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NEW DELHI. Giving mega relief to MNC subsidiaries vide a significant ruling AIT-2007-70-AARAuthority for Advance Rulings (Income-Tax) has ruled 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.

T H E F A C T S:

The applicant, Hoechst GmBH, Germany, was a company incorporated in Germany. Aventis Pharma Holding GmbH (APH) which got amalgamated with the applicant, effective on and from 30.09.2005, was 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 was 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 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?”

T H E R U L I N G:

Question no. 1: No 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. 2: This is consequential to the ruling on the first question. In view of the said ruling, this question does not survive.

Question no. 3: It is consequential and does not require a ruling.

( Click here for full text of Ruling AIT-2007-70-AAR)