1994 (9) TMI 349 - AAR - Income Tax

Whether any liability to pay income-tax in India under the Income-tax Act, 1961, read with the DTAA would arise on amalgamation of the applicant with its holding company whereby shares of an Indian company held by the company would vest in the amalgamated company ? Whether the provisions of section 47(via) of the Income-tax Act be considered as satisfied with regard to the above scheme of amalgamation?

Issues Involved:
1. Liability to pay income-tax in India under the Income-tax Act, 1961, read with the Double Taxation Avoidance Agreement (DTAA) on amalgamation.
2. Satisfaction of the provisions of section 47(via) of the Income-tax Act concerning the amalgamation scheme.

Issue-wise Detailed Analysis:

1. Liability to Pay Income-Tax in India:

The applicant, a Canadian company, proposed a "vertical short form amalgamation" with its holding company under section 184(1) of the Canada Business Corporations Act. This amalgamation would result in the shares held by the applicant in an Indian company vesting in the new amalgamated corporation. The applicant sought to determine if this transaction would attract capital gains tax in India.

The judgment noted that if both companies were Indian, such a transaction would not attract capital gains tax due to specific provisions in sections 2(1B), 2(14), 2(47), 45(1), and 47(vi) of the Indian Income-tax Act. The primary question was whether the capital gain from the change in ownership of Indian assets due to the amalgamation would be subject to tax in India or Canada or both. Article 14 of the Double Taxation Avoidance Agreement (DTAA) between India and Canada allows taxation in both countries but provides relief under article 23.

Assuming the change in ownership involves a "transfer," the gains would be deemed income accruing in India and chargeable under section 5 read with section 9(1)(i) of the Act. However, section 47 provides exemptions for transfers part of an amalgamation scheme, specifically outlined in clause (via):

Section 47(via):
- Transfer in an amalgamation of shares held in an Indian company by a foreign company to another foreign company is exempt if:
- At least 25% of the shareholders of the amalgamating company remain shareholders of the amalgamated company.
- The transfer does not attract capital gains tax in the country of the amalgamating company.

The amalgamation under section 184(1) of the Canada Business Corporations Act meets the definition of "amalgamation" in section 2(1B) of the Indian Act, fulfilling the first condition of section 47(via).

2. Satisfaction of Section 47(via) Provisions:

The second condition requires that the transfer should not attract capital gains tax in Canada. Under the Canadian Income-tax Act, a resident pays tax on all taxable income, including capital gains. The term "disposition" includes transactions like amalgamations, and "capital gain" is computed as the excess of the proceeds over the adjusted cost base.

Section 69(13) of the Canadian Act deems properties transferred during amalgamations to be disposed of at their cost amount, resulting in no capital gain. Section 87(4) ensures shareholders of amalgamating companies are not considered to have made a gain. Thus, the amalgamation does not attract capital gains tax in Canada, fulfilling the second condition of section 47(via).

However, the judgment clarified that if the transaction is later found to be part of a series of transactions attracting tax under section 69(11) of the Canadian Act, the exemption under section 47(via) would not apply.

The applicant was advised to obtain an advance ruling from Canadian authorities to conclusively determine the tax implications under Canadian law, though it was noted this was not pursued due to cost considerations.

Conclusion:

The authority ruled that while Article 14(2) of the DTAA allows India to tax capital gains on the alienation of Indian company shares, no tax on capital gains from the proposed amalgamation can be charged under section 47(via) of the Indian Act unless it is later found that such gains are taxed in Canada due to the transaction itself or as part of a series of transactions under section 69(11) of the Canadian Act.

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