilities relating to the Demerged Undertaking from the Demerged/Transferor Company to the Resulting/Transferee Company. The Scheme of Arrangement for the demerger was approved by the HC, vide its order dated 19 November 2009, under Sections 391 to 394 read with Sections 100 to 104 of the Companies Act, 1956. While the Scheme of Arrangement was approved by the HC on 19 November 2009, the Appointed Date for the demerger was 1 April 2007. In other words, the transfer of the Demerged Undertaking to the Resulting/Transferee Company was deemed to be effective from 1 April 2007.

8 Pursuant to the demerger, the Demerged/Transferor Company and the Resulting/Transferee Company had revised their respective returns of income to claim proportionate MAT credit. The Resulting/Transferee Company, in its revised return of income, had also claimed credit of TDS and advance tax paid by the Demerged Company from the Appointed Date. The claim of MAT credit, advance tax and TDS by the Resulting Company was denied by the Tax Authority on the basis that the scheme of demerger, as approved by the HC, did not mention the bifurcation of various tax credits.

9 The order of the Tax Authority was upheld by the First Appellate Authority. Tribunal s ruling The Scheme of Arrangement, as approved by the HC, provides for transfer of all assets, properties, debts, liabilities, duties, obligations and deferred tax benefits of the Demerged Undertaking from the Demerged/Transferor Company to the Resulting/Transferee Company. Based on the decision of the Supreme Court, in the case of Marshall Sons & Company India Ltd. [2], the Demerged/Transferor Company is deemed to have carried on the operations of the Demerged Undertaking on behalf of the Resulting/Transferee Company from the Appointed Date ( , 1 April 2007).

10 Given the above legal position, the Resulting/Transferee Company would be entitled to claim MAT credit, TDS and advance tax credit of the Demerged/Transferor Company. The entitlement of benefits in the hands of the Resulting/Transferee Company would be restricted to the extent the benefits relate to the Demerged Undertaking. In light of the clauses stated in the Scheme of Arrangement, Sections 391 to 394 of the Companies Act, 1956, Section 2(19AA) of the ITL and the judicial precedents, the Resulting/ Transferee Company can claim pro rata MAT credit, TDS and advance tax credit to the extent pertaining to the Demerged Undertaking.