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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 ..... er 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 in the following companies: (i) Bock Holding, Germany (ii) Bock Compressors Hangzhou Co. Ltd., China ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chever 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 assets located in India where value of Indian assets on the specified date: (i) exceeds INR 100 mn [approx. USD 1.5 MN], and (ii) represents at least 50% of the value of all the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustralia, 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 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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". 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 7.8.1 Article 13 of the India Germany DTAA, and specifically paragraphs 4 and 5 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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