2018 (1) TMI 945 - AAR - Income Tax

Tax exemption for shareholders selling Bock GmbH shares in India under India-Germany treaty

In Re : GEA Refrigeration Technologies GmbH, DorstenerStrasse 484 44809 Bochum Germany

The income derived by the shareholders from the sale of shares of Bock GmbH is not chargeable to tax in India under the Income-tax Act, 1961, read with ... Income chargeable to tax in India - income derived by the shareholders of Bock GmbH from the sale of shares of Bock GmbH, Germany - India-Germany DTAA - Bock GmbH, Germany holds 100% share capital of Bock India Private Limited - liability to TDS u/s 195 - Held that:- Applicant’s income cannot be brought to tax in India under the provisions of the Income tax Act 1961, as Bock GmbH derives its value substantially from its other companies situated in Germany, China, England, Czech Republic, Singapore, Malaysia, Thailand and Australia etc., whereas its value of assets in Bock India is a mere 5.40%, far lower than the requirement of 50%. Hence, it fails the test of deriving value substantially from the Indian company, as is also conceded by the Revenue, on the available facts. A similar matter under similar provisions of the DTAA, was decided in the case of Sanofi Pasteur Holding SA (2013 (2) TMI 589 - HIGH COURT OF ANDHRA PRADESH) wherein shares of a French company which held 80% shares in an Indian company were transferred to another French company. It was held that the gain arising from such transfer was taxable in France and not in India. Hence, in spite of a possible contrarian argument, in cases of indirect transfer, the decision in the case Sanofi Pasteur, cited above, stands as of date and has to be respectfully followed. We come to the conclusion, therefore, that the gains arising from the alienation of shares of Bock GmbH, on account of its acquisition by GEA Refrigeration Technologies GmbH, the Applicant, shall not be taxable in India. TDS u/s 195 - As per section 195(1), briefly, any person responsible for paying to a non-resident interest or any other sum chargeable under the provisions of the Act shall deduct tax at the time of such credit or remittance. Thus, the liability to deduct arises only if the sum so paid was chargeable to tax. This view was upheld in GE Technology Centre P. Ltd. v. CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA ] that in cases where income is not chargeable to tax under the Act, as per expressions used in section 195 itself, there will be no obligation to withhold tax. - Decided in favour of assessee Issues Involved:1. Taxability of income derived by the shareholders of Bock GmbH from the sale of shares under the Income-tax Act, 1961 and India-Germany DTAA.2. Obligation of the Applicant to deduct tax at source under section 195 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Taxability of Income Derived by ShareholdersFacts and Arguments:The Applicant, a German company, acquired Bock GmbH, which indirectly led to the transfer of shares in Bock India. The Applicant sought a ruling on whether the income from this indirect transfer is chargeable to tax in India under section 9(1)(i) of the Income-tax Act, 1961, read with the India-Germany DTAA.Legal Provisions:- Section 9(1)(i) of the Income-tax Act, 1961: Income accruing or arising in India, directly or indirectly, through the transfer of a capital asset situated in India, is taxable in India. Explanation 5 clarifies that shares in a foreign company are deemed to be situated in India if they derive substantial value from assets located in India.- Explanation 6 to Section 9(1)(i): Specifies that the value of Indian assets must exceed INR 100 million and represent at least 50% of the value of all assets owned by the foreign company.- India-Germany DTAA, Article 13: Gains from the alienation of shares in a company resident in a contracting state may be taxed in that state.Applicant's Submissions:- The value derived by Bock GmbH from Bock India is less than 50% of its total assets, hence not chargeable to tax in India.- Under Article 13 of the India-Germany DTAA, the gains from the alienation of shares are taxable only in Germany since both the seller and buyer are German residents.Revenue's Position:- The Revenue agreed that the gains arising from the transfer of shares could be taxed in India only if Bock GmbH’s holding in Bock India was more than 50% of its total assets, which was not the case here.Ruling:- The value of Bock India’s assets was determined to be between 5.23% to 5.57% of the total assets of Bock GmbH, far below the 50% threshold.- Therefore, the income from the sale of shares is not chargeable to tax in India under the Income-tax Act, 1961.- Additionally, under the India-Germany DTAA, the gains are taxable only in Germany.Issue 2: Obligation to Deduct Tax at SourceFacts and Arguments:The Applicant sought a ruling on whether it is required to deduct tax at source under section 195 of the Income-tax Act, 1961, on payments made to the shareholders of Bock GmbH.Legal Provisions:- Section 195(1) of the Income-tax Act, 1961: Requires any person responsible for paying to a non-resident any sum chargeable under the Act to deduct tax at the time of such payment.Applicant's Submissions:- Cited the case of GE India Technology Cen. (P.) Ltd. vs. CIT, where it was held that there is no obligation to deduct tax if the income is not chargeable to tax under the Act.Ruling:- Since the income from the sale of shares is not chargeable to tax in India, there is no obligation to deduct tax at source under section 195.Conclusion:1. Taxability: The income derived by the shareholders from the sale of shares of Bock GmbH is not chargeable to tax in India under the Income-tax Act, 1961, read with the India-Germany DTAA.2. Tax Deduction at Source: There is no obligation to withhold tax under section 195 of the Income-tax Act, 1961.The ruling was pronounced on 28th November 2017.