TaxTMI 
TaxTMI 
2018 (1) TMI 945
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....cesses, and is a market and technology leader in its business areas. 2.1 In order to gain access to wider range of cooling applications and to enhance the know-how with regard to environment friendly solutions, the Applicant entered into a Share Purchase Agreement to acquire an unrelated German company, Bock Kaltemaschinen GmbH (Bock GmbH) at a purchase price of Euro 40,504,000, which converts to approximately INR2533 million, as on 31 March 2011. 2.2 Bock GmbH is a family owned company. The consideration of Euro 40.50 mn. was paid to the shareholders of Bock GmbH, all of whom are residents of Germany. They are as under: (i) Wolfgang Etter, Nurtingen, Germany (ii) Wolfgang Etter GmbH, Nurtingen, Germany (iii) Bernhard Etter, Frickenhausen, Germany (iv) Bernhard Etter GmbH, Frickenhausen, Germany (v) Gerhard Etter, Nurtingen, Germany (vi) Gerhard Etter GmbH, Nurtingen, Germany (vii) Elvira Bock-ReuB, Frickenhausen, Germany (viii) Marcus ReuB, Neuffen, Germany (ix) Oliver ReuB, Nurtingen, Germany 2.3 Bock GmbH holds 100% shares in Bock India, and also holds, directly or indirectly, 100% shares i....
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....idents of Germany, they were entitled to the benefits under the India Germany DTAA, and that it also had the option of being governed by provisions of the Act or the DTAA, whichever was more beneficial to it, as per section 90(2) of the Act, as also as per Circular no. 333 and various cases, such as Azadi BachaoAndolan, 263 ITR 706 (SC). 4.2 As regards taxability under the Income tax Act 1961, it is submitted that section 9(1)(i) of the Act provides circumstances in which income accruing or arising, directly or indirectly, is taxable in India. One of the limbs of clause (i) is income accruing or arising directly or indirectly through the transfer of a capital asset in India. The section has been amended by Finance Act, 2012, retrospectively, to clarify that an asset or a capital asset being any share or interest in a company registered or incorporated outside India shall be deemed to be, and shall always be deemed to have been, situated in India if the said share or interest, derives its value substantially from the assets located in India. 4.2.1 As per Explanation 6 to section 9(1)(i) of the Act, a foreign company shall be deemed to derive its value 'substantially' from asse....
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....eferred to in this context. 4.3.2 In the alternative, but without conceding, the Applicant has submitted that even if the Revenue takes a view that some other controlling rights have been transferred, other than shares, as mentioned in paragraph 4 of Article 13, then they have to be construed as covered within paragraph 5 of Article 13, and the same can again be taxed only in the state where the alienator is resident, ie. in Germany. Reference in this regard has been made to the case of Sanofi Pasteur Holding SA vs. DR [2013], 354 ITR 316 (AP), wherein this view was taken with reference to a French company. 5. The submissions of the Applicant, as filed along with the application were also examined by the Revenue. The Commissioner's report, which encloses the comments of the concerned Addl. Commissioner of Income tax, dated 09 August 2017, takes us through brief details of the Applicant, the nature of the transaction, details of assets held by Bock (India) Pvt. Ltd., discusses the Applicant's interpretation of issues before the AAR with reference to the Section 9(1)(i) of the Act and its Explanations, as also Article 13 of the India Germany DTAA. In conclusion the Addl. CIT st....
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....tered in Germany, and is a tax resident of Germany. It is engaged in the manufacture of compressors and condensing units for refrigerators and air conditioners, and has subsidiaries and investments in companies in Europe, Asia and Australia, a list of which has been filed and perused. In India it had a wholly owned subsidiary, Bock India Pvt. Ltd. (Bock India), located at Vadodara, Gujarat, which manufactures Open Type Reciprocating Compressors, Motor Compressors, Mobile Compressors, air and gas cooled Compressors, etc. 7.2 On 31 March 2011, the Applicant acquired Bock GmbH, ie. the company which has 100% stake in Bock India, apart from holding in companies in several countries, through a Share Purchase Agreement. Because of this acquisition, there was a change in the ownership of Bock India, and indirect transfer of all its shares to the Applicant German company. Hence, in the transaction between two German companies, the shares in the Indian company got indirectly transferred from Bock GmbH to the Applicant. 7.3 On the above facts the question raised in this application, seeking a Ruling from us, is whether the income arising from such indirect transfer of the shares of Boc....
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....r through or from any asset or source of income in India or through the transfer of capital asset situate in India, shall be deemed to accrue or arise in India. Explanation 5 thereof clarifies that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Explanation 6 provides that the said explanation 5 will be applicable, if on the specified date the value of such assets exceeds the amount of INR10 crore and represents at least 50% of the value of such assets owned by the company/entity. Explanation 7, however, provides a carve out from the applicability of Explanation 5 to small Investors holding no right of management or control of such company/entity and holding less than 5% of the total voting power/share capital/interest of the company/entity that directly or indirectly owns the assets situated in India. Section 285A of the Act casts a reporting obligation on the India concern whose shares are substantially held directl....
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....me are found to be at variance such as to exceed 50%, the Ruling would not apply to the new set of facts and figures that may come before the Revenue, and it would not be bound by this Ruling. 7.7 To conclude this issue, we are of the view that in the above facts and circumstances the 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. 7.8 As regards the provisions of Article 13 of the India Germany DTAA are concerned, as applicable to the instant case, we may mention at the very outset, that this examination is only academic, since we have ruled above that the gains arising from the indirect transfer of shares of Bock GmbH are not chargeable to tax in India in view of the provisions of the Act. Hence, in view of section ....
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....te 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. 7.9 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. 8. Question no. (ii) is whether, in the above circumstances, the Applicant is liable to deduct tax at source under section 195 of the Act, read with the provisions of the India-Germany DTAA, on the payments made by it to the shareholders of Bock GmbH, Germany on account of purchase of their shares in Bock GmbH. 8.1 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 by the Hon'ble Supreme Court in GE Technology Centre P. Ltd. v. CIT, 327 ITR 456, that in cases where income is not chargeable to tax under the Act, as pe....