NDTV: A legal mountain to climb

The strenuous legal defence mounted by NDTV against the IT Department’s claims of irregularities, could be prolonged.
The Hoot’s ANALYST* explains why

An NDTV announcement on July 27, 2017.

 

“The attempt to intimidate and paralyze NDTV has reached epic proportions in the last 24 hours.”

That was an announcement from NDTV to the Bombay Stock Exchange lon July 26. The reference was to the regulatory action launched by agencies of the Central Government such as the CBI, IT Department and the Enforcement Directorate against the company.

On the face of it, the announcement seemed somewhat incongruous. The Stock Exchange’s platform for disseminating corporate announcements is not a place for scoring political debating points against the Government. It is meant to inform the investors of material developments that could potentially affect a listed company’s stock price.

But here is a company which is using a stock exchange’s digital platform to accuse the Government of unleashing the regulatory agencies upon it to thwart its media operations.

However, whatever be the merits of its allegations against the Government, two points can still be made. One, media companies see themselves as custodians of the public interest and consequently, their journalistic efforts often put them in an adversarial position vis a vis the policies/administrative actions of the Government.

Even routine actions of the Government could be seen as a hostile official response to adverse reportage by a media organisation. In that sense, listed media companies are exposed to the added risk of the Government’s coercive powers being used against them to stymie their media operations and that would certainly have adverse stock price implications.

"For NDTV, legal troubles in recent times have not so much been raining as pouring"
 

Even if the actions of Government agencies were in the ordinary course of their regulatory mandate, if a media company believes that they were motivated, then as a matter of abundant caution, they can put the investors on notice.

Two, having said that, for NDTV, legal troubles in recent times have not so much been raining as pouring. This is clear from the notes accompanying the company’s financial performance for the quarter ending June 2017 that was put out just a day after the company made its sensational claim before the Stock Exchange on July 27th. The notes attached to the financial results had this to say:

-      That the Reserve Bank of India had turned down its application for ‘compounding’ (a euphemism for settling a regulatory complaint by paying a fine without admitting guilt) alleged contraventions of the provisions of the Foreign Exchange Management Act. The company went on to say that it had filed a writ petition in the Bombay High Court which is posted for hearing on August 8th.

-      It is facing an investigation by the CBI following the registration of a complaint that the company, its promoters and certain as yet unnamed officials of ICICI Bank, had colluded to defraud the bank of monies due to it on a loan given to the promoters. The Delhi High Court had asked the CBI to submit a status report September 21st of this year, the company statement went on to claim.

-      That the company had applied to the Securities and Exchange Board of India (SEBI) for a monetary settlement of a notice issued to it regarding delay/non-disclosure of transactions of trading in its shares that the SEBI notice alleged were in violation of the law on ‘insider trading’.

-      The company has been served with a notice to pay immediately a sum of Rs 428.93 crore as taxes following the acceptance by the Income Tax Appellate Tribunal of the IT Department’s claim that the company was found to be in possession of monies to the tune of Rs 642 crore, and that the company could not explain to the Department’s satisfaction the source of this money.     

While the issues that the company faces with agencies such as the Enforcement Directorate, SEBI and the CBI will meander on before they are resolved one way or the other, the demand for immediate payment of Rs 428.93 crore is a formidable challenge that the company has to overcome, here and now.

There was nothing in the June quarter results (consolidated after-tax loss of Rs 22.01 crore) nor in the performance of the company in the financial year just gone by (consolidated loss of Rs 86.18 crore in 2016-17) that suggests that its finances could bear an additional demand, this time from the tax authorities, of the order of Rs 428.93 crore.

The company has, however, claimed that it has received legal advice saying it has a good case for challenging the tax demand. It may well have a point but it rests on some arcane interpretation of what the Tribunal ruling actually means to the company’s tax liability for the assessment year 2009-10.

The Hoot has already published a detailed account of NDTV’s tax troubles. Briefly stated, as against a business loss of Rs 64.84 crore that NDTV claimed that its operations had suffered in the financial year 2008-09, the IT department contended that it had actually resulted in a taxable income of Rs 838 crore.

"There was nothing in the June quarter results (consolidated after-tax loss of Rs 22.01 crore) nor in the performance of the company in the financial year just gone by (consolidated loss of Rs 86.18 crore in 2016-17) that suggests that its finances could bear an additional demand"

 

It based its claim on the ground that NDTV had failed to account for roughly Rs 900 crore worth of additions to the figure of income which would result in the conversion of a loss of Rs 64.84 crore into a taxable profit of Rs 838 crore.

Of the many transactions that the IT department thought that should have been added to the initially returned figure of a ‘business loss’, two transactions stand out.

One, a figure of Rs 642.54 crore which represents the rupee value of what NDTV had claimed as $150 million raised during the financial year 2008-09 by one of its own ‘step-down’ foreign subsidiaries by issuing shares to NBCUniversal, a US-based company in the broadcasting business. This money was to fund NDTV’s foray into a host of non-news related channels and in particular, a general entertainment channel.

The Department contended that the entire transaction did not appear to possess all the characteristics that one usually associates with a foreign investor, especially one as large as NBCUniversal, a subsidiary of General Electric no less, making an investment in an Indian company with an uncertain business outlook.

It identified a number of circumstances that led it to believe that this was not NBCUniversal’s money but that of NDTV itself, whose origins were as yet unknown. For instance, it said that NDTV could not show any evidence of a valuation report having been prepared either by NDTV or NBCUniversal justifying the huge premium that was collected over and above the face value of these shares for a minority stake.

To compound matters, the NDTV subsidiary utilised the money collected by way of share premium to pay dividends to its ‘upstream’ parent company (another subsidiary of NDTV) but not a single penny to NBCUniversal which, after all, was a minority stakeholder in that company.

Not only did NBCUniversal not seem interested in collecting its share of the dividends that were made possible by its investments made (at a premium) only months earlier,  it was also willing, not long after, to sell its stake back to NDTV at a fraction of the price paid earlier.

Adding another curious twist to the saga was that all the upstream and downstream subsidiaries were wound up or merged with NDTV a couple of years down the road,  leaving the latter effectively with the Rs 642 crore in monies that NBCUniversal claimed to have invested.

The second substantial addition to the figure of ‘business loss’ return filed by NDTV was a loan transaction in foreign exchange involving another NDTV overseas subsidiary, valued at Rs 254.75 crore. The IT Department contended that there were serious infirmities in the documentation evidencing the loan supposed to have been raised by one of NDTV’s subsidiaries.

The absence of proper authentication of the lender, the terms as to the rate of interest to be charged, terms of repayment or evidence of fulfilment of prior conditions before becoming eligible to receive the loan etc. were cited by the IT Department as examples of infirmities to suggest that this was not a bonafide loan transaction.

The IT Department argued that the tax law provides for piercing the corporate veil of the entity of the borrower to trace it to the ultimate beneficial owner (in this case NDTV) if the loan transaction fails the test of proper documentation.

The matter was finally taken up before the Income Tax Appellate Tribunal. The Tribunal gave its ruling in favour of the IT Department with regard to the share subscription (Rs 642 crore) allegedly made by NBCUniversal in one of NDTV’s subsidiaries. Endorsing the findings of the IT Department, the Tribunal said that the circumstances surrounding the investment transaction were such that a case can be made for inclusion of that sum as income in the hands of NDTV to the initially returned figure of ‘business loss’.

That was substantial enough to give rise to a figure of taxable income on which NDTV would have to pay a tax unless it was overturned by higher judicial authorities.

Curiously, however, with regard to the other major claim of the IT Department, namely, the loan transaction of Rs 245 crore, the Tribunal asked the former to examine the fresh evidence submitted by NDTV and pass orders according to merits. We thus have a situation where an assessment order had been validly passed by the assessing officer. That order had two significant elements of additions to the reported figure of taxable income filed by NDTV. Both those additions were disputed by NDTV. Hence the matter went to appeal before the Tribunal.

The latter gave its ruling on one but chose to refer the second back to the IT Department for a fresh examination. The fact is that the Tribunal, as the ultimate fact-finding authority, should have ruled on both matters and thus brought a finality to the rival contentions on the legal merits of both. Unfortunately this has not been the case.

In fairness, it must be said that many tribunals have in the past remanded cases back to the official agencies for fresh examination of new evidence, preferring to adjudicate on it later when the case will necessarily come up before them a second time. But this has given rise to a situation where litigation experts will be salivating at the prospect of extended arguments and counter arguments going all the way up to an eventual resolution by the Supreme Court.

The question is this: Has the assessment for the year 2009-10 been completed? The IT Department says it has been completed because nothing can go to a Tribunal except a completed assessment on which the taxpayer has a dispute.

"A tax demand can arise only upon completion of the assessment and a figure of tax is computed for that assessment year"

 

NDTV appears to be saying that the very fact that the Tribunal has remanded a portion of assessed income for fresh examination means the assessment process now stands reopened and therefore it is not yet completed.

A tax demand can arise, it argued, only upon completion of the assessment and a figure of tax is computed for that assessment year. In this case there can be no finality to the assessment of income or a tax demand springing from such an assessment because the Tribunal has asked the IT Department to examine new additional evidence.

There is, in its view, no provision in law for completion of assessment in instalments. Consequently there is no question of the IT Department asking NDTV to immediately pay a sum of Rs 428.93 crore as tax for the assessment year 2009-10 when the assessment process is still underway.

The problem is compounded by the fact that under the income tax law there is no comprehensive definition of what constitutes an ‘assessment’. Nor is there any explanation as to when that process of ‘assessment’ whatever that might be, can be said to have been completed. A similar confusion exists with regard to the term ‘reassessment’. One would think that a case of ‘reassessment’ arises only in a situation where the assessing officer unearths some fresh piece of evidence warranting the reopening of an already completed exercise of assessment of income and hence the term, ‘reassessment’.

But equally, it could be argued with some force that the term ‘reassessment’ could also imply a case where there is a reiterative process of ‘assessments’ (reassessment) within a single exercise of determining the sum total of income that the tax payer has earned in a year. The NDTV case, at least in the tax department’s eyes, is a fit case of reassessment in the sense of repeated exercises of assessment because of the Tribunal’s order remanding a disputed portion of the assessed income back to the income tax department for a fresh examinantion of the facts of the case.

It doesn’t also help that the Income Tax Act confines itself to merely stating that ‘assessment’ includes ‘reassessment’ while defining what constitutes ‘assessment’. The action of the tax department in demanding the immediate payment of Rs 428.93 crore towards income tax on that portion of the income that had already been crystallised by the Tribunal’s ruling and NDTV disputing such a piecemeal approach to the process of determination of a tax payer’s income, has to be understood in this context.   

Mind you, the Tribunal’s ruling on the substantive question of whether the Rs 642 crore investment that NBCUniversal is supposed to have made in an overseas subsidiary of NDTV and later made a quick exit from it at a huge loss, represents income in the hands of NDTV, is itself liable to be challenged. It is far from certain that the convoluted reasoning adopted by the Tribunal to rule in favour of the tax department would stand the test of judicial scrutiny when the issue is agitated before a higher judicial forum.

The Tribunal said, “The investment decision by the investor was taken without any valuation report, due diligence report i.e. financial and legal both, and the exit decision was also taken by investor without getting its assets fairly valued. It is really unbelievable in the corporate world that an investor behaves in that manner”.

In other words, the Tribunal has chosen to paint the actions of NBCUniversal during the relevant period as one of colluding with NDTV to route the latter’s monies through its own books when a far simpler explanation namely, ‘rank managerial ineptitude’ might very well have fitted the facts in the instant case.

So, as they say in Bollywood, ‘Picture aur baaki hai’.       

 

Note: The article published on July 31, 2017, has been revised once for incorporating an expanded explanation of the nature of the dispute between NDTV and the IT Department over the latter’s demand for immediate payment of Rs 428.93 crore as tax for the assessment year 2009-10. 

 

* The author is an editorial consultant with The Hindu Business Line.                  

 

 

 

 

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