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In Re : Banca Sella S.P.A.

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, the important question is whether in the absence of any consideration flowing to .....

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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 circumstances and under same condition' We are of the opinion that this Article basically mea .....

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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 because admittedly the apex court has settled the issue in the case of Grace Collis. .....

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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 is chargeable to tax. We need not go into other issues. - Shareholders of SSB .....

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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 if there is no liability to tax. The Applicant has relied on the ruling of this A .....

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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 incidental services. Sella Servizi Bancari S.C.P.A. (SSBS) was one of the group companies .....

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ion 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 January, 2010, SSBS established its branch office in India (Branch). The Branch took .....

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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 been merged with the applicant. The effective date of amalgamation was 30th May, 201 .....

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stions : (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) be treated as Cost of Acquisition u/s. 55(2) of ITA? (2) Assuming a view is take .....

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r 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 before the Authority involves determination of the fair market value of shares of SS .....

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y 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 consequence of their extinguishment on the dissolution of SSBS pursuant to the amalgam .....

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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 2(47) of the ITA and about the taxability of the same if the answer to Question N .....

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ts 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 No 1 relates to the transfer and since SSBS has amalgamated and its assets have be .....

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S 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 by all the shareholders including the applicant and " extinguishment of rights .....

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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 Revenue submitted that in the instant case, the capita! asset, being the branch office .....

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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, some kinds of transactions are exempted from taxation, which specifically find t .....

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eral 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 extinguishment of shares held by him in the amalgamating company as a consequence of the am .....

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cant 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 provisions relating to amalgamation of companies which have been discussed at para 55 .....

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ere 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. B. The applicant further submits that even assuming there is a transfer, there is .....

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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 is the market value of SSBS as reduced by the net asset value. The applicant subm .....

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ard 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 the computation provisions break down the charge must fail and the applicant menti .....

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crimination-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 provisions of Article 25(1) of the Double Taxation of Avoidance Agreement entered int .....

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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's contention is that the non-discrimination would trigger when in the same cir .....

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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 allowances, reliefs and reduction for taxation purposes to its residents, then it would .....

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t 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 also? As regards (a) is concerned, Explanatory Notes to Finance Act 1967 clarifies .....

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onsideration 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) of DTAA and therefore it needs to be addressed. Article 25 very specifically talks .....

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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 seeks to ensure that both countrio do not decline any allowance or exemption only on .....

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d 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 there still would be no liability to capital gains because no consideration accrued t .....

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ares 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 applicant has also issued its own shares to the other shareholders of SSBS, the nu .....

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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 regarded as accruing or deemed to accrue or arise in India and, therefore, having r .....

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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 the shares of SSBS is derived from India but as to what is the meaning to be give .....

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he 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 year 2016-17 for a share to be deemed to be situated in India at least 50% of the .....

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d 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 than 50% of the value is derived from India the gains must be taxed as that was not a .....

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ation 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 consists directly or indirectly principally of immovable property situated in a Contracti .....

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ncipally 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 the company, whose shares is the subject matter of the transfer, is resident. As the .....

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ns 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 such a permanent establishment (alone or together with the whole enterprise) or o .....

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terprise, 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 is alienation of a PE of SSBS in India together with the whole enterprise i.e. SS .....

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e 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 received any consideration. The answer is in negative. The Revenue has given a strange .....

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