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2016 (9) TMI 163 - AAR - Income TaxTaxability 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 the amalgamating company can such transfer be taxed for capital gains? The notional market value of SSIPL cannot be treated as cost of consideration for 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 (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 circumstances and under same condition We are of the opinion that this Article basically means that there is no discrimination between locals and foreigners in the matter of taxation and no preferential treatment be given to local taxpayers. 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 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. As regards the definition of substantial in explanation 5 to section 9(1) (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 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 SSBS - Held that - 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 to Article 14(5) the gains are taxable in Italy. The Revenue contends that Article 14(2) is applicable because SSBS had a PE in India in the form of its branch. What is important is to 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 if there is no liability to tax. The Applicant has relied on the ruling of this Authority in Amiantit International Holding Limited in re 2010 (2) TMI 123 - AUTHORITY FOR ADVANCE RULINGS where this Authority following its earlier ruling categorically held that the transfer pricing provisions are inapplicable if there is no charge. We respectfully agree.
Issues Involved:
1. Whether the amalgamation of SSBS with the applicant involves a 'transfer' under section 2(47) of the Income Tax Act, 1961 (ITA) and if such transfer is chargeable to tax under section 45 of ITA. 2. Whether the price paid by the branch to SSIPL can be treated as the Cost of Acquisition under section 55(2) of ITA. 3. Whether by virtue of Article 25 of the Indo-Italian DTAA, the exemption under section 47(vi) is available. 4. Whether any charge under section 45 of the ITA has arisen to the applicant as a consequence of the extinguishment of its 15% shareholding in SSBS. 5. Whether any Capital Gains chargeable to tax under section 45 of the ITA has arisen to shareholders of SSBS upon their transferring of their shareholding in SSBS and the methodology to compute the same. 6. Whether the applicant was liable to withhold tax under section 195 of the ITA. 7. Whether the amalgamation of SSBS with the applicant attracts transfer pricing provisions under sections 92 to 92F of the ITA. Detailed Analysis: Issue 1 & 2: Transfer and Taxability of SSBS - The applicant argued that there is no transfer on amalgamation as SSBS would stand dissolved, citing judgments from CIT v. Texspin Engineering and Manufacturing Works and Shaw Wallace & Co. Ltd. v. CIT. - The Revenue contended that amalgamation involved the extinguishment of rights in the shares of SSBS, which falls under the ambit of section 2(47) of the ITA, supported by Explanation 2 to section 2(47). - The applicant further argued that even if there is a transfer, no consideration accrues to SSBS, thus no capital gains can be levied, supported by CIT v. George Henderson & Co. Ltd. - The Revenue argued that the cost of acquisition is ascertainable and capital gains should be computed based on the market value of SSBS's assets. - The applicant invoked Article 25 of the Indo-Italian DTAA to claim non-discrimination, arguing that the exemption under section 47(vi) should be available to SSBS. - The judgment concluded that even if the amalgamation is considered a transfer, no consideration accrues to SSBS, thus no capital gains can be computed. Additionally, the non-discrimination clause in Article 25 of the DTAA ensures that the exemption under section 47(vi) is available to SSBS. Issue 3: Taxability of BSS - The applicant admitted that there is a transfer as per the Grace Collis judgment but argued that no consideration accrued to BSS on the extinguishment of shares in SSBS. - The Revenue proposed a notional method to compute capital gains, which was rejected by the judgment as capital gains should be based on real gains. - The judgment concluded that no consideration accrues to BSS, thus no capital gains are chargeable to tax. Issue 4: Taxability of Shareholders of SSBS - The applicant argued that Article 14(5) of the DTAA applies, making the gains taxable in Italy. - The Revenue contended that Article 14(2) applies as SSBS had a PE in India. - The judgment concluded that shareholders parted with their shares in SSBS, not the movable property of the branch, thus Article 14(5) applies, and the gains are not chargeable to tax in India. Issue 5: Withholding Tax under Section 195 - The judgment concluded that BSS was not liable to withhold tax under section 195 of the ITA as there was no chargeable capital gain. Issue 6: Transfer Pricing Provisions - The Revenue argued that transfer pricing provisions apply even if there is no tax liability. - The applicant relied on the ruling in Amiantit International Holding Limited, where it was held that transfer pricing provisions are inapplicable if there is no charge. - The judgment agreed with the applicant, concluding that transfer pricing provisions are not applicable as there is no chargeability of tax. Rulings: 1. SSBS, BSS, and shareholders of SSBS are not chargeable to tax in India. 2. BSS was not liable to withhold tax under section 195 of the ITA. 3. Transfer pricing provisions are not applicable as there is no chargeability of tax.
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