GAAR Panel applies anti-avoidance provisions to NCLT approved demerger

 The Approving Panel under General Anti-Avoidance Rules (GAAR), in a landmark direction, has characterized the demerger of Digital, Media and Communication Business Undertaking of NXT Digital Limited into Hinduja Global Solutions Limited (HGSL) as an "impermissible avoidance arrangement". This marks a rare instance where a NCLT approved corporate restructuring has been subjected to anti-avoidance scrutiny, challenging the presumption that NCLT-sanctioned schemes are immune from GAAR provisions.

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The restructuring involved two sequential steps: HGSL first divested its profitable Healthcare Services business to Baring Private Equity Asia (BPEA) for an enterprise value of USD 1,200 million in August 2021, generating significant capital gains. Subsequently, the loss-making Digital, Media and Communication business undertaking of NXT Digital Limited was demerged into HGSL through a Scheme of Arrangement approved by the Hon'ble NCLT Mumbai on November 11, 2022, with an appointed date of February 1, 2022. The combined effect of these transactions enabled HGSL to set off carried-forward losses from the demerged NXT Digital business against the capital gains earned from the healthcare divestment, resulting in a tax reduction of ~280 crs.​
The Panel observed that the primary purpose of the arrangement was to obtain a tax benefit and that the transaction lacked sufficient commercial substance. This direction empowers the tax officer to recharacterize or disregard the arrangement for tax purposes and take consequential action. This determination came after the tax department conducted a survey at HGSL's premises in November 2023, following which the matter was referred to the GAAR Panel for investigation.
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This ruling underscores that under GAAR, ‘substance’ prevails over ‘form’—even legally valid, court-approved restructurings may be disregarded if their predominant purpose is found to be tax minimization rather than genuine business reorganization. It signals heightened regulatory scrutiny of intra-group reorganizations where tax benefits arise, particularly those involving loss absorption or offset mechanisms. Corporates must now demonstrate clear commercial intent, economic substance, and valuation rationale to support such transactions, as judicial approval alone may not insulate restructurings from anti-avoidance provisions.