India: Foreign Amalgamation Eligible For Tax Exemption In India By Applying Non-Discrimination Clause

Recently the AAR in the case of Banca Sella SPA ("the Assessee"), dealt with the issue of tax implications arising on amalgamation of two Italian companies, which resulted in transfer of a branch office in India to the amalgamated company, under the Income-tax Act, 1961 ("the Act") and the India-Italy Double Taxation Avoidance Agreement ("Tax Treaty") and held that in the absence of consideration flowing to the amalgamating company, the transfer cannot be taxed as capital gains in India.

The Assessee together with its Holding company and other Group companies, holds another Italian company, SSBS.  The Assessee holds 15% in SSBS (prior to its amalgamation) and the balance is held by other Group entities. The Group was carrying out business in India through one of its subsidiaries (SSIPL) incorporated in India. On 15 February 2010, SSIPL transferred the information technology business to the Indian branch of SSBS (set up in January 2010) on a going concern basis, for a fair consideration.

The Assessee approached the AAR for a ruling on tax implications that may arise from the amalgamation.

Under the Act, "transfer" cannot be taxed as capital gains in the absence of any consideration flowing to the amalgamating company i.e., SSBS. Applying the non-discrimination clause of the Tax Treaty in the present case, AAR held that the exemption in respect of amalgamation available under the Act shall be available to SBBS. 

Further, on the issue "whether BSS and other shareholders would be liable to tax on extinguishment of 15% holding in SSBS", AAR held that in the present case, "transfer" is in the hands of the Assessee, and since the Assessee has not received any consideration, there would be no taxability in their hands. In respect of other shareholders, though they have received consideration in the form of shares of BSS, what these shareholders have transferred are shares in SSBS, an Italian company, and not assets in the PE of SSBS. Since gains arising on transfer of shares of an Italian company would be taxable only in Italy, the same is not taxable in India.

Nangia's Take

This favorable ruling reiterates the settled principles of tax in the case of amalgamations under overseas restructuring within a group, that capital gain tax exemption available to Indian companies under the Act shall be available to foreign companies under the provisions of the non-discrimination clause of the Tax Treaty.

[Source: TS-468-AAR-2016]

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