Aditya Birla cos, Idea and its arm asked to pay Rs 3,900 cr in tax

In what could be the first attempt by the income-tax department to bring corporate demergers under the tax net, two AdityaBirla group companies—Idea Cellular and AdityaBirla Telecom — have been asked to pay Rs3,900 crore in taxes for the demerger of the telecom business that took place in 2009.


"The I-T department is treating the transfer of licence, assets and liabilities from Aditya Birla Telecom Ltd to Idea CellularBSE -2.73 % as a slump sale, which is subject to capital gains tax," a person close to the development told ET NOW, which was the first to report the development. Idea Cellular has been issued a tax demand order of Rs1,500 crore on business income arising out of the transfer of telecom licences and other assets from Aditya Birla Telecom as part of the demerger, while ABTL, which is a subsidiary of Idea Cellular, has been served with a tax demand of Rs2,400 crore. Idea confirmed that it had received the tax orders, but said the demands are not justified.
"They are inconsistent with established tax laws and past precedents. The company believes the demands are unjustified and based on an erroneous interpretation of the current tax laws and the facts of the case," the 111 telco said, adding that it will challenge the orders. Tax experts buy Idea's argument, and say using the provisions of the General Anti-Avoidance Rules (GAAR) on court-approved demergers will set a wrong precedent. "The law was amended to make mergers and de-mergers taxneutral, if they complied with certain conditions. Attempts by the tax office to tax such transactions will only be a negative move at a time when restructuring is a business inevitability," said DineshKanabar, deputy CEO of KPMG India. In 2009, ABTL transferred its telecom licence for the Bihar circle, along with other assets and liabilities, to its parent, Idea Cellular.

Both the Gujarat and Bombay High Courts approved the arrangement, which valued the transaction atRs2,069 crore. "The transaction involves a scheme of restructuring between a wholly owned subsidiary and a parent company with the sole objective of administrative consolidation of a telecom licence of one service area in the parent company, without any financial transaction or transfer of funds," Idea said.

Kalpesh Desai, Partner at BMR & Associates, said the new approach of the I-T authorities would make business reorganisations tougher for companies. "The Indian revenue authorities seem to have taken a view that all transactions must be implemented at arms length price even if these are merely internal group reorganisations (without any 'real' income).

This approach will increase the risk for group reorganisations and increase transaction costs." Parthasarathi Shome, who was appointed by the government to review the controversial GAAR provisions, said in his panel's final report, "An illustrative list of tax mitigation or a negative list for the purposes of invoking GAAR, as mentioned below, should be specified- for instance amalgamations and de-mergers (as defined in the Act) as approved by the High Court." 

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