AAR : 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

Authority For Advance Rulings (Income Tax), New Delhi

Banca Sella S.P.A., In Re

Section : 45, 9

Justice V.S. Sirpurkar, Chairman

A.K. Tewary, Member (Revenue) And R.S. Shukla, Member (Law)

A.A.R. No. 1130 Of 2011

August 17, 2016

Ruling

A. K. Tewary, Member (Law) – 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 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 of 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.

2. The shareholding pattern of SSBS before the amalgamation was as follows:

Sr. No. Name of the share holder  Shareholding %
1 Banca Sella Holding S.p.A. 80.226
2 Banca Sella S.p.A 14.958
3 Banca Sella Nordest Bovio Calderari S.P.A. 1.174
4 Banca Sella Sud Arditi Galati S.P.A. 2.179
5 Banca Patrimoni Sella & C.S.P.A. 1.127
6 Sella Gestioni SGR S.P.A. 0.195
7 C.B.A. Vita S.P.A. 0.124
8 Brosel S.P.A. 0.017
9 Total 100

3. Gruppo Banca Sella has effected a restructuring in Italy, Whereby SSBS has been merged with the applicant. The effective date of amalgamation was 30th May, 2011. As a result of the Amalgamation, shareholders of SSBS (i.e., Holding Co. & Others excluding the applicant) were allotted additional shares (fresh issued) in the applicant company. Consequently the company SSBS Ceased to exist 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 ITA 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 ITA has arisen to shareholders of SSBS (other than the applicant) upon their transfer ring of their shareholding in SSBS?

(ii) if yes, then the methodology to compute the same?

(5)If answer to question (1) or (4) is in the affirmative, whether applicant was liable to withhold tax u/s. 195 of the ITA.

(6) Whether the amalgamation of SSBS with the applicant attracts transfer pricing provisions of Sec. 92 to 92F of the ITA?

5. The Revenue 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 submitted that the three entities that could possibly 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, if any, to the other shareholders of SSBS on the extinguishment of their shares as a consequence of the amalgamation of SSBS into BSS.

However, the above submission of the applicant is with a demur.

7. According to the applicant Questions 1 and 2 raised in the application deal with the taxability of SSBS, Question 3 with the taxability of BSS and Question 4 deals with the taxability of the other shareholders. The Revenue pointed out that questions (1) and (2) do not deal with the taxability of SSBS saying that the Applicant assumes that Question No.1 read with Question No. 2 is about the taxability of SSBS in India whereas there is no specific mention of SSBS in the questions raised. According to the Applicant vide Question No. 1 and Question 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 its assets have been transferred, the question definitely relates to SSBS. The objection of Revenue is not correct.

Question Nos. 1 & 2 relating to SSBS

8. The contentions of the Applicant and Revenue are dealt with as under:

A. The applicant submits that there is no transfer on the amalgamation because a transfer, in its general connotation, postulates a change of ownership of property from one person to another both of them and the property existing. 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 Engg & Mfg Works[2003] 263 ITR 345/129 Taxman 1 (Bom.) and the judgment of the Calcutta High Court in Shaw Wallace & Co. Ltd. v. CIT[1979] 119 ITR 399/1 Taxman 551 (Cal.).

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 India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;”

The Revenue submitted that in the instant case, the capital asset, being the branch office situated in India, has been parted with or the interest therein has been parted with by SSBS indirectly by way of an agreement and thus, the Explanation 2 to section 2(47) of the Act only fortifies the argument that a ‘transfer’ of ‘capital asset’ took place in the instant case which attracts the charging provisions of section 45. According to Revenue the assessee’s contention 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 CIT v. Grace Collis[2001] 248 ITR 323/115 Taxman 326 (SC) to support its contention that there is a transfer on the merger of SSBS into BSS. However the applicant’s counsel contended that the reliance on the aforesaid judgment is misplaced as what the Supreme Court was concerned in that case was a transfer by a shareholder by way of extinguishment of shares held by him in the amalgamating company as a consequence of the amalgamation of the amalgamating company with the amalgamated company. 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 have been brought in. The Revenue added that a few of the amendments (vide the Finance Act, 1967) in the matter to the Income Tax Act were intended to clarify the intention underlying the provisions which existed previously while others were designed to remove certain tax liabilities which were attracted in the case of an ‘amalgamating company’ (i.e., the company which merges into another company) as well as the shareholders of the amalgamating company who receives shares in the ‘amalgamated company’ (i.e., the company in which the enterprise of the other company is merged) in lieu of their share holding in the amalgamating company.

B. The applicant further submits that even assuming there is a transfer, there 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 Texspin Engg & Mfg Works (supra), the ruling of this Authority in Hoechst GMBH, In re [2007] 289 ITR 312/159 Taxman 207 (AAR), judgment of the Calcutta High Court in Shaw Wallace & Co. Ltd. (supra) and the ruling pronounced by the Authority in Amiantit International Holding Ltd., In re [2010] 322 ITR 678/189 Taxman 149 (AAR – New Delhi). 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, the cost of acquisition and the cost of improvement of the asset transferred and thus what is contemplated is that there is a positive inflow of consideration before the charge can be triggered and the market value of that which is parted cannot be the basis to determine the capital gains. In this regard reliance was placed by the applicant on the judgment of the Supreme Court in CIT v. George Henderson & Co. Ltd.[1998] 66 ITR 622 (SC) where the Court held that the market value 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 Setty[1981] 128 ITR 294/5 Taxman 1 (SC) and PNB Finance Ltd. v. CIT[2008] 307 ITR 75/175 Taxman 242 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) v. CIT[1982] 137 ITR 493/8 Taxman 22 (Bom.) 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 submits that having regard to the provisions of Article 25(1) of the Double Taxation of Avoidance Agreement entered into between the Governments of India and Italy the charge would fail. In so far as the applicability of Article 25(1) of the DTAA is concerned, the revenue relies upon paragraph 3 of Article 25 to urge that the non-discrimination provisions are inapplicable. The applicant pointed to the wordings used in the said paragraph indicating that the paragraph only deals with personal allowances, reliefs and reductions for taxation purposes and does not deal with the exclusion from the ambit of the charge under section 45 which is provided for in section 47. The personal allowances are those that are available 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 purposes, have been specifically reiterated, according to which where a State grants any personal allowances, reliefs and reduction for taxation purposes to its residents, then it would not become encumbering on that State to grant such benefits to the non-resident tax payers. According to Revenue the word “reduction for taxation purposes” as appearing in Article 25(3) would have much wider meaning and cannot be construed to have a restricted meaning of ‘rebate’, ‘relief, 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 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 Srinivasa Setty (supra) 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 countries 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 the extinguishment of the shares held by BSS in SSBS there is no transfer because what is covered by the definition of the word ‘transfer’ in section 2(47) is an extinguishment of any right in an asset and not the extinguishment of the asset itself. However, the applicant admitted that this aspect of the matter is concluded against the Applicant by virtue of the judgment of the Supreme Court in Grace Collis (supra).

B.However, even though there would be a transfer it was 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, the applicant would also be required to pay-out or show as liability in its B/S an amount equal to 85% of the valuation of the of SSBS at the time of amalgamation. In this way, what comes into the B/S of BSS post-amalgamation is 15% of the valuation of SSBS, which is the ‘sale consideration’ for the purpose of section 48 of the Act. In this way according to Revenue it is possible to quantify the capital gain accruing to the applicant as a result of ‘transfer of shares of SSBS, and, consequently, the applicant’s reliance on the Hon’ble Apex Court’s judgment in BC Srinivasa Shetty (supra) is unwarranted.

C.The applicant further submits that the asset that 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 the 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 given to the term “its value substantially from assets located in India” as used in Explanation 5. It is the submission of the Applicant that as the entire capital gains that would arise on the transfer of such a share would be chargeable to tax in India the word “substantial” must be given the meaning that which is close to the whole because if such an interpretation of the word “substantial” is not accepted, then, the consequence would be that even though say 60% of the value of the shares is derived from 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 Ltd.[2015] 371 ITR 114/[2014] 226 Taxman 226/49 taxmann.com 125 (Delhi) wherein it was held that gains arising from the sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situate in India would not be taxable under section 9(1 )(i), it was submitted that it does not necessarily follow that if more than 50% of the value is derived from India the gains must be taxed as that was not an issue which the Court was required to decide.

According to Revenue by any stretch of imagination, ‘substantially’ cannot mean ‘wholly’ or ‘entirely’, not even ‘almost wholly’. In the Act, ‘substantially’ has meant different percentages in different sections. In DTC 2013, it was proposed to mean 25%. In any case, the Hon’ble Delhi High Court had held in the Copal judgment that ‘substantially’ 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 SSBS did not own any immovable property in India. Paragraph 5 provides that gains from alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of Italy may be taxed in Italy. Therefore, the capital gains arises on the transfer of shares the two Contracting States have ceded the right to tax capital gains, to the country where the company, whose shares is the subject matter of the transfer, is resident. As the shares held by BSS in SSBS are shares held in a company that is a resident of Italy, India would have no right to tax the gain, if any, arising. Therefore, 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 the PE of SSBS in India. The Revenue contends that the amalgamation of SSBS into BSS involved alienation of this PE together with the whole enterprise, i.e., the SSBS. According to Revenue all the requirements of paragraph (2) of Article 14 of the India-Italy DTAA are satisfied and therefore, Article 14(2) of the DTAA is applicable in the facts of the case.

(b) The Revenue further contend that Article 14(2) covers a specific situation, of the alienation of the PE of an enterprise, alone or together with the whole enterprise and in the instant case, there is alienation of a PE of SSBS in India together with the whole enterprise i.e. SSBS. Thus, in the instant case, 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 no consideration accrues to the amalgamated company and no capital gains is chargeable to tax. We need not go into other issues.

Question No. 4: Shareholders of SSBS

12. With respect to the Other shareholder of SSBS, the applicant submitted that the arguments set out whilst dealing with the taxability of BSS would clearly apply mutatis mutandis save and except the argument that ‘no consideration accrued on the extinguishment of the shares’ would be unavailable.

Inference

13. 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).

Question No. 6: Issue of transfer pricing

14. The revenue has submitted that transfer pricing provisions are applicable because there is a chargeable capital gain. 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 Ltd., (supra) where this Authority following its earlier ruling categorically held that the transfer pricing provisions are inapplicable if there is no charge. We respectfully agree.

15. In view of above, following rulings are pronounced:

Q. Nos 1,2, 3 & 4: SSBS, BSS and shareholders of SSBS are not chargeable to tax in India.

Q. No. 5: BSS was not liable to withhold tax under section 195 of the Act.

Q. No. 6: Transfer pricing provisions are not applicable because there is no chargeability of tax.

[Citation : 387 ITR 358]