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2016 (9) TMI 163 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (9) TMI 163 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 387 ITR 358 - Taxability as a result of amalgamation - A foreign company has a branch in India holding shares in India company - Determination of the fair market value of shares of SSBS - Held that:- Explanatory Notes to Finance Act 1967 clarifies that tax liabilities are attracted in the case of both amalgamating company and shareholders. But even if such cases are treated transfer within the meaning of section 2(47) of the Act .....

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inivas Setty [1981 (2) TMI 1 - SUPREME Court] is applicable here. If the applicant succeeds on this issue there is no need to deal with other issues. However, in the question the applicant has raised the issue of discrimination also as per Article 25(3) of DTAA and therefore it needs to be addressed. Article 25 very specifically talks about 'personal allowances, reliefs and reduction for taxation purposes'. The revenue has put emphasis on 'reduction for tax purposes' and 'in the same circumstanc .....

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ecial benefits to a local company and its shareholders, there is no reason to deny the same to a foreign company and its shareholders in similar case of amalgamation. We are of the opinion that non discrimination clause seeks to ensure that both countrio do not decline any allowance or exemption only on the ground of nationality of taxpayers. Therefore, we feel that exemption under section 47(vi) is available to SSBS also. - In the case of BSS it is established that it is case of transfer be .....

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ssue that it should mean more than 50%. We respectfully agree. - However, the most important issue is whether BSS has received any consideration. The answer is in negative. The Revenue has given a strange method of working out capital gains which is completely on notional basis and is based on presumptions. Capital gains have to be calculated on real gains and not on the basis of some notional values. - In this case no consideration accrues to the amalgamated company and no capital gains .....

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see what has been parted with by shareholders. They have parted with their shares in SSBS and not the movable property of the branch. Therefore, we are not influenced by Revenue's contention and we are of the opinion that though capital gains accrue to shareholders, the same is not chargeable to tax in India in view of Article 14(5). - Issue of transfer pricing - Held that:- In the course of the hearing the Revenue also submitted that the transfer pricing provisions would be applicable even .....

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Indra Anand For The Department : C.S. Gulati, Ms. Nausheen J. Ansari, K.L. Kanak and S.S. Negi RULING A. K. Tewary, Member - The applicant Ranca Sella SPA (BSS) is a banking company, wholly owned by Banca Sella Holding S.p.A. ('Holding Co.'), Italy. BSS engaged in the business of collection of savings and exercising the business of credit, in all forms, in Italy and abroad, it also proposes to provide outsourcing services, banking & financial services and other ancillary and inciden .....

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ommercial support services, administrative services, control services and information technology services. Gruppo Banca Sella had been carrying out business in India through Sella Synergy India Private Limited ('SSIPL'), a subsidiary ot the Holding Co., incorporated in India under the Companies Act, 1958. SSIPL was engaged In the business of Information technology (software design, development and other related maintenance services) provided to entities of Gruppo Banca Sella. On 15TH Jan .....

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. The shareholding pattern of SSBS before the amalgamation was as follows: Sr. No. Name of the share holder Shareholding % 1 Banca Sella Holding S.p.A. 80.226 2 Banca Sella S.p.A 14.958 3 Banca Sella Nordest Bovio Calderari S.P.A. 1.174 4 Banca Sella Sud Arditi Galati S.P.A. 2.179 5 Banca Patrimoni Sella & C.S.P.A. 1.127 6 Sella Gestioni SGR S.P.A. 0.195 7 C.B.A. Vita S.P.A. 0.124 8 Brosel S.P.A. 0.017 Total 100 3. Gruppo Banca Sella has effected a restructuring in Italy, Whereby SSBS has be .....

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carry on IT services. 4. The applicant has sought ruling from on the following questions : (1) (i) Whether the amalgamation of Sella Servizi Bancari S.C.P.A. (SSBS) with the applicant involves a 'transfer' u/s, 2(47) of Income Tax Act, 1961 (ITA), of capital asset of SSBS, being a branch in India? (ii) If yes, is such transfer chargeable to tax u/s. 45 of ITA? (iii) Can the price paid by the branch to Sella Synergy India Private Limited (SSIPL) to acquire the business (including goodwill .....

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o shareholders of SSBS (other than the applicant) upon their transfer ring of their shareholding in SSBS? (ii) if yes, then the methodology to compute the same? (5) If answer to question (1) or (4) is in the affirmative, whether applicant was liable to withhold tax u/s. 195 of the ITA. (6) Whether the amalgamation of SSBS with the applicant attracts transfer pricing provisions of Sec. 92 to 92F of the ITA? 5. The Revenue has challenged the admission of the application observing that the issue be .....

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do not at all concern valuation of shares. Therefore, we do not think there is any jurisdictional bar. We treat the admission order as final. 6. The Applicant submite that the three cntitico that could poooibly be taxed in India as a consequence of the amalgamation are:- (i) SSBS on the capital gains accruing, if any, on the transfer of its Indian Branch as a consequence of the amalgamation; (ii) BSS on the capital gains, if any, accruing on the transfer of the shares it holds in SSBS as a cons .....

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ity of the other shareholders. The Revenue pointed out that questions (1) and (2) do not deal with the taxability of SSBS saying that the Applicant assumes that Question No.1 read with Question No. 2 is about the taxability of SSBS in India whereas there is no specific mention of SSBS in the questions raised. According to the Applicant vide Question No. 1 and Question No. 2 it has sought a ruling whether the said amalgamation can be construed as a 'transfer' within the meaning of section .....

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plicant has specifically raised Question No. 3 for determining the taxability in its own hands, Question No. 4 deals with the taxability in the hands of other shareholders and Question No. 5 relates to applicability of the provisions for deduction of tax at source to BSS in respect of the gains, if any, arising to SSBS and the other shareholders whereas Question No. 6 deals with the applicability of the transfer pricing provisions. We have examined the questions carefully and find that Question .....

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e property existing. In the present case, as a consequence of the amalgamation SSBS would stand dissolved and, therefore, there is no transfer as contemplated. In this regard, reliance was placed on the judgment of the High Court at Bombay in CIT v. Texspin Engineering and Manufacturing Works 263ITR 345 and the judgment of the Calcutta High Court in Shaw Wallace & Co.Ltd. v. CIT 119 ITR 399. The Revenue has contended that amalgamation involved extinguishment of rights in the shares of SSBS b .....

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ting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;" The Reve .....

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or has ceased to exist, and, therefore, there is no 'transfer' of capital assets, is misplaced because on the effective date of amalgamation both the transferor as well as the transferee were in existence. The Revenue further submitted that every merger has a pre-condition of taking over all the liabilities and assets of the entity which is amalgamating and liabilities also include contingent liabilities including taxes to be paid by the amalgamating company or the transferor but however .....

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the Act has been provided as an 'abundant precaution' and he mentioned several instances in section 47. The revenue also relies upon the judgment of the Supreme Court in CIT v. Grace Collis 248 ITR 223 to support its contention that there is a transfer on the merger of SSBS into BSS. However the applicant's counsel contended that the reliance on the aforesaid judgment is misplaced as what the Supreme Court was concerned in that case was a transfer by a shareholder by way of extinguis .....

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sequence of the amalgamation that all the assets of SSBS stood vested in the Applicant which does not tantamount to a transfer as explained earlier. Without prejudice to this argument, the applicant submitted that the transferor, SSBS, ceases to exist upon amalgamation and, hence, Explanation 2 to sec 2(47) of the iTA is not attracted as the same does not in express terms do away with the requirement of the existence of two parties in a transfer. Revenue has referred to the amendments to the pro .....

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fy the intention underlying the provisions which existed previously while others were designed to remove certain tax liabilities which were attracted in the case of an 'amalgamating company' (i.e., the company which merges into another company) as well as the shareholders of the amalgamating company who receives shares in the 'amalgamated company' (i.e., the company in which the enterprise of the other company is merged) in lieu of their share holding in the amalgamating company. .....

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H 289 ITR 312, judgment of the Calcutta High Court in Shaw Wallace & Co. Ltd. v. CIT 119 ITR 399 and the ruling pronounced by the Authority in Amiantit International Holding Limited, in re: 322 ITR 678. The revenue contended that the cost of acquisition of the Indian branch is known as the Indian branch was acquired by SSBS from SSIPL on a slump sale basis for an agreed price and therefore cost of consideration is ascertainable. According to the revenue the capital gains that accrues to SSBS .....

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at which is parted cannot be the basis to determine the capital gains. In this regard reliance was placed by the applicant on the judgment of the Supreme Court in CIT v. George Henderson & Co. Ltd. 66 ITR 622 where the Court held that the market value of that which is parted with can never be the consideration that accrues on its transfer. C. Having regard to the principle laid down by the Supreme Court in CIT v. B.C.Srinivasa Setly 128 ITR 294 and PNB Finance Ltd. v. CIT 307 ITR 75 that if .....

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ara 1 of Art. 25 of India - Italy DTAA is reproduced herein under :- "Non-discrimination-1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected." The applicant submits that having regard to the pro .....

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xation purposes and does not deal with the exclusion from the ambit of the charge under section 45 which is provided for in section 47. The personal allowances are those that are available to certain individuals only. Reliefs are provided for in Chapter-VIII(B) of the Act and reduction for taxation purposes refers to various amounts allowed as a deduction in computing the income chargeable to tax. Article 25(3) thus can have no application to the provisions of section 47 of the Act. The Revenue& .....

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rticle shall be construed as obliging a Contracting State to grant to persons not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to persons who are so resident." The Revenue submits that as per this para, sovereignty of either States in respect of grant of pursuant allowances, reliefs and reduction for taxation purposes, have been specifically reiterated, according to which where a State grants any personal allowa .....

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laws cited by them. Four important issues are required to be addressed with respect to questions 1 and 2: (a) whether amalgamation of SSBS with BSS results in transfer? (b) whether such transfer is taxable? (c) whether market value of SSIPL is cost of consideration in the context of capital gains and whether it has been received by SSBS? (d) whether by virtue of Article 25 of DTAA the exemption under section 47(vi), otherwise available only to Indian companies, is allowable to foreign companies .....

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or the purpose of capital gains in the hands of SSBS which could not receive any consideration before it merged and lost its identity. In the absence of consideration capital gains cannot be computed. The decision of the apex court in the case of CIT v. B C Srinivas Setty [1981] 128 ITR 294 is applicable here. If the applicant succeeds on this issue there is no need to deal with other issues. However, in the question the applicant has raised the issue of discrimination also as per Article 25(3) .....

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. The exception is only in cases of personal allowances, relief, reduction etc and we agree with the applicant that these are in the context of individuals and not in case of companies as the starting word 'personal' denotes. If a case of amalgamation results in some special benefits to a local company and its shareholders, there is no reason to deny the same to a foreign company and its shareholders in similar case of amalgamation. We are of the opinion that non discrimination clause se .....

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ment of the shares held by BSS in SSBS there is no transfer because what is covered by the definition of the word 'transfer' in section 2(47) is an extinguishment of any right in an asset and not the extinguishment of the asset itself. However, the applicant admitted that this aspect of the matter is concluded against the Applicant by virtue of the judgment of the Supreme Court in CIT v. Grace Collis 248 ITR 223. B. However, even though there would be a transfer it was contended that the .....

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to Revenue prior to amalgamation, the Balance Sheet of BSS records the value of shares of SSBS as an asset, which is nothing but the 'cost of acquisition' of these shares. Post-amalgamation, these shares will no longer appear in the B/S of BSS as the shares are extinguished, and, consequently, they cease to exist. Further, for the purpose of amalgamation the applicant is required to carry out valuation of SSBS, which would find its suitable place in the B/S of BSS post-amalgamation. The .....

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section 48 of the Act. In this way according to Revenue it is possible to quantify the capital gain accruing to the applicant as a result of 'transfer1 of shares of SSBS, and, consequently, thn applicant's reliance on the Hon'ble Apex Court's judgment in RC Srinivasa Shetty [128 ITR 294 (SC)] is unwarranted. C. The applicant further submits that the asset that stands transferred, viz., the shares in SSBS, is not situated in India and, hence, the capital gains, if any, cannot be r .....

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dia " According to the applicant this explanation would have no impact on tho taxability of the capital gains that is alleged to arise to BSS because what Explanation 5 to section 9(1 )(i) contemplates is that the shares of SSBS should derive their value substantially from assets located in India and the assets of SSBS located in India constituted about 5.75% of the total cost of the assets of SSBS. The Applicant submitted that it was not seeking ruling as to what percentage of the value of .....

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uot; is not accepted, then, the consequence would be that even though say 60% of the value of the shares is derived from assets located in India, nevertheless, 100% of the capital gains that accrues on the transfer of such shares would be chargeable to tax in India. It was further submitted that the amendments brought about by the Finance Act 2015 by the insertion of Explanations 6 and 7 to section 9(1 )(i) support the aforesaid contention. It is now provided that with effect from the assessment .....

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ondingly it should be directed that only a pro rata part of the gain, if any, would be taxable in India. As regards Delhi High court's decision in the case of DIT (International Tax) v. Copal Research 371ITR 114 wherein it was held that gains arising from the sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situate in India would not be taxable under section 9(1 )(i), it was submitted that it does not necessarily follow that if more tha .....

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t that 'substantially' would mean 'more than 50%'. Finally, Explanation 6 to section 9(1 )(i) has now defined the word 'substantially'. D. Having regard to provisions of Article 14 of the DTAA the Applicant submitted that there should be no liability to tax in India. The relevant extract of Article 14 'Capital Gains' is reproduced below: "1 & 3. ** ** ** 4. Gains from the alienation of shares of the capital stock of a company the property of which consist .....

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nt Paragraph 4 of Article 14 does not apply because the assets of SSBS arc not principally immovable properties in India. In fact GODS did not own any immovable property in India. Paragraph 5 provides that gains from alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of Italy may be taxed in Italy. Therefore, the capital gains arises on the transfer of shares the two Contracting States have ceded the right to tax capital gains, to the country where th .....

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isions of Article 14(2) is reproduced herein under for ready reference - "Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of .....

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amation of SSBS into BSS involved alienation of this PE together with the whole enterprise, i.e., the SSBS. According to Revenue all the requirements of paragraph (2) of Article 14 of the India-Italy DTAA are satisfied and therefore, Article 14(2) of the DTAA is applicable in the facts of the case. (b) The Revenue further contend that Article 14(2) covers a specific situation, of the alienation of the PE of an enterprise, alone or together with the whole enterprise and in the instant case, there .....

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) (i) of the Act we feel that Applicant's counsel had tried to attach the issue too far by saying that meaning of 'substantial' should be taken as 'close to whole'. We do not agree. 'Substantial' will always mean at least 50%. Its dictionary meaning is 'of considerable importance, size or worth'. Moreover, Delhi High Court has settled this issue that it should mean more than 50%. We respectfully agree. However, the most important issue is whether BSS has recei .....

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er of SSBS, the applicant submitted that the arguments set out whilst dealing with the taxability of BSS would clearly apply mutatis mutandis save and except the argument that 'no consideration accrued on the extinguishment of the shares' would be unavailable. Inference 13. In this case admittedly there is consideration received by shareholders. Therefore, the only issue remains to be decided is whether shareholders get the benefit of Article 14 of DTAA. The applicant says that according .....

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