Govt challenges merger of Sesa Sterlite, says aimed at evading taxes

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Jul 15 2014, 06:53am hrs
SesaThe Sesa Goa-Sterlite merger conducted in an all-share transaction led to the formation of Sesa Sterlite, India?s biggest aluminium maker.
The Centre on Monday moved the Supreme Court challenging the merger of two Vedanta group companies iron ore mining unit Sesa Goa and copper producer Sterlite Industries alleging that the amalgamation approved by the Bombay High Court in August last year was aimed at avoiding taxes to the tune of Rs 847 crore.

While seeking the setting aside of the merger scheme, the ministry of corporate affairs (MCA) said the relevant scheme of amalgamation was nothing but a colourable device adopted by Sesa Goa, the once-flagship iron ore producer of Anil Agarwal-controlled Vedanta Resources, to evade payment of tax, by being eligible for refund.

The Sesa Goa-Sterlite merger conducted in an all-share transaction led to the formation of Sesa Sterlite, Indias biggest aluminium maker. As per the merger scheme, investors got three Sesa Goa shares for five shares of Sterlite, while London-based Vedanta transferred to the new entity for $1 its 38.8% stake in Cairn India, including debt of $5.9 billion. The scheme, first announced in February 2012, has since received all other regulatory clearances and the merged entity started trading on Indian bourses on August 30 last year.

A bench headed by justice Fakkir Mohamed Ibrahim Kalifulla posted the matter for further hearing on Thursday, the day when an earlier the income tax departments appeal in a related matter comes up for hearing.

The department had appealed against the Bombay HCs order that dismissed its intervention application on the ground that it had no locus standi, and the Supreme Court then said any objection would be entertained only if the MCA filed a special leave petition.

The ministry has now said that parent company Vedanta Aluminium had huge accumulated loss/unabsorbed depreciation of Rs 2,461 crore whereas Sesa Goa had paid total taxes of Rs 846.97 crore for the financial year ended March 31, 2012. Therefore, the entire tax liability of Sesa Goa was wiped, causing the total taxes of Rs 846.97 crore to be refunded at the expense of the public exchequer, it added.

Senior counsel Harish Salve and Ranjana Roy, appearing for Sesa Goa, argued that the ministry had filed objections that were never raised by it before the high court. Under Section 72A of the Income Tax Act, if there is any merger or demerger, the company can take refund to set off the losses, they said, adding that the SC has already upheld the merger scheme on August 27 after dismissing an appeal filed against the merger.

To support its contentions, the government has relied upon McDowell & Co. Ltd v CTO and SRF Ltd vs Garware Plastics & Polyesters Ltd. The Centre stated that when an amalgamation scheme is framed with the sole objective of deriving unjustifiable benefit like obtaining refund of taxes paid earlier at the cost of the public exchequer, then such schemes are considered to be colourable devices with the motive of evading payment of tax.

When the HC granted approval to the merger, it had rejected a review petition filed by a shareholder of Sesa Goa and sanctioned the scheme of amalgamation and arrangement amongst Sterlite Industries (India) and Sesa Goa.

Recast the deal

* In February 2012, Vedanta Resources proposes consolidation of Sesa Goa, Sterlite, Vedanta Aluminium and Madras Aluminium into a single entity Sesa Sterlite

* Argues that the single-entity structure would lead to consolidation and simplification of the group structure

* All-share merger of Sesa Goa and Sterlite Industries became effective on August 17, 2013, to form Sesa Sterlite

* Vedanta claims contributing R31,100 crore to govt in FY14 in taxes, duties, royalties & profit petroleum

* Sesa Sterlites tax outgo in FY14 was negative R847 cr (credit) vs R1,024 cr (on adjusted pro forma) basis in FY13