2007 (1) TMI 107 - AAR - Income Tax

Held that amalgamation of the wholly owned subsidiary foreign company with its parent company does not result in a transfer for consideration and therefore, does not give rise to any capital gains. The liability to capital gains tax (if any) can only be on the transferor-company (subsidiary), which in the present case has lost its identity and ceased to exist.

Summary

Issues involved:
1. Exemption from capital gains tax on amalgamation of companies under section 47(via) of the Income-tax Act.
2. Computation of capital gains tax on amalgamation of foreign companies.
3. Applicability of tax rate on capital gains under the proviso to section 112(1) of the Income-tax Act.

Issue 1: Exemption from capital gains tax on amalgamation under section 47(via)
The case involved an application seeking advance ruling on whether the vesting of shares of an Indian company held by a foreign company in another foreign company pursuant to an amalgamation scheme is exempt from capital gains tax under section 47(via) of the Income-tax Act. The applicant argued that since the amalgamating company was a wholly owned subsidiary and ceased to exist post-amalgamation, no consideration passed, and hence, no capital gains arose. They relied on legal principles and a previous ruling to support their claim. The Authority, following the Supreme Court's view, held that amalgamation of a wholly owned subsidiary foreign company with its parent company does not result in a transfer for consideration, thus no capital gains liability arises.

Issue 2: Computation of capital gains tax on amalgamation of foreign companies
The applicant sought clarification on whether any capital gains chargeable under section 45 of the Income-tax Act arose on the amalgamation. They argued that no capital gains should be charged as no consideration passed from the amalgamated company to the amalgamating company. The applicant emphasized that the computation provisions fail when no consideration is involved. The Authority, aligning with the applicant's arguments, ruled that no capital gains chargeable under section 45 arose on the amalgamation, thereby rendering the question of computation irrelevant.

Issue 3: Applicability of tax rate on capital gains under the proviso to section 112(1)
The applicant also sought clarity on whether the tax rate of 10% could be applied to the capital gains under the proviso to section 112(1) of the Income-tax Act if the computed tax was lower than the standard rate of 20%. They argued that the lower tax rate should apply based on specific exemptions provided in the Act. However, since the ruling on the first question negated the need for further considerations, the Authority deemed the third question as consequential and did not provide a separate ruling on it.

In conclusion, the Advance Ruling Authority ruled that no capital gains arose on the amalgamation of the companies, thereby exempting them from capital gains tax under section 47(via) of the Income-tax Act. The judgment emphasized the legal principles regarding amalgamations and the non-existence of capital gains liability in such scenarios. The decision rendered the subsequent questions on computation and tax rate applicability inconsequential, as they were contingent on the ruling of the first issue.