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TMI Blog2016 (9) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions are inapplicable if there is no charge. We respectfully agree. - A.A.R. NO. 1130 OF 2011 - - - Dated:- 17-8-2016 - V.S. SIRPURKAR, A.K. TEWARY AND R.S. SHUKLA, JJ. For The Applicant : P.J. Pardiwala and Ms. Indra Anand For The Department : C.S. Gulati, Ms. Nausheen J. Ansari, K.L. Kanak 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 of Banca Sella Group (Gruppo Banca Sella). It was incorporated on 01.04.2009. Before the amalgamation of SSBS into BSS, BSS held around 15% equity stake in SSBS. SSBS was rendering services to entities within Gruppo Banca Sella which were necessary for operational activities of Grouppo Banca Sella as a whole. The main activities so performed amongst others were, support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and all assets and liabilities of SSBS got vested with the applicant - which is now the amalgamated company. Post amalgamation, the Branch (now belonging to the applicant) continues to carry on IT services. 4. The applicant has sought ruling from on the following questions : (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 taken that SSBS is chargeable to tax in India on its amalgamation with the applicant, then, whether by virtue of Article 25 of the Indo-Italian DTAA, the exemption u/s. 47(vi) is available to it? (3) Whether any charge u/s. 45 of the IT A has arisen to the applicant as a consequence of the extinguishment of its 15% shareholding in SSBS? (4) (i) Whether any Capital Gains chargeable to tax u/s 45 of the IT A has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion 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 No.1 is in the affirmative. The applicant mentioned that as per the overall scheme of taxation, capital gains are brought to tax in the hands of the transferor and, therefore, it is quite obvious that Question Nos.1 and 2 dealing with the taxability of capital gains in case of amalgamation could only be in the hands of the transferor, i.e. SSBS, in the instant case. It was also submitted by the applicant that the Applicant has specifically raised Question No. 3 for determining the taxability in its 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the transferor has ceased to exist, and, therefore, there is no 'transfer' of capital 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 their mention in Section 47 of the Act. According to the Revenue since the case of the applicant does not get covered in any of the clauses of section 47, this case falls clearly outside the ambit of section 47 and within the ambit of section 45 of the IT Act, 1961, and, therefore, provisions of section 45 would accordingly apply to the facts of this case. However, Counsel of the applicant argued that section 47 of the Act has been provided as an 'abundant precaution' and he mentioned several instances in section 47. The revenue also relies upon the judgment of the Supreme Court in CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no consideration which accrues to SSBS and, therefore, there can be no question of levy of capital gains because absent any accrual of consideration the computation provisions would break down. In support of this proposition reliance was placed by the applicant on the judgment of the Bombay High Court in CIT v. Texspin Engineering and Manufacturing Works 263 ITR 345, the ruling of this Authority in re: Hoechst GMBH 289 ITR 312, judgment of the Calcutta High Court in Shaw Wallace Co. Ltd. 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 submitted that the methodology of computing the capital gains provided for in section 45 postulates a reduction from the value of the consideration accruing or arising as a consequence of the transfer, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 circumstances, and under the same conditions, an Indian company is exempted from taxation in India while a non-resident company is held to be taxable According to Revenue the emphasis in Article 25(1) is on the words in the same circumstance and under same condition . Reference was also made to the para 3 of Art. 25 of the DTAA between India and Italy which reads as under:- Nothing contained in this Article shall be construed as obliging a Contracting State to grant to persons not 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Question No. 3: BSS 10. The contentions of the Applicant and Revenue are as under: A. The Applicant submitted that there would be no liability to tax in India both in terms of the income-tax Act, 1961 as well as the DTAA. In so far as the Act is concerned it was submitted that on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard to the explicit provisions of section 5(2) of the Act there ought not to be any liability to tax in India. Reference was made to Explanation 5 to section 9(1)(i) which was inserted vide Finance Act 2012 w.e.f. 1.4.1962 and reads as under: For the removal of doubts, it is hereby clarified that, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India According to the applicant this explanation would have no impact on tho 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially' would mean 'more than 50%'. Finally, Explanation 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 Contracting State may be taxed in that State. 5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State. 6. Gains from the alienation of any property other than that referred to in paragraphs 1,2,3,4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident. According to the Applicant Paragraph 4 of Article 14 does not apply because the assets of SSBS arc not principally immovable properties in India. In fact GODS did not own any immovable property in India. Paragraph 5 provides that gains fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Article 14(2) will prevail over Article 14(5), thereby rendering the taxability of the Applicant, other shareholders and even SSBS in India. Inference 11. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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