India: Tax benefit on restructuring allowed if backed by commercial expediency (tribunal decision)
A share sale between Indian wholly owned subsidiaries followed by a fast-track merger was tax-exempt due to commercial substance.
The Chennai Bench of the Income Tax Appellate Tribunal held that the sale of shares of an Indian wholly owned subsidiary to another Indian wholly owned subsidiary (followed by a fast-track merger of the two subsidiaries) was a bona fide transaction, and the capital gains attributable to the taxpayer from the sale were not taxable in India, as the prescribed conditions for the capital gains exemption were satisfied.
The tribunal rejected the tax authority’s allegation that the arrangement was a “colourable device,” noting that a transaction cannot be disregarded merely because it resulted in a tax benefit. The tax authority cannot question commercial decisions or recharacterize transactions in the absence of evidence of a sham or lack of commercial substance.
The case is: Valeo Bayen v. DCIT
Read a June 2026 report prepared by the KPMG member firm in India