Mumbai: The Jet-Sahara saga that seemingly ended with Naresh Goyal’s Jet Airways (India) Ltd buying Air Sahara from Subrata Roy’s Sahara India Pariwar last April, after a year of legal manoeuvring, is far from over.
In the latest round of troubles to plague the acquisition, the income-tax department has demanded about Rs200 crore from Jet Airways in taxes on the acquisition of Sahara Airlines Ltd, the company that owned Air Sahara, which has since been rebranded JetLite.
It is not clear whether this tax liability is by way of capital gains tax or service tax or both. But, arguing that it is Sahara’s liability, Jet Airways has deducted Rs37.08 crore from its first instalment that fell due in March this year to Sahara India Commercial Corp. Ltd as part of the April 2007 transaction. This amount was paid to the income-tax department on 24 March, a person close to the situation said, on the condition of anonymity.
Taxing times: Jet Airways’ Naresh Goyal and Sahara’s Subrata Roy .
According to its buyout agreement with Sahara Group on 17 April 2007, Jet had agreed to pay Rs550 crore in four equal instalments commencing March 2008 and ending March 2011. As per this, Jet Airways was supposed to pay Rs137.50 crore in March.
Mumbai-based Jet Airways had bought 100% shares of Sahara Airlines Ltd for Rs1,450 crore, of which Rs900 crore has already been paid to Sahara by 20 April last year.
Since rechristened JetLite, Jet Airways has positioned the former Air Sahara between a full-service airline and a low-fare carrier. Goyal has said that JetLite will make profits by the end of the current fiscal year. Together, Jet Airways and JetLite run India’s largest airline by passengers carried.
When asked about the inco-me-tax department’s action, Jet Airways executive director Saroj K. Datta confirmed it to Mint on 3 April, but declined further detail. On 17 April, Go-yal insisted the liability “would be paid by Sahara, not Jet”.
Sahara India Financial Corp. executive director Pallav K. Agarwal said he would not comment on the matter.
However, a person close to the development said Sahara has contested Jet Airways’ move and asked for a payment of the full amount as there is no provision for treating a tax liability in the share purchase agreement, or SPA, signed bet-ween Jet and Sahara.
Mint couldn’t independently verify this.
“This tax liability can be paid in instalments. However, this points out the potential loopholes in the SPA and will have an impact in the profitability of Jet Airways,” he said.
Akil Hirani, managing partner at Mumbai law firm Majmudar and Co., said: “The liability to pay income tax or service tax will be based purely on the share purchase agreement signed between Jet Airways and Air Sahara. The buyer (Jet Airways) will be liable to pay taxes for liabilities incurred following the closing of the transaction on 17 April as it is the owner effective therefrom. But, provisions could have been included in the SPA making Sahara liable for such claims as well.”
In respect to income-tax claims, the department could have served Jet Airways a notice to pay capital gains tax on transfer of the shares or the business, Hirani said, detailing the possible reasons behind the tax claim. “Capital gains tax is payable on the difference of the cost of acquistion of assets and sale price of those assets. The (income-tax) department has been sending such notices to various Indian and foreign companies recently,” Hirani added.
In such cases, “typically, the seller would be liable to pay the tax. But there could be an obligation on the buyer to withhold the tax (and pay it to the government),” he said.
If the tax department’s claim are related to service tax, these can be traced to the transfer of aircraft leases to Jet, Hirani further explained. “However, the share purchase agreement should contain provisions for attribution of liability in this regard,” Hirani added.
A Mumbai-based aviation analyst, who did not want to be named, said the cost of acquiring JetLite would go up on Jet’s books, potentially (if Sahara gets Jet to pay the entire instalment, and Jet ends up paying the tax), leading to a cash crunch at India’s leading airline group.
“Though it will not have any direct impact on profitability as it is a capital expenditure, this will halt expansion plans of Jet Airways. It will also lead to borrowing more from the market, resulting in interest cost shooting up,” he said.
The Jet Airways-Air Sahara deal was first attempted late in 2005, which concluded in a purchase agreement on 18 January 2006 that entailed an acquisition cost of Rs2,000 crore.
The original 65-day term of that agreement expired in March 2006 and was extended to 21 June by Jet paying Sahara an advance of Rs500 crore, the repayment of which was secured by a pledge agreement and a personal guarantee of Sahara Group founder Roy.
At the expiry of the extended period, disputes arose between the parties as to whether or not the agreement had terminated (for non-fulfilment of some conditions). Finally, these disputes were referred for hearing to an arbitration tribunal and reached a consensus on 17 April 2007 when Jet finally acquired Air Sahara.