The Authority for Advance Rulings (AAR), in the recent judgement of Banca Sella SpA,[1] held that capital gains arising on amalgamation of a non-resident company, having a branch in India, with its non-resident group entity would not attract capital gains tax in India in view of the non-discrimination clause of the India-Italy Double Taxation Avoidance Agreement (DTAA).


The Applicant, Banca Sella SPA, Italy (Banca Italy) and Sella Servizi Bancari SCPA, Italy (Sella Italy) were part of the Italy based Banca Sella group. Sella Italy also had a branch in India.

The Banca Sella Group carried out a business restructuring, in the course of which, Sella Italy was merged into Banca Italy.

As a result of the merger:

  • The shareholders of Sella Italy (except Banca Italy) were allotted shares in Banca Italy. All the shareholders including Banca Italy were based in Italy.
  • Banca Italy’s investment in Sella Italy got cancelled as it could not have issued shares to itself, hence no shares were allotted to it pursuant to the merger.
  • Sella Italy, being the merging company, ceased to exist and all its assets and liabilities were vested with Banca Italy.

The applicant approached the AAR for the determination of the following tax issues that arose on the merger of Sella Italy with Banca Italy:

  1. Whether transfer of the Indian branch of Sella Italy to Banca Italy as a consequence of the merger would be a transfer under section 2(47) (which defines transfer) of the Income-tax Act, 1961 (IT Act) and whether such transfer would be taxable in India?

         2.Whether by virtue of the non-discrimination clause of the DTAA, Sella Italy would also be eligible to the capital gains tax exemption under section 47(vi) of the IT Act, which is otherwise available to an Indian company in a scheme of amalgamation/merger?

         3. Whether Banca Italy and other shareholders of Sella Italy would be taxable in India due to extinguishment of its shareholding in Sella Italy as a result of merger?

        4. Whether the above merger attracted transfer pricing provisions under the IT Act?

AAR Ruling

The AAR held as under:

Gains in the hands of Sella Italy

The AAR held that merger of Sella Italy with Banca Italy was a transfer under Section 2(47) of the IT Act.

However, applying the non-discrimination provision under the DTAA (Article 25), the AAR held that capital gains tax exemption under Section 47(vi) of the IT Act, which is otherwise available to an Indian company in a scheme of amalgamation when the amalgamated company is an Indian company, should also be available to Sella Italy upon transfer of its assets to Banca Italy. The AAR held that if an amalgamation resulted in special benefits to a local company and its shareholders by virtue of the non-discrimination clause, there was no reason to deny similar benefits to a foreign company and its shareholders in a similar case of amalgamation. In light of the above, the exemption under section 47(vi) would be available to Sella Italy.

The AAR further observed that no consideration was flowing to Sella Italy with respect to transfer of the Indian Branch. In the absence of consideration, the computation mechanism under section 48 of the IT Act would fail and thus, there would not be any capital gains tax arising in India[2].

Gains in the hands of shareholders of Sella Italy

The AAR held that due to merger, shares held by the shareholders in Sella Italy had been extinguished and such extinguishment was also considered a transfer under the IT Act.

However, with respect to Banca Italy, in the absence of any consideration received by it, the AAR held that there were no capital gains chargeable to tax in India.

As far as the remaining shareholders were concerned, while consideration (in the form of allotment of shares of Banca Italy) was received by such shareholders due to the favourable DTAA provisions, such gains were held to be not taxable in India.

In relation to the above, the Applicant contended that due to a specific deeming provision under the IT Act, only when Sella Italy shares are deemed to be situated in India and derived substantial value from Indian assets, gains on transfer of Sella Italy shares would be taxable in India in the hands of the shareholders. Further, the applicant contended that the term ‘substantial’ would mean ‘close to whole’. In this regard, disagreeing with the applicant’s interpretation on the term ‘substantial’, the AAR held that substantial would always mean at least 50%. The AAR also considered the dictionary meaning of substantial, wherein it was defined as ‘of considerable importance, size or worth’. The AAR relied on the Delhi High Court judgement in the case of Copal Research[3] on this point.

Issue of Transfer Pricing

The AAR, on the basis of its earlier ruling in the case of Amiantit International Holding Limited[4], held that transfer pricing provisions are inapplicable in case there is no charge of tax in India.


The Ruling of the AAR granting capital gains exemption to a foreign company, in case of an offshore merger by applying the provisions of the non-discrimination clause in the Tax treaty provides a ray of hope for other non-residents. Foreign companies have been increasingly placing reliance on non-discrimination clauses contained in the tax treaties and it will be interesting to see to what extent the tax authorities will give effect to such beneficial (protective) provisions. While a ruling given by the AAR, is only binding on the applicant and the tax authorities dealing with the said case, it still has persuasive value and its ratio / observations are used as guiding principles. Thus, the observations of the AAR, in this case would be of relevance to non-residents at the time of transfer of shares of a company that derives substantial value directly or indirectly from assets situated in India, whether the transfer is in the form of a plain vanilla transfer, or forms part of a business restructuring exercise.