AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
Credit Suisse (International) Holding AG, In re
Justice P.K. Balasubramanyan, Chairman
A.A.R. No. 956 of 2010
August 22, 2012
The applicant is a company incorporated under the laws of Switzerland and is a fully owned subsidiary of another company referred to as ‘company C’ hereinafter, incorporated in Switzerland. The applicant had set up a wholly owned subsidiary in India under the Indian Companies Act, 1956. For convenience, the Indian company is henceafter referred to as ‘I Co.’ The applicant and its nominees together hold all the shares of I Co.
2. The main business of the applicant is to acquire, hold, administer and have disposition over financial participation in other companies. ‘Company C’ and the applicant intend to merge into a single legal entity by means of a merger by absorption pursuant to Article 3 paragraph 1a of the Swiss Merger Act. Thereby, all the assets and liabilities of the applicant would be assumed by ‘company C’ and the applicant would be dissolved without liquidation. No consideration would pass to the applicant consequent on the merger in view of Article 8 of the Swiss Merger Act.
3. The applicant approached the Authority with this application under section 245Q of the Income-tax Act seeking advance rulings on the questions raised by it in the context of the above merger. After hearing both sides, while reserving the question for consideration whether any scheme for avoidance of tax was involved, this Authority allowed the application under section 245R(2) of the Act to render Rulings on the following questions:
1. Whether any capital gains under section 45 of the Act arises to the applicant as a result of vesting of shares of Credit Suisse Services (India) Private Limited (I Co.) held by the applicant in Credit Suisse AG on its amalgamation with Credit Suisse AG, the parent company?
2. Whether the vesting of shares of I Co. held by the applicant in Credit Suisse AG, pursuant to a scheme of amalgamation is exempt from capital gains tax under section 47(via) of the Act?
3. If answer to question 1 is in the affirmative and answer to question 2 is in the negative, whether the rate of tax applicable to the applicant is 20% as per the provisions of section 112(1) of the Act after giving effect to the first proviso to section 48 of the Act?
4. If answer to question 1 is in the affirmative and answer 2 is in the negative, whether there is any requirement on Credit Suisse AG to withhold taxes in accordance with the provisions of section 195 of the Act?
5. If answer to question 1 is in the negative and/or the answer to question 2 is in the affirmative, then, whether the applicant is required to file a return of income under section 139 of the Act?
6. Whether the provisions of sections 92 to 92F of the Act are attracted in case of the applicant as a result of vesting of shares of ‘I’ Co. held by the applicant, in Credit Suisse AG pursuant to the scheme of amalgamation?
4. It is argued on behalf of the applicant that in the merger which was proposed when the present application was filed, but which had been completed before the application was allowed under section 245R(2) of the Act, was not a transfer in the eye of law, that no consideration accrued to the applicant even if there was a transfer and that in any event such a transaction was exempted from the operation of section 45 of the Act by section 47(via) of the Act and that no taxable capital gain arose in India chargeable to tax in India. On behalf of the Revenue, it is contended that the transaction is a transfer in terms of section 2(47) of the Act, that the Indian company is prosperous and it continues to exist in spite of the so-called merger, that there is consideration in law for the transfer easily capable of being quantified and that the transaction is taxable in India under the Act. Section 47(via) of the Act is not applicable to the present case.
5. It is argued by learned Senior Counsel on behalf of the applicant that the merger of the applicant and ‘company C’ had taken place as per Article 3 of Swiss Merger Act. On the basis of that provision a merger can take place when one company takes over the other company, which is designated ‘merger by absorption’. With the merger, the assets and liabilities of the applicant are transferred by way of universal succession under civil law and the transferring company is dissolved without liquidation, in terms of Article 126.96.36.199. The condition that the company may remain liable to pay tax in Switzerland would apply to the acquiring company in terms of Article 188.8.131.52.2. When a company merges in another, there is an effacement of the merged company. The Ruling in Hoechst GmbH, AAR No.728 of 2006 supports this position, according to counsel. He also refers to the two decisions of the Supreme Court referred to in that Ruling.
6. The term ‘merger’ is not defined in the Companies Act or in the Income-tax Act. Section 2(1B) of the Income-tax Act defines ‘amalgamation’ in relation to companies as meaning ‘merger’ of one or more companies with another company, or merger of two or more companies to form one company. Section 47(vi) of the Income-tax Act provides that nothing contained in Section 45 of the Act shall apply to any transfer in a scheme of amalgamation of a capital asset by the amalgamation company to the amalgamated company if the amalgamated company is an Indian company. Section 47(via) exempts any transfer of a similar capital asset by a foreign amalgamating company to the amalgamated foreign company on the conditions therein being satisfied.
7. ‘Merger’ according to the Dictionary is ‘amalgamation, combination, union, fusion, coalition, application, unification, incorporation, consolidation, link-up, alliance’. The first argument on behalf of the applicant is that a merger does not involve a transfer. For the purposes of the Income-tax Act, transfer in relation to a capital asset is defined in section 2(47) of the Act. It is an inclusive definition. Not a restrictive definition. It includes the sale, exchange or relinquishment of an asset or the extinguishment of any right therein.
8. We notice that in the Ruling in P.3 of 1994, In re (240 ITR 518) this Authority assumed that the change of ownership of the shares from the applicant to the amalgamated company would involve a transfer of shares by the applicant to the amalgamated company. It does not appear to be necessary to pursue that aspect, since the question in this case is whether the transfer has generated any income liable to be charged under section 45 of the Act.
9. In the Ruling referred to above and in the decision of the High Court of Bombay in Forbes Forbes Campbell & Co. Ltd. v. CIT (150 ITR 529) what was involved was amalgamation. In the case on hand, the question to be considered is whether what has taken place is amalgamation as defined in section 2(1B) of the Act. To satisfy that definition, three conditions have to be satisfied. Conditions (i) and (ii) are satisfied in this case but, condition no..(iii) is not satisfied as the shareholders of the applicant merging with ‘company C’ do not or cannot become shareholders of company ‘C’ as company ‘C’ is the only shareholder of the applicant. It is argued by counsel for the applicant that section 47(via) contains a relaxation of this condition. That may be in respect of the shareholders proportion, reduced from 75% to 25%, but the condition itself is not dispensed with. Therefore, in this case, it cannot be postulated that section 47(via) takes the transaction out of the clutches of section 45 of the Act.
10. That would mean that section 45 of the Act would be attracted. But then, what is the consideration for the transfer? According to the Revenue, the Indian business is thriving and it is a gain for ‘company C’. Even if there is a loss to the parent company as a whole on this merger, there must also be a benefit accruing to it. The applicant has not disclosed what that benefit is.
11. According to the applicant, the merger and consequent transfer of all assets and liabilities did not generate any gain. The applicant was in involved circumstances. That is why the merger with the parent company was thought of. On a merger, the transferor is effaced. The transaction undertaken is apparently one sanctioned by Swiss law. The gain if any in this case is not determinable within the scope of section 45 and section 48 of the Act as postulated in the Ruling in Dana Corporation (AAR No.788 of 2008). On a consideration of the facts obtaining in this case, I am of the view that no capital gain chargeable to tax under the Act in terms of section 45 read with section 48 can be said to arise.
12. In the light of the discussion above, on question no.1 it is ruled that no capital gain arises to the applicant as a result of the merger. On question no. 2 it is ruled that the merger involved in this case, is not exempt from capital gains tax under section 47(via) of the Act.
13. In view of the ruling on question no.1, question no. 3 need not be ruled on.
14. On question no.4 the ruling is that there is no obligation on ‘Company C’ to withhold taxes under section 195 of the Act.
15. Learned Counsel for the applicant submitted that he was not pressing the request for Rulings on question nos. 5 and 6. In view of this, those questions are not ruled on.