BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI 28 th Day of November, 2017 A.A.R. No 1232 of 2012 PRESENT Mr. R.S. Shukla,In-chargeChairman Mr. Ashutosh Chandra, Member (Revenue) Name & address of the applicant: Present for the applicant: Present for the Department:, DorstenerStrasse 484 44809 Bochum Germany Shri S P Singh, Shri L N Pant, ShriSharadGoyal, Mrs. KavitaPandey, CIT (DR) Mr. KamleshC Varshney, CIT(IT) RULING (ByAshutosh Chandra) The Applicant,, filed an application under section 245Q(1) of the Income tax Act, 1961, on02 January 2012, and the same was admitted on 30 September 2013. 2. As per the submissions of the Applicant, it is a German company of the GEA Group AG ( GEA ), and is also a tax resident of Germany, as per the TRC issued by the German authorities. It is engaged in the business of industrial refrigeration. The applicant has extensive experience in the fields of the food and beverage industry, petroleum and gas etc. The GEA group is one of the largest system providers for food and energy processes, and is a market and technology leader in its business areas. 1AAR/1232/2012
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 in the following companies: (i) Bock Holding, Germany (ii) Bock Compressors Hangzhou Co. Ltd., China (iii) Bock GB Ltd., England (iv) Bock Czech Kaltemaschinens.r.o, Czech Republic (v) Bock Asia Pte. Ltd., Singapore (vi) Bock South Asia (M) Sdn. Bhd., Malaysia 2AAR/1232/2012
Apart from the above, Bock GmbH also holds, directly or indirectly, majority of the voting rights in a Thailand company, and a minority stake in an Australian company. 2.4 Bock India is an operating company with its own manufacturing facilities in India and as a result of the aforementioned transaction, there was an indirect change in the ownership of Bock India due to the acquisition of Bock GmbH by the Applicant. 2.5 A diagrammatic representation of the said transaction is as under: GEA Group AG Shareholders of Bock GmbH Germany [Seller] Consideration Euro 40.5 Mn. 100% (INR 2533 Mn.) 100% GEA Refrigeration Technologies GmbH ( the Applicant ) [Buyer] Acquired Bock GmbH Germany 100% Bock (India) Pvt. Ltd. ( Bock India ) Other subsidiaries outside India 2.6 In respect of the values adopted in the aforesaid transaction, the Applicant has filed a report on the Fair Market Valuation of the 100% equity of GEA Refrigeration India Private Limited (earlier known as Bock India Private Limited, or Bock India) as on 31 December 2010. As per this report the value of its shares was determined at INR 136.70 mn. As against this, the market value of Bock GmbH as a whole was determined at INR 2533 mn, worked out as per the prescribed Rules. 3AAR/1232/2012
3. In the said application, the Applicant has sought our Ruling on the following questions: (i) Whether on the facts and circumstances of the case, the income derived by the shareholders of Bock GmbH from the sale of shares of Bock GmbH, Germany is chargeable to tax in India under the provisions of the Income-tax Act, 1961 read along with the provision of the India-Germany Double Taxation Avoidance Agreement ( DTAA ), where Bock GmbH, Germany holds 100% share capital of Bock India Private Limited? (ii) If the answer to the above question is negative, whether on the facts and circumstances of the case, the Applicant is liable to deduct tax at source under section 195 of the Act read along 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 shares from these shareholders in Bock GmbH, Germany? 4. During the course of these proceedings, Sri S.P.Singh, Learned Authorised Representative for the Applicantstated as under: 4.1 Since all the shareholders of Bock GmbH were tax residents 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 AzadiBachaoAndolan, 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 4AAR/1232/2012
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 assets located in India where value of Indian assets on the specified date: (i) exceedsinr 100 mn [approx. USD 1.5 MN], and (ii) represents at least 50% of the value of all the assets owned by the foreign company or entity. Both conditions need to be satisfied cumulatively. 4.2.2 Further, as per Rule 11UB (6) of the Rules, the FMV of assets of foreign company i.e. Bock GmbH in the present case, shall be: A + B, where; A = Market capitalization of the foreign company computed on the basis of the full value of consideration for transfer of the share; B = Book value of liabilities of the company as on the specified date as certified by a qualified investment banker or accountant. Computation of the ratio of the assets of Bock India to the assets of Bock GmbH, Germany has been provided. This shows that the value of Indian assets to overall value of Bock GmbH is merely 5.40%. 4.2.3 It is thus submitted that the value derived by Bock GmbH from Bock India is less than 50% of the total value of its assets, and further that the 5AAR/1232/2012
shareholders are tax resident of Germany and therefore, they are not chargeable to tax in India, and are entitled to be taxed in accordance with the provisions of India-Germany DTAA. 4.3 As far as the benefit stated to be available to it under the DTAA is concerned, the Applicant has referred to Article 13, paragraph 4 of the India Germany DTAA, as per which the gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that state. And, since Bock GmbH was a tax resident of Germany and the shares were being transferred to another German company (the Applicant) by the shareholders of Bock GmbH, who were also residents of Germany, the gains arising from such transfer were taxable only in Germany. 4.3.1 The Applicant has submitted that in its case, the matter was simply of transfer of shares. It has referred to the case of Vodafone International Holdings BV, 193 Taxman 100, wherein, after considering several cases, it was held that controlling interest does not constitute a distinct capital asset. It is contended that the controlling interest was nothing but the holding of a particular number of shares so as to control the decision making in a company. The cases of Smt Maharani Usha Devi, 131 ITR 445 (MP), and Venkateshvs CIT, 243 ITR 367 (Mad.) have been referred 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. 6AAR/1232/2012
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 states that: We may point out that Applicant has not given the total value of assets owned by it. This is necessary to calculate if the value of assets held in India is less than 50% to the total value of the assets. Though it does appear that the shares and interest of Bock GmbH (which have been transferred and are subject matter of application) do not derive, directly or indirectly, its value substantially from the assets located in India but it would have been better if the Applicant had furnished the figures. Thus, according to the Revenue also, 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 in this case did not appear to be so. Thus, subject to the exact valuation, in principle the revenue has agreed with the contentions of the Applicant. 5.1 Present for the Revenue, Mr. Kamlesh C Varshney, Ld. Commissioner of Income tax (IT), New Delhi, referring to the report of the Addl. CIT, New Delhi, stated that while the figures of total assets of Bock GmbH or its holding in Bock India as submitted by the Applicant before the AAR may be correct, as also its contentions with regard to taxability, in case any discrepancy was subsequently found in the respective valuations, the assessing officer would be entitled to act as per the provisions of the Income tax Act. 7AAR/1232/2012
6. With reference to question no. 2, that is whether, if the Applicant s income is not chargeable to tax under the provisions of the Act, there was any liability to deduct tax at source under section 195 of the Act at the time of remittance, the Applicant has cited the case of GE India Technology Cen. (P.) Ltd. vs. CIT [2010] (SC),193 Taxman 234, to say that there was no liability to deduct tax at source, and has sought a Ruling accordingly. 7. We have considered the facts of the Applicant s case, the provisions of the Act and the DTAA surrounding the same, and the submissions made, both by the applicant and the Revenue. 7.1 The applicant is a German company of the GEA group. To enhance its capability and knowhow with regard to environment friendly solutions based on natural refrigerants for which there is an increasing demand in the market, it entered into a Share Purchase Agreement, to acquire Bock Kaltemaschinen GmbH (Bock GmbH), which is a family owned business, headquartered 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. 8AAR/1232/2012
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 Bock GmbH in Bock India to the Applicant would be chargeable to tax in India, within the provisions of section 9(1)(i) of the Income tax Act, 1961, read with the India Germany DTAA, keeping in mind the provisions of section 90 (2) of the Act, ie. the more beneficial of the two provisions would be applicable in the case of the Applicant, a German company. 7.4 As per section 9(1)(i) of the Act, all income accruing or arising in India, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India, would be taxable in India. However, these broad provisions have been clarified/qualifiedby various explanations that follow. 7.4.1 Explanation 5 to Section 9(1)(i) of the Act states 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. 7.4.2 Conversely therefore, if the share or interest of the company registered or incorporated outside Indiadonot derive their value substantially from the assets located in India, it cannot be deemed to have been situated in India, and hence, as per section 9(1)(i) cannot be brought to tax as per the Act, in India. 7.4.3 Explanation 6 further declares that to see whether the share or interest derives, directly or indirectly, its value substantially from the assets, two requirements are needed, namely: 9AAR/1232/2012
(i) that the value of such assets exceeds the amount of Rs 10 crore; and (ii) that the value of such shares represent at least 50% of the value of all the assets owned by the company. Both these requirements must be cumulatively fulfilled. 7.5 On this issue of Indirect Transfer, Circular No.41 of 2016 of the CBDT (FT&TR Division) vide letter F.No.500/43/2012 - FT& TR, clarifies the above provision as under: Under the indirect provisions contained in section 9(1)(i) of the Income Tax ( Act ), all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or 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 directly or indirectly by a company or entity registered and incorporated outside India. 10AAR/1232/2012
7.6 To ascertain the position of the Applicant vis-a-vis the above requirements, it is required to examine the value of the total assets of Bock GmbH as also the value of its 100% holding in Bock India. 7.6.1 The Applicant has filed a detailed Valuation Report before us in the course of these proceedings. The same is prepared by Deloitte Haskins and Sells LLP, dated 27 September 2017, and is with regard to the Fair Market Valuation of Bock India, known as GEA Refrigeration India Pvt. Ltd. after the acquisition, for the valuation date 31 December 2010. As regards the overall assets of Bock GmbH, in its Paper Book, the Applicant has filed a calculation of the Preliminary Basic Purchase Price at which the entire shareholding of Bock GmbH was acquired, and which is considered the total value of Bock GmbH. The values so worked out as per the Valuation Report and the formula prescribed in the Rules, respectively, and the ratios obtained are given in the chart below: Ratio of Value of Assets of Bock India to Assets of Bock GmbH Germany (Amount INRmn.) Particulars Low Medium High Fair Market Value (FMV) of Bock India (A) 132.5 136.7 141.0 FMV of Bock GmbH (B) 2,533.0 2,533.0 2,533.0 Percentage value of Bock India over Bock Gmbh (A/B) 5.23% 5.40% 5.57% It is submitted by the Applicant that the above values are without considering the liabilities of Bock GmbH. If the same were also considered, the ratio will go down further. 7.6.2 On perusal of the valuations submitted we are of the view that the report from the independent valueris a detailed one and can be relied upon, especially in view of the fact that the value of the assets of Bock India against 11AAR/1232/2012
the total assets of Bock GmbH ranges between 5.23% to 5.57% of the value of Bock GmbH, which is miniscule,as against the requirement of 50% mentioned in Explanation 6. Even some variation in the valuation, as apprehended by the Revenue, is unlikely to enhance this ratio to the extent that it can be classified as substantially derived. In fact the same may only go down when the liabilities of Bock GmbH are taken into account. Be that as it may, we hardly need to emphasise, that this Ruling is based on the facts and figures brought before us, and if subsequently the same 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 concludethis 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 90(2) of the Act, the Applicant would be entitled to take advantage of the provision that was more beneficial to it. However, since a reference to the same has been made in the questions raised before us, we have chosen to deal with the same. 12AAR/1232/2012
7.8.1 Article 13 of the India Germany DTAA, and specifically paragraphs 4 and 5 thereof, read as under: ARTICLE 13 CAPITAL GAINS 1... 2... 3... 4. Gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that State. 5. Gains from the alienation of any property other than that referred to in paragraphs 1 to 4 shall be taxable only in the Contracting State of which the alienator is a resident. 7.8.2 However, as far as the above provisions in the DTAA are concerned, especially paragraph 4 of Article 13, since the 9 sellers, being the shareholders of Bock GmbH; and the buyer, GEA Refrigeration Technologies GmbH, that is the Applicant, as per the Share Purchase Agreement of 16 December 2010 (an English translation of which has been filed), are alltax residents of Germany, the transfer has been affected in Germany, and the payments have also been made in Germany, the gains arising from the alienation of shares by the shareholders of Bock GmbH can be brought to tax only in Germany. Even if a view was taken that some other rights were transferred, other than shares, though we do not endorse that view in view of the decision in the case of Vodafone cited by the Applicant, then paragraph 5 of Article 13 would come into operation, and then again tax could be charged only in the country of the alienator, ie. the shareholders of Bock GmbH, that is in Germany. 13AAR/1232/2012
7.8.3 A view could be possible that since the shares of Bock GmbH were sitting in Bock India, that is in India, and got indirectly transferred to the Applicant in Germany when it acquired Bock GmbH, gains arising from the same could be taxed in India. However, it is seen that a similar matter under similar provisions of the DTAA, was decided in the case of Sanofi Pasteur Holding SA (AP), 354 ITR 316, 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. 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 per expressions used in section 195 itself, there will be no obligation to withhold tax. Respectfully following that decision, we have been consistent in holding that there is no obligation on an Applicant to withhold tax in a case, as 14AAR/1232/2012
the one in hand, when we have ruled that the gain arising from the alienation of shares was not chargeable to tax in India. 9. In conclusion, the questions referred to us for our Ruling, are answered as under: 9.1 Questions no. (i): No, the income derived by the shareholders from the sale of shares of Bock GmbH would not be chargeable to tax in India under the provisions of the Income-tax Act, 1961 read with the provisions of the India Germany DTAA. 9.2 Question no. (ii): No, there will be no obligation to withhold tax under section 195 of the Act. The Ruling is accordingly given and pronounced on this 28 th day of November, 2017. Sd/- (Ashutosh Chandra) Member(Revenue) Sd/- (R.S.Shukla) In-charge Chairman 15AAR/1232/2012