GEA Refrigeration Technologies GmbH
AAR No. 1232 of 2012
Date of Order: 28th November,
2017
The Taxpayer, a foreign company, acquired
100% shares of another foreign company (FCo1) from foreign shareholders
(Sellers). FCo1 was a family owned company having investments in many countries
including a wholly owned subsidiary in India (ICo). Pursuant to acquisition of
shares in FCo1 by the Taxpayer, there was an indirect change in ownership of
ICo.
From the valuation of the assets of FCo1
undertaken by an Independent valuer, it was found that ICo contributed in the
range of 5.23% to 5.57% to the value of total assets of FCo1.
Taxpayer as a buyer sought an advance ruling
to determine the taxability of transaction in the hands of the Sellers in terms
of indirect transfer provisions u/s. 9(1)(i) of the Act and India-Germany DTAA
and its consequential withholding
obligation.
The facts are pictorially reproduced as
follows:
Held:
– Under the Indirect transfer provisions of
the Act, gains arising from a transfer of a share or interest in a foreign
company/ entity that derives, directly or indirectly, its value substantially
from assets located in India is taxable in India. For this purpose, share/
interest is deemed to derive its value substantially from assets located in
India if the value of Indian assets: (a) exceeds INR 10Cr; and (b) the value
represents at least 50% of the value of all assets owned by the foreign
company/ entity.
– Where value contribution of ICo to the value
of total assets of FCo1 is minuscule as against the substantial value
requirement of at least 50% provided in the Act, then shares in FCo1 cannot be
said to derive substantial value from shares in ICo to trigger indirect
transfer provisions in India. Hence, income arising on account of transfer of
such shares in FCo1 cannot be taxed in India.
– As per India-Germany DTAA, gains derived
from transfer of shares of a company which is a resident of Germany may be
taxed in Germany. Further the capital gain article contains a residuary clause,
in terms of which the gains which other than the gains from transfer of assets
specified in the other clauses of capital gain article is taxable only in the
resident state.
– Since the income from transfer is not
taxable under the Act itself, the provisions of the DTAA becomes academic.
– Without prejudice, since the Taxpayer as
well as the Sellers were tax residents of Germany, transfer and payment for the
transaction was completed in Germany, capital gains arising from the transfer
of such shares by the shareholders of FCo1 would be taxable only in Germany as
per India-Germany DTAA.
– Even if one were to argue that transfer of
100% shares results in transfer of controlling interest, transfer of such
rights would be taxable only in the resident state i.e Germany in this case.
Since the transfer is not taxable in India, there will be no obligation on the
Taxpayer to withhold taxes.
