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ITAT Ahmedabad Rules Against Reckitt Benckiser on Demerger Tax

The Income Tax Appellate Tribunal (“ ITAT ”), Ahmedabad Bench, recently handed down a significant judgment in the case of Reckitt Benckiser Healthcare India Private Limited v. Dy. Commissioner of Income-tax , impacting the tax implications of corporate demergers. The Tribunal dismissed Reckitt Benckiser 's appeal, upholding the tax authorities' assessment that the company's demerger of its treasury undertaking was not a qualifying demerger under Section 2(19AA) of the Income Tax Act, 1961. This ruling means Reckitt Benckiser is liable for capital gains tax and dividend distribution tax.

Case Overview

Reckitt Benckiser , a pharmaceutical and cosmetic company, had transferred its treasury unit to Sterling Addlife India Ltd. (" Sterling ") via a court-approved scheme of arrangement. The company claimed this was a qualifying demerger, exempting it from capital gains tax under Section 47(vib) of the Act. However, the tax authorities argued that the demerger did not meet the conditions stipulated in Section 2(19AA), specifically concerning the transfer of assets and liabilities.

Contentions of the Parties

Reckitt Benckiser argued that the demerger fulfilled all the conditions of Section 2(19AA). They contended that all assets were transferred to Sterling , and that the absence of liabilities at the time of demerger satisfied the legal requirements. They emphasized that the scheme was sanctioned by the Gujarat High Court.

The Revenue, on the other hand, argued that the demerger was not a genuine transfer of an undertaking as a going concern. They highlighted inconsistencies in the company's accounting, alleging that the transfer was selective and designed to avoid tax liabilities. The Revenue pointed to discrepancies in asset valuations and the failure to transfer certain liabilities. They relied heavily on the findings of the Assessing Officer and the Commissioner of Income Tax (Appeals).

The Tribunal's Decision

The ITAT meticulously examined the provisions of Section 2(19AA), focusing on the requirement for the transfer of all assets and liabilities of the undertaking. The Tribunal found that Reckitt Benckiser had failed to comply with Section 2(19AA)(ii) and (iii), specifically regarding the transfer of liabilities. The Tribunal noted that while the Gujarat High Court had approved the scheme, this did not preclude the tax authorities from examining whether the transaction met the requirements of the Income Tax Act. The Tribunal stated that a harmonious interpretation of corporate law and tax law is necessary, but simply obtaining court approval for a demerger does not automatically grant tax exemptions. The Tribunal agreed with the Revenue's assertion that the transaction amounted to a transfer of capital assets, triggering capital gains tax under Section 45 and dividend distribution tax under Section 2(22).

The Tribunal also addressed Reckitt Benckiser 's other grounds of appeal, including disallowances under Section 14A (expenses related to exempt income) and Section 80IC (deductions for profits from certain industrial undertakings). On these issues, the Tribunal partly allowed the assessee's appeal, referencing its own past decisions and relevant CBDT circulars.

Implications

The ITAT 's decision underscores the importance of meticulous compliance with Section 2(19AA) for claiming tax exemptions in demerger transactions. The judgment highlights that court approval of a demerger scheme under company law doesn't automatically translate into tax benefits under the Income Tax Act. Companies undertaking demergers must ensure complete and accurate accounting to avoid disputes with tax authorities. This case serves as a cautionary tale for companies planning demergers, emphasizing the need for careful planning and compliance with both company and tax laws. The judgment's impact extends beyond Reckitt Benckiser , setting a precedent for similar cases involving demerger transactions.