HC upholds IT tribunal order in Birla telecom unit case

The Bombay High Court has upheld an order of the income tax tribunal, which said that Aditya Birla Group’s telecom unit did not violate rules while receiving an investment of Rs 2,098.25 crore from a subsidiary of global private equity firm Providence Equity Partners.

The high court said in its order last week that the transaction was genuine and could not be considered round tripping of funds, providing major relief for Aditya Birla Telecom, a unit of erstwhile Idea Cellular.

The high court was hearing a petition filed by the Commissioner of Income Tax on a dispute that had its genesis about a decade ago.

Aditya Birla Telecom received Rs 2,098.25 crore from Mauritius-based P5 Asia Holding Investment (P5AHIML), a subsidiary of Providence Equity Partners, in FY08. The amount included share premium of Rs 2,096.32 crore upon allotment of compulsory convertible preference shares to the subsidiary.

However, the revenue department invoked Section 68 of the Income Tax Act and held that the company had merely routed its own money through a complex web of corporate structures. The department argued that the company had used only Rs 7.31 crore received from P5AHIML for its own operations and transferred the balance amount to Idea Cellular, the holding company, or to Idea Cellular Infrastructure Services Ltd., another group company, for the purpose of other investment.

“There was no reason why P5AHIML should have transferred such huge amount without any apparent return,” the tax department argued.

While upholding the Income Tax Appellate Tribunal’s order, the high court held that P5AHIML belongs to Providence Equity Partners, it was registered as a Foreign Venture Capital Investor with the Securities & Exchange Board of India and had taken the Foreign Investment Promotion Board’s approval for making the investment and hence could not be booked for round tripping.

“Merely because the investment was considerably large and as noted, several corporate structures were either created or came into play in routing the investment in the assesse through P5AHIML, would not be sufficient to brand the transaction as colourable device,” the court observed in its order on March 26.

The court also took into account the order of the tribunal, which observed that the assessing officer had carried out a detailed inquiry and was prima facie of the belief that the materials on record proved the genuineness of the transaction.

“The source of the funds in the hands of P5AHIML was also verified,” the court said.

Tax experts said the order is important because of its timing, when authorities are keeping tabs on funds flowing in from all sources.

“This assumes significance in the present scenario where Section 68 is being invoked in several cases, even where the investments are coming from reputable and creditworthy investors,” said Amit Maheshwari, a partner at Ashok Maheshwary and Associates LLP, a chartered accountancy. “The HC has correctly ruled that merely because the investment is coming through multiple corporate entities does not make the transaction a sham transaction.”