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Section 47(vi) of the Act; Articles 14 and 25 of India-Italy DTAA – (i) In absence of consideration flowing to the amalgamating company, no capital gains in India; (ii) S. 47(vi) of the Act, exempting capital gains in the hands of amalgamating company is also applicable on amalgamation of Italian companies by applying the nationality non-discrimination clause of the DTAA; (iii) Capital gains on transfer of Italian company shares is taxable only in Italy under the India- Italy DTAA
Facts:
The Applicant was a banking company incorporated in Italy (“BSS”) and a member of a banking group in Italy. BSS, held 15% shares in an Italian company, SSBS while the balance shares were held by other Group entities.
In 2010, one of the group entities transferred the information technology business to the Indian branch of SSBS, for a fair consideration and on a going concern basis. Subsequently, SSBS merged into BSS. Consequently, SSBS ceased to exist and the Indian branch of SSBS vested in BSS. BSS paid the consideration to other shareholders of SSBS by way of fresh issue of shares, while shares which BSS held in SSBS were extinguished.
The pictorial representation of facts is as follows:
The Applicant sought ruling from AAR on the following questions.
•Upon amalgamation, whether SSBS would be taxable in India, as there is transfer of a capital asset, being the branch in India.
•If the above is answered in the affirmative, whether Article 25(3) of the DTAA on Nationality Non Discrimination Clause (NNDC) can be invoked to claim the exemption on amalgamation under S. 47(vi) of the Act, which is available only if the amalgamated company is an Indian company.
•Whether BSS and other shareholders would be liable to capital gains on extinguishment of its shareholding in SSBS.
•Whether amalgamation attracts transfer pricing (TP) provisions of the Act.
Held:
•In the absence of any consideration flowing to the amalgamating company i.e., SSBS, the computation mechanism would fail and hence income from “transfer” cannot be taxed as capital gains. Reliance in this regard was placed on SC decision in CIT v. B. C. Srinivasa Setty.
•Although, there is a transfer of shares by BSS, in absence of consideration, no capital gains accrued to BSS.
•Article 25(3) of the DTAA on NNDC provides that there should be no discrimination between locals and foreigners in the matter of taxation. The only exception to Article 25(3) is grant of personal allowances, reliefs, reductions etc. The word ”personal” denotes that the allowances are those that are available to individuals only. Thus the exception is not applicable to companies.
S. 47(vi) of the Act provides exemption to a local amalgamating company, on transfer of assets on amalgamation. By virtue of NNDC of DTAA, similar exemption is available to SSBS.
•Transfer of shares by other shareholders of SSBS results in capital gains. However, such capital gain is taxable only in Italy by virtue of Article 14(5) of India-Italy DTAA.
•TP provisions are not applicable in the absence of any charge of tax in India
