No Capital Gains on Amalgamation of MNC with Parent: Advance Ruling
February, 21st 2007
BEFORE THE AUTHORITY FOR ADVANCE RULINGS
(INCOME TAX) NEW DELHI
Honble Mr. Justice Syed Shah Mohammed Quadri (Chairman)
Mr. A.S.Narang (Member)
Mr. A.Sinha (Member)
Monday, the twenty second January Two Thousand-seven
A.A.R. NO. 728 OF 2006
Name & address of the appellant
Haechst GmBH, (as successor to Aventis Pharma Holding GmBH) Bruningstrasse 50 65926 Frankfurt/Main Germany
Director of Income Tax (International Taxation), Mumbai
Present for the Department
Present for the Applicant
Shri S.E.Dastur, Senior Advocate and others
Head Note: amalgamation of the wholly owned subsidiary foreign company with its parent company does not result in a transfer for consideration and therefore, does not given rise to any capital gains.The liability to capital gains tax (if any) can only be on the transferor company (subsidiary), which in the present case has lost its identity and ceased to exist. (Para 6)
(By Mr. A.S.Narang)
1. In this case an application under section 245Q(1) of the Income-tax Act, 1961(for short the Act) has been filed on 6.6.2006, in Form No.34C (meant for non-resident applicants) seeking advance ruling from the Authority.The applicant, Hoechst GmBH, Germany, is a company incorporated in Germany.Aventis Pharma Holding GmbH (APH) which got amalgamated with the applicant, effective on and from 30.09.2005, is a hundred per cent subsidiary of the applicant.By virtue of the amalgamation, all the assets and liabilities of APH became the assets and liabilities of the applicant.APH held 11,538,342 shares of Aventis Pharma Ltd. (APL) an Indian company listed on Mumbai Stock Exchange.As a result of amalgamation, the shares of APL held by APH vested in the applicant and since the applicant was the only shareholder of APH, no share was issued to any third party consequent to the amalgamation.It is stated that by virtue of section 11 of the German Reorganization Tax Act, the amalgamation will not attract capital gains tax in Germany.On the basis of these facts advance ruling is sought on the following questions:
(1)Whether the vesting of shares of Aventis Pharma Limited, India held by Aventis Pharma Holding GmBH in Hoechst GmbH pursuant to the scheme of amalgamation is exempt from capital gains tax under section 47(via) of the Income-tax Act?
(2)If the exemption under section 47(via) is not available, whether any capital gains chargeable under section 45 of the Income-tax Act arose to the Aventis Pharma Holding GmbH on its amalgamation with Hoechst GmbH in respect of the shares of Aventis Pharma India Ltd. held y Aventis Pharma Holding GmbH?
(3)If the answer to question 2 is in the affirmative, whether the tax rate of 10 per cent can be applied to the capital gains under the proviso to section 112(1) of the Income-tax Act?
The questions were subsequently revised vide letter dated 14th November 2006, as under:
1.Whether any capital gains chargeable under section 45 of the Income-tax Act arose to Aventis Pharma Holding GmbH on its amalgamation with Hoechst GmbH in respect of the shares of Aventis Pharma Limited, India held by Aventis Pharma Holding GmbH?
2.If the answer to question 1 is in the affirmative, whether the vesting of shares of Aventis Pharma Limited, India held by Aventis Pharma Holding GmbH in Hoechst GmbH pursuant to the scheme of amalgamation is exempt from capital gains tax under section 47(via) of the Income-tax Act?
3.If the answer to question 1 is in the affirmative and to question 2 in the negative, whether the tax rate of 10 per cent can be applied to the capital gains under the proviso to section 112(1) of the Income-tax Act if the tax so computed is lower than the tax at the rate of 20 per cent computed as per section 112(1) (c) of the Act?
2.No comments have, however, been received from the Jurisdictional Commissioner.
3.In the application, with regard to the first question, it is submitted that since the entire assets and liabilities of APH vested in Hoechst GmbH and no consideration accrued to APH, no capital gains chargeable under section 45 arose to APH.With regard to the second question, it is submitted that section 47 of the Act deals with transactions not regarded as transfer and section 47 (via) describes a situation relating to amalgamation of foreign companies identical to the amalgamation of the appellant.Hoechst GmbH held 100% shares of APH and on amalgamation of APH with Hoechst GmbH, all assets and liabilities of APH vested in Hoechst GmbH and the shares held by Hoechst GmbH in APH stood extinguished.Condition (a) under section 47(via) contemplates that at least 25% of the shareholders of the amalgamating company should continue as shareholders of the amalgamated company, which can be fulfilled only in the case where shareholders are other than the amalgamated company itself.Since a company cannot be its own shareholder condition (a) cannot apply to the extent to which the amalgamated company holds shares.In other words condition (a) cannot be fulfilled where more than 75% shares are held by the amalgamated company.That it is a well settled legal principle that a person cannot be expected to fulfill a condition, which is impossible of performance.Since Hoechst GmbH the amalgamated company itself held 100% of the shares in APH, condition (a) will not apply to the proposed amalgamation.Reliance is placed on the following observation of the Honble Supreme Court in the case of Commissioner of Income-tax v/s Gotla, 156 ITR 323:
Where the plain literal interpretation of the statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the legislature so as to achieve the intention of the Legislature and produce a rational construction.
In view of the above, it is submitted that condition (a) will not apply in applicants case where a wholly owned subsidiary amalgamates with its holding company.Accordingly transfer of shares of APL under the scheme of amalgamation would be exempt from capital gains tax.For this preposition the applicant has also placed reliance on the ruling given in the case of P_3 of 1994 240 ITR 518 (AAR), the facts of which are stated to be identical.With regard to the third question it is submitted that capital gains will be computed in accordance with the first proviso to section 48.Further since APL India is a listed company the rate of tax of 10.455% (i.e. 10+surcharge and education cess) prescribed in the proviso to section 112(1) will apply as APH being a non resident in the proviso would apply.
4.Shri Soli Dastur, learned counsel for the applicant, has argued that where amalgamating company which is a 100% subsidiary merges with the holding company (amalgamated company), no question of any profit or gain would arise because amalgamating company (wholly owned subsidiary), on amalgamation ceases to exist, and its identity merges completely with the amalgamated company; where however, in case amalgamating company receives nothing but shareholders receive shares of amalgamated company, there is no question of capital gains in the hands of amalgamating company since it is the shareholders who receive consideration (if any).That in an amalgamation where no shares are issued by the amalgamated company, because amalgamating company was a wholly owned subsidiary, no question of capital gain can arise because the amalgamating company does not receive any consideration.Section 48 of the Act states that income chargeable under the head capital gains shall be computed by deducting from the full value of the consideration received certain amounts as detailed in the Act.That in the present case no consideration has passed from amalgamated company to amalgamating company, therefore, computation provisions fail completely.For this proposition, reliance is placed on the decision of the Honble Supreme Court in B.C.Srinivas Setty [128 ITR 294].It was further argued by the learned counsel that assuming for a moment that the applicant is chargeable for capital gains under the provisions of the Act, then section 47(via) read with section 2(1)(b) provides a specific exemption in the case of the applicant.The learned counsel explained that basically there is a transfer only in so far as the shares of Indian company held by one German company are taken over by another German company, which is the sole shareholder of the amalgamating company.Since no consideration has passed over to the amalgamating company, there is no liability to capital gains tax.Reference was made to the Commentary of Kanga & Palkhiwala on the subject.
5.In response to the notice for hearing dated 21/24.7.2006 nobody attended on behalf of the Commissioner.
6.We have given careful consideration to the arguments of the learned counsel.
Honble Supreme Court while examining the effect of amalgamation in the case of General Radio and Appliances Co. Ltd. v. M.A.Khader [(1986) 60 Comp Cas 1013 (SC)] observed that after the amalgamation of two companies, the transferor company ceases to have any identity and the amalgamated company acquires a new status and it was not possible to treat the two companies as partners or jointly liable in respect of their liabilities and assets.In the case of Saraswati Industrial Syndicate Ltd. v. CIT [(1990) 186 ITR 278, 283-84 (SC)], Honble Supreme Court observed that the Tribunal rightly held that the appellant company was a separate entity and a different assessee, company was a separate entity and a different assessee, and therefore, the allowance made to Indian Sugar Company which was a different assessee could not be held to be the income of the amalgamated company for purposes of section 41(1) of the 1961 Act.The High Court was in error in holding that, even after amalgamation of the two companies, the transferor-company did not become non-existent but instead it continued its entity in a blended form with the appellant-company.The High Courts view that, on amalgamation, there is no complete destruction of the corporate personality of the transferor-company but instead there is a blending of the corporate personality of one with another corporate body and it continues as such with the other is not sustainable in law.The true effect and character of the amalgamation largely depends on the terms of the scheme of merger.But there cannot be any doubt that, when two companies amalgamate and merge into one, the transferor-company loses its entity as it ceases to have its business.However, their respective rights and liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor-company ceases to exist with effect from the date of amalgamation is made effective.In that view of the matter, the Supreme court agreed with the Tribunals view that the amalgamating company ceased to exist in the eye of law and, therefore, the appellant was not liable to pay tax on the amount of Rs.58,735 under section 41(1).(Emphasis supplied).
Respectfully following the view expressed by the Honble Supreme Court we hold that amalgamation of the wholly owned subsidiary foreign company with its parent company does not result in a transfer for consideration and therefore, does not given rise to any capital gains.The liability to capital gains tax (if any) can only be on the transferor company (subsidiary), which in the present case has lost its identity and ceased to exist.
Question Nos. 2 and 3 are consequential and do not require a ruling since answer to question No. 1 is in the negative.
7.In the light of the foregoing discussion we rule as under:
question no. 1No capital gains chargeable under section 45 of the Income-tax Act arose to Aventis Pharma Holding GmbH on its amalgamation with Hoechst GmbH in respect of the shares of Aventis Pharma Limited, India held by Aventis Pharma Holding GmbH;
question no. 2This is consequential to the ruling on the first question.In view of the said ruling, this question does not survive.
question no. 3It is consequential and does not require a ruling.
Pronounced by the Authority on this 22nd day of January 2007.