India: Foreign Amalgamation Involving Indian Assets Exempt From Capital Gains Tax: Aar Relies On Non-Discrimination Clause In India-Italy Dtaa

Last Updated: 16 September 2016
Article by Afaan Arshad and Mansi Seth
  • Even if assets were transferred through a merger, notional market value of such assets cannot be value of consideration for purpose of computing capital gains tax and hence untaxable.
  • Denial of tax benefits available to domestic companies to foreign companies is violative of the Non-Discrimination clause in DTAAs.
  • Non-Discrimination clause afforded a wide interpretation implicitly similar to the concept of Article 14 of the Indian Constitution.

In a decision that significantly benefits foreign companies, the Authority for Advance Rulings ("AAR") has ruled that merger of two non-resident companies with underlying assets (held through a branch) in India will not be liable to capital gains tax under the Income Tax Act 1961 ("ITA") relying on Article 24 (Non-Discrimination clause) of the India–Italy Double Taxation Avoidance Agreements ("India-Italy DTAA"). The AAR, in the Banca Sella S.p.A case, has effectively extended the benefit under Section 47(vi) of the Income Tax Act 1961 ("ITA") that exempts Indian companies from capital gains tax in the event of amalgamations to foreign companies as well. In addition to the aforesaid, the decision also reiterates the importance of calculating capital gains on the basis of real values as opposed to notional gains.

Background

The applicant Banca Sella SPA ("BSS"/ "Applicant"/ "Sub A"), Italy is a banking company, part of an Italian group called Banca Sella Group (Gruppo Banca Sella), wholly owned by Banca Sella Holding S.p.A ("Hold Co"), Italy. Sub A primarily provides banking and financial services in Italy and abroad. Sella Servizi Bancari S.C.P.A ("SSBS"/ "Sub B"), an Italian company incorporated in 1999, rendered support services to the group entities, 15% equity of which was held by Sub A. Hold Co owned 80% of the equity in Sub B while the remaining was held by other group companies.

In 2010, Sub B established a branch office in India ("BO") which took over the information technology business from Sella Synergy India Private Limited ("SSIPL"), a subsidiary of the Hold Co in India, as a going concern, through a slump sale. The capital gains tax for this business transfer was duly paid by SSIPL.

In 2011, Sub B merged with Sub A as part of an internal restructuring such that post-merger Sub B ceased to exist and all assets and liabilities including the assets of the BO were vested with Sub A. It is with respect to this merger that Sub A had sought a ruling from the Authority for Advance Rulings ("AAR"), inter alia, on the following issues:

  1. Whether the amalgamation of Sub A with Sub B results in the applicability of Indian capital gains tax in the hands of Sub B, Sub A or the shareholders, including the Hold Co?
  2. Assuming the aforementioned merger is liable to capital gains tax, whether by virtue of the Non-discrimination Clause (''NDC") in Article 25 of the Indo-Italian DTAA, the exemption u/s 47(vi) of the ITA is available to Sub A?

The Ruling

  1. Sub B, which was claimed by the revenue to be taxable in India as the transferor of the Indian BO, was held by the AAR to not be taxable for the following reasons:
    1. Notional market value cannot be value of consideration for transfer of assets through a merger: Though the value of cost of acquisition was not disputed as it was the cost of acquisition of SSIPL during slump sale, it was the determination of the cost of consideration which was under dispute. The Revenue claimed that the value of consideration should be the notional market value of the BO at the time of the merger for computation of capital gains. The AAR rejected this argument based on the ratio in the Supreme Court judgment of CIT v. George Henderson & Co. Ltd.1 where it was held that "the market value of which is parted can never be the consideration that accrues on its transfer." Further, applying the principles laid down in CIT v. B.C.Srinivasa Setty2 the AAR concluded that the charge of capital gains tax must fail as the gain was incalculable due to break down of computation provisions.
    2. Denial of tax benefits available to domestic companies to foreign companies is violative of the Non-Discrimination clause in DTAAs – Applying the Non Discrimination ("ND") clause under Article 25 of the India-Italy DTAA, the charge of capital gains tax should fail as Indian companies are exempt under the ITA for capital gains arising out of such transfer. The revenue argued that the relief under NDC is subject to Article 25(3) which entitles states to discriminate in certain instances, for instance while dealing with Permanent Establishments or personal allowances. Rejecting this argument the court held that the exception under Article 25(3) is only in cases of personal allowances, relief, reduction only in context of individuals and not companies thereby concluding that relief under the ITA is available to foreign companies in similar circumstances as Indian companies. The court held that:
      "9.......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 countries do not decline an allowance or exception only on the ground of nationality of taxpayers."
  2. Sub A, which was claimed by the revenue to be taxable in India due to extinguishment of its rights in the 15% shares in Sub B, was also held by the AAR to not be taxable as it did not receive any consideration as a result of the merger.
  3. Lastly, for Hold Co and other shareholders, as they had parted with their shares in SSBS and not BO or its movable property, the AAR concluded that though capital gains has accrued to shareholders, it will not be chargeable to capital gains tax in India under Article 14(5) of India-Italy DTAA, which provides that 'gains from the alienation of shares other those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State'.

Analysis

Given how the Indian rules are drafted, including in particular the indirect transfer rules (which have been relied on by the Indian tax authorities to proceed after companies such as Vodafone), it is possible for offshore restructurings, amalgamations, liquidations, etc. to get caught within the Indian tax net and result in a tax liability for the parties involved. The widely worded withholding obligations do not help the situation as they impose an obligation on even a non-resident payor. In that backdrop, the AAR's decision is favorable for foreign companies undertaking such internal restructuring and generally confirms their ability to rely on ND Clause under their respective treaties with India.

The ruling is along the lines of the previous rulings that interpreted ND Clauses in DTAAs and international developments in the recent past. Indian rulings appear to have been influenced by the concept of discrimination as enshrined under Article 14 of the Indian Constitution dealing with substantive equality. Courts have either expressly or impliedly held that differentiation between residents and non-residents based on unreasonable grounds are impermissible.

For instance in Daimler Chrysler India Private Limited v. Deputy Commissioner of Income Tax3 disallowing an Indian subsidiary of a German parent to carry forward and set off-losses under section 79 of the ITA was held to be discrimination under Article 24(4) of the treaty since the benefit was available to an Indian subsidiary with an Indian parent where both parents were listed in the respective national stock exchanges. While coming to this decision, drawing parallels to the position under the India-USA Tax Treaty, the tribunal noted that "differentiation is on unreasonable grounds and clearly a case of discrimination which is prohibited under Article 24 of the Indo German Tax treaty."

On a similar note, the European Court of Justice ("ECJ") in the Schumaker case4 had noted that if the domestic rules of any state denies benefit to non-residents which are available to residents, it most likely will operate to the detriment of non-nationals since most non-residents are non-nationals (foreigners). Thus, taking a broader view, the ECJ stated that discrimination based on residence would constitute indirect discrimination based on nationality.

The ITA under the section 47 provides relief to Indian companies by excluding various transactions to not be considered as 'transfers' such as demergers where the resulting company is an Indian company (47(vib), the exemption under 47(iv) wherein the transfer of a capital asset by a company to its Indian subsidiary is exempt, section 47(v) which exempts transfer of a capital asset by an Indian subsidiary to an Indian holding company. This ruling potentially opens the door for foreign companies (located in favorable treaty jurisdictions) for availing these domestic reliefs while restructuring.

In addition to the concept of non-discrimination, the decision is also helpful in that it strikes down notional market value or other methods based on presumptions from being used for computing 'consideration' and it strongly reiterates the position that in the absence of consideration, capital gains cannot be computed.

Footnotes

1 66 ITR 622

2 128 ITR 294

3 (2009) 29 SOT 202 (PUN)

4 Finanzamt Koln Altsadt v. Schumacker [1995] ECR I-225 (ECJ).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Afaan Arshad
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions