TaxTMI 
TaxTMI 
2016 (9) TMI 163
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppo Banca Sella as a whole. The main activities so performed amongst others were, support services for group direction, business and commercial support services, administrative services, control services and information technology services. Gruppo Banca Sella had been carrying out business in India through Sella Synergy India Private Limited ('SSIPL'), a subsidiary ot the Holding Co., incorporated in India under the Companies Act, 1958. SSIPL was engaged In the business of Information technology (software design, development and other related maintenance services) provided to entities of Gruppo Banca Sella. On 15TH January, 2010, SSBS established its branch office in India (Branch). The Branch took over the Information technology business of SSIPL as a going concern, on slump sale basis on 15th February, 2010, pursuant to the Business Transfer Agreement dated 10th February, 2010 at a contribution of INR 1306,00,000/- (Rupees thirteen crores six lakhs only). SSIPL paid tax of Rs. 27287501 on the capital gains of Rs. 120421450 on the transaction of business transfer from SSIPL to the branch of SSBS. S 2. The shareholding pattern of SSBS before the amalgamation was as follows....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nue has challenged the admission of the application observing that the issue before the Authority involves determination of the fair market value of shares of SSBS and has further stated that while admitting the application, the Authority has not categorically overruled the objections of the department and as such the said objections are still alive. We have considered this objection in the context of the questions raised and find that questions relate only to taxability as a result of amalgamation with respect to amalgamating and amalgamated companies and shareholders and do not at all concern valuation of shares. Therefore, we do not think there is any jurisdictional bar. We treat the admission order as final. 6. The Applicant submite that the three cntitico that could poooibly be taxed in India as a consequence of the amalgamation are:- (i) SSBS on the capital gains accruing, if any, on the transfer of its Indian Branch as a consequence of the amalgamation; (ii) BSS on the capital gains, if any, accruing on the transfer of the shares it holds in SSBS as a consequence of their extinguishment on the dissolution of SSBS pursuant to the amalgamation; and (iii) the capital gains,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ting. In the present case, as a consequence of the amalgamation SSBS would stand dissolved and, therefore, there is no transfer as contemplated. In this regard, reliance was placed on the judgment of the High Court at Bombay in CIT v. Texspin Engineering and Manufacturing Works 263ITR 345 and the judgment of the Calcutta High Court in Shaw Wallace & Co.Ltd. v. CIT 119 ITR 399. The Revenue has contended that amalgamation involved extinguishment of rights in the shares of SSBS by all the shareholders including the applicant and " extinguishment of rights" would also fall squarely within the ambit of provisions of section 2(47) of IT Act, 1961. Furthermore, an Explanation 2 has been inserted into section 2(47) of the Act with retrospective effect from 01.04.1962, which is reproduced as under: "Explanation 2 - For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any. As regards explanation to section 2(47) the Applicant submits that the CIT's assumption/ argument (that the transaction involved a transfer of the branch of SSBS to the Applicant) is fundamentally misconceived because there was no independent transfer of the right, title and interest in or transfer of the branch of SSBS as it was only as a consequence of the amalgamation that all the assets of SSBS stood vested in the Applicant which does not tantamount to a transfer as explained earlier. Without prejudice to this argument, the applicant submitted that the transferor, SSBS, ceases to exist upon amalgamation and, hence, Explanation 2 to sec 2(47) of the iTA is not attracted as the same does not in express terms do away with the requirement of the existence of two parties in a transfer. Revenue has referred to the amendments to the provisions relating to amalgamation of companies which have been discussed at para 55 to 57 of the Explanatory Note of the Finance Act, 1967 and it is seen that with a view to facilitating the merger of uneconomic company units with their financially sound company units in the interest to increase efficiency and productivity, several provisions ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue of that which is parted with can never be the consideration that accrues on its transfer. C. Having regard to the principle laid down by the Supreme Court in CIT v. B.C.Srinivasa Setly 128 ITR 294 and PNB Finance Ltd. v. CIT 307 ITR 75 that if the computation provisions break down the charge must fail and the applicant mentions that in present case the cost of improvement of the business was not ascertainable the charge to capital gains fails as one of the limbs in the computation provision was inapplicable. In this regard reliance was placed by the applicant on the judgment of the High Court at Bombay in Evans Fraser & Co.Ltd. (in Liquidation) vs. CIT 137 ITR 493 in paragraphs 28 to 32. D. Reference was made by the applicant to Para 1 of Art. 25 of India - Italy DTAA is reproduced herein under :- "Non-discrimination-1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances and under the same conditions are or may be subjected." The applicant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ef, or similar other phrases. Inference 9. We have carefully considered the arguments of both sides and case laws cited by them. Four important issues are required to be addressed with respect to questions 1 and 2: (a) whether amalgamation of SSBS with BSS results in transfer? (b) whether such transfer is taxable? (c) whether market value of SSIPL is cost of consideration in the context of capital gains and whether it has been received by SSBS? (d) whether by virtue of Article 25 of DTAA the exemption under section 47(vi), otherwise available only to Indian companies, is allowable to foreign companies also? As regards (a) is concerned, 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 consid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contended that there still would be no liability to capital gains because no consideration accrued to BSS as a consequence of the extinguishment of the shares it held in SSBS because unlike the other shareholders who receive the shares in BSS in lieu of the shares they held in SSBS, BSS did not receive any consideration as a consequence of the extinguishment of the shares it held in SSBS and, therefore, having regard to the judgment referred earlier, there ought not to be any liability to tax in India. According to Revenue prior to amalgamation, the Balance Sheet of BSS records the value of shares of SSBS as an asset, which is nothing but the 'cost of acquisition' of these shares. Post-amalgamation, these shares will no longer appear in the B/S of BSS as the shares are extinguished, and, consequently, they cease to exist. Further, for the purpose of amalgamation the applicant is required to carry out valuation of SSBS, which would find its suitable place in the B/S of BSS post-amalgamation. The applicant has also issued its own shares to the other shareholders of SSBS, the number/value of which would be decided in the ratio of their respective shareholding in SSBS. Thus, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om assets located in India, nevertheless, 100% of the capital gains that accrues on the transfer of such shares would be chargeable to tax in India. It was further submitted that the amendments brought about by the Finance Act 2015 by the insertion of Explanations 6 and 7 to section 9(1 )(i) support the aforesaid contention. It is now provided that with effect from the assessment year 2016-17 for a share to be deemed to be situated in India at least 50% of the value of all assets owned by the company must be located in India. Clause (b) of Explanation 7 further clarifies that the capital gains that would thus be charged to tax would only be on a pro rata basis. It was further submitted that assuming this interpretation is not accepted and a view is taken that the words "substantial" in Explanation 5 must be regarded as any value in excess of 50%, then, correspondingly it should be directed that only a pro rata part of the gain, if any, would be taxable in India. As regards Delhi High court's decision in the case of DIT (International Tax) v. Copal Research 371ITR 114 wherein it was held that gains arising from the sale of a share of a company incorporated overseas, which derive....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re, even in accordance with the provisions of the DTAA the gains would not be taxable in India. The Department's argument in this regard are summarised as under :- (a) In the facts of the case, what is applicable is Article 14(2) and not Article 14(5). The provisions of Article 14(2) is reproduced herein under for ready reference - "Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State." The Revenue submits that the Branch in India was the capital asset of SSBS; it was also the PE of SSBS in India; it did not have any immovable property in India; instead it had only movable properties in India and these movable properties formed part of the business properties of the Branch, being t....