January 27, 2010

The STAR Amalgamation: No Indian tax liability for transfer of shares / assets

In a recent matter of Star Television Entertainment Ltd1., the Authority for Advance Rulings (“AAR”) has held, that no capital gains tax liability would arise under the Income Tax Act, 1961 (“ITA”) in respect of transfer of shares/ assets forming part of the terms of an amalgamation. The AAR rejected the plea of the income tax department and refused to deny the benefit of capital gain tax exemption on the ground that the amalgamation is without any commercial or business purpose.


Star Television Entertainment Ltd. (“STEL”) and Star Asian Movies Ltd. (“SAML”), companies incorporated in British Virgin Islands, broadcast the entertainment channels Star Plus and Star Gold, respectively, while Star Asian Region FZ LLC (“SAR”), incorporated in UAE, broadcasts Star One and Star Utsav.

Figure 1: Scheme of Amalgamation


For commercial reasons, the three abovementioned Indian language channels were to be consolidated into the Indian group company, Star India Pvt. Ltd., which is engaged inter alia in the business of marketing of the channels. Accordingly, an amalgamation of STEL, SAML and SAR (collectively referred to as the “Amalgamating Companies”) into SIPL was proposed, pursuant to which all assets and liabilities of the Amalgamating Companies shall stand transferred to SIPL. In turn, SIPL would issue shares to the shareholders of the Amalgamating Companies as per a share exchange swap ratio. The scheme of amalgamation (“Scheme”) is presently pending sanction of the Bombay High Court.

Question before the AAR

Whether the amalgamation of STEL, SAML and SAR with SIPL would result in any liability under the ITA in the hands of the Amalgamating Companies and their shareholders?

Relevant ITA provisions

Section 45 of ITA, which is the charging provision for capital gains tax in India, provides for a capital gains tax on transfer of a capital asset. Section 47 of ITA enumerates the transactions which are not regarded as ‘transfer’ and hence exempt from capital gains tax under the ITA. As per sections 47 (vi) and 47(vii), where such amalgamated company is an Indian company, the transfer of assets by an amalgamating company to amalgamated company, and the transfer of shares by a shareholder of an amalgamating company in consideration of allotment of the shares of amalgamated company, respectively, are exempt from capital gains tax in India.

Contention of the Income Tax Department

The revenue authorities raised doubts over the genuineness of the transaction and claimed that the Amalgamating Companies have resorted to the Scheme only for availing the benefit of exemption under section 47 and hence, the entire Scheme should be disregarded. Further, they also objected to the AAR hearing the application on the ground that section 245 R(2) of the ITA provides that the AAR shall not allow application related to a transaction which is designed prima facie for avoidance of tax. It was also their plea that the AAR should not rule on the applications till the Scheme is sanctioned by the Bombay High Court. 

The Ruling

The AAR, at the outset, rejected the revenue’s plea to not decide the matter, since that would amount to a statutory authority refusing to exercise its jurisdiction vested in it by law. Further, the AAR held that an applicant may seek an advance ruling in respect of a proposed transaction and the present ruling based on the assumption that the Scheme receives an approval from the High Court.  

The AAR also rejected the revenue’s contention that the entire transaction was devised as an amalgamation to avoid capital gains tax, without the backing of any commercial purpose. In relation to this, the AAR referred to the age-old principle laid down in IRC v. Duke of Westminister2:

Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

[Emphasis Supplied]

The AAR also relied on the landmark decision of the Supreme Court in Azadi Bachao Andolan’s Case3, which reiterated the principles laid down in IRC v. Duke of Westminister and held that the expression “transaction designed to avoid income tax” cannot be understood to mean that a tax payer is precluded from taking into account the tax implications and to minimize its tax burden. The AAR observed that it is within the legitimate freedom of the contracting parties to enter into a transaction, which has the effect of extending to the party the benefit of exemption under the taxation statute.

The AAR distinguished the present case from the Wood Polymer Ltd’s case4, wherein the Gujarat High Court held that the amalgamation had no commercial or business purpose and the sole purpose of the same was to avoid tax. The AAR held that the facts of the aforesaid case were not comparable to those of the present case since the organizational restructuring of the Star group companies whereby the Indian language entertainment channels were concentrated in SIPL, had a definite business purpose, namely, “synergies of operation, enhanced operational flexibility and to create a stronger base for future growth of the amalgamated entity”.

On the basis of the above, the AAR held that Amalgamating Companies and their shareholders could avail the tax benefits under section 47(vi) and 47(vii) of ITA and that the Scheme was not a colorable device to avoid tax liability.


This decision is an excellent illustration wherein the judiciary has yet again recognized the principles laid down in Azadi Bachao Andolan’s case and the reiterated fact that as long as a transaction is commercially justifiable, the incidence of a tax exemption would not result it being considered as “designed to avoid income tax”. Similar to the decision in Canoro Resources Limited5 the AAR has yet again rejected the plea of the revenue contesting admissibility of an application on the ground that the transaction was for avoidance of tax. The tax payers are free to plan their taxes and take steps to mitigate them as long as they remain within the framework of law and the AAR has rightly applied the beneficial provisions of ITA to the amalgamation under question.



1 A.A.R. NO. 805-810/2009

2 1936 AC 1 p.754

3 Union of India  v. Azadi Bachao Andolan, 2003, 263 ITR 706 

4 109 ITR 179 

5 AAR No. 779 of 2008





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