I-T dept to move SC against Reliance Jio's plan to sell stake in tower arm

NCLAT had rejected govt argument that the move was illegally aimed to evade tax payment

Reliance Jio Infocomm’s plan to reduce debt by selling stake in its telecom tower arm to Canadian investor fund Brookfield isn't free of the income tax (I-T) department hurdle.

The latter plans to petition the Supreme Court against the National Company Law Appellate Tribunal (NCLAT) order of December 20 which cleared Jio's proposed demerger of tower and fibre optic network assets to two infrastructure trusts. 

The clearance was in spite of I-T objections. The department  argued that the proposed conversion of preference shares worth Rs 65,000 crore by Jio – by cancelling and then converting these into loans — would substantially reduce the profit of the demerged company. And, so, cause huge loss of revenue to the department. In sum, a move to avoid and evade taxes, it contended. 

Jio denied the charges. An e-mail sent this week by this publication to Reliance for its views on the issue did not elicit a response.

In July this year, Brookfield had said it would pay Rs 25,215 crore in the units to be issued by the Tower Infrastructure Trust.  Jio was to be anchor tenant for the infrastructure investment  (InvIT) company, for 30 years — giving a guaranteed source of income to the trust. Brookfield was to hold 51 per cent stake in the tower InvIT; Reliance Industries (RIL), parent entity of Jio, plans to hold the rest.

The I-T department argued the scheme sought to indirectly do what RIL could not directly do under the law. By way of the composite scheme, there is an indirect release of assets by the demerged company to its shareholders, which is used to avoid the dividend distribution tax which would have otherwise been attracted via Section 2(22) (a) of the I-T Act. 

Also, the composite scheme does not fulfil the requirements of Section 2 (19AA) which defines the meaning of ‘demerger’ under the Companies Act, was another objection. The department's legal counsel said this section “requires transfer of an undertaking on a going concern basis, not evident from the balance sheet and profit and loss account of Reliance Jio Infocomm”.

Further, under law, dividends arising out of preference shares can only be paid by the company out of accumulated profits. However, when preference shares are converted into loans, shareholders turn into creditors of a company. Which has two consequences, the department said. First, the shareholders who are now creditors can seek payment of the loan, irrespective of whether there are accumulated profits or not. Second, the company is liable to pay interest on loans to its creditors, which it otherwise would not have had to do to its shareholders.

The payment of interest on such huge amounts of loan would lead to reducing the total income of the company 'in an artificial manner', which is not permissible in law, the department said.

The department 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 Infocomm’s tax by about Rs 258 crore each year. This is tax evasion, was the contention.

However, the NCLAT did not find these arguments compelling and rejected the I-T department's petition.