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TMI Blog2018 (1) TMI 945X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - A.A.R. No 1232 of 2012 - - - Dated:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, 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: 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. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/qualified by 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 India do not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the same has been made in the questions raised before us, we have chosen to deal with the same. 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 all tax 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 Germa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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