India: Tax Treaty Benefits Available In The Case Of Indirect Transfer Of The Shares Of An Indian Company

Last Updated: 25 January 2018
Article by SKP  

Recently, in the case of GEA Refrigeration Technologies GmbH [1], the Authority for Advance Rulings (AAR-New Delhi) held that the indirect transfer of the shares of an Indian entity is not taxable in India as the value of Indian assets was less than 50% of the value of all the assets owned by the taxpayer.

AAR also held that the India-Germany Tax Treaty benefits would be available even in the case of indirect transfer of Indian assets.


  • The taxpayer, a German company, entered into a Share Purchase Agreement for the acquisition of an unrelated German company, Bock Kaltemaschinen GmbH (Bock GmbH). The sale consideration for the transaction was EUR 40.50 million (i.e. INR 2,533 million).
  • Bock GmbH has a subsidiary in India (Bock India). Furthermore, it also has subsidiaries in Germany, China, England, Czech Republic, Singapore and Malaysia. It also holds majority voting rights in a Thai company and a minority stake in an Australian company.
  • The share purchase of Bock GmbH resulted in the indirect transfer of the shares of the Indian subsidiary of Bock GmbH (Bock India).


  • Whether the transaction for the acquisition of Bock GmbH by the taxpayer can be subjected to tax as an indirect transfer according to Section 9(1)(i) of the Indian Income Tax Act, 1961 (Act).
  • Whether the taxpayer can avail relief under the India-Germany Tax Treaty in the case of indirect transfer of shares.
  • Alternatively, whether the taxpayer is liable to withhold tax at source under Section 195 of the Act on the payments made by it to the SHS of Bock GmbH on the account of the purchase of shares from them.

 Taxpayer's contentions

  • In respect of the indirect transfer of shares, the taxpayer contended that the value of Indian assets (Bock India) was less than 50% of the overall value of Bock GmbH. Accordingly, the indirect transfer provision does not trigger as the taxpayer does not satisfy the twin conditions provided under the Indian laws to tax an indirect transfer of shares.
  • Alternatively, it was also argued that as per the provisions of Article 13(4) of the India-Germany Tax Treaty, any transfer of shares by a German tax resident would be taxable only in Germany.
  • Furthermore, it was also argued that controlling interest does not constitute a distinct capital asset and hence, only the transfer of shares has to be considered. The taxpayer also contended that even if the Indian Revenue Authorities took a view that some controlling interest was transferred, then too such interest should not be taxable in India as per the provisions of Article 13(5) of India-Germany Tax Treaty. Article 13(5) of India-Germany Tax Treaty provides that in the case of transfer of any property other than shares (as referred to in Article 13(4)) by a German resident would be taxable only in Germany.

 Ruling of AAR

  • The AAR observed that based on the valuation report issued by the third-party accountant, the value of the Indian assets was only in the range of 5.23% to 5.57% in comparison to the requirement of 50% provided under the Indian tax laws. Accordingly, the AAR held that shares of Bock GmbH did not derive its value substantially from its subsidiary in India and hence, the provisions of indirect transfer are not applicable.
  • The AAR held that the taxpayer is eligible to be governed by the provisions of the Indian Income Tax Act or tax treaty, whichever is beneficial. Furthermore, the AAR also held that indirect transfer of shares of the Indian company would be taxable only in Germany as per the provisions of Article 13(4) of India-Germany Tax Treaty. Furthermore, the AAR also placed reliance on the decision of the Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA [2], wherein it was held that indirect transfer of Indian company's shares by a French Company to another French Company would be taxable only in France as per the provisions of India-France Tax Treaty.
  • The AAR also held that it disagrees with the view that in case of transfer of shares, some other rights are also transferred. However, it held that even if some other rights are also transferred, the same would still be taxable only in Germany as per the provisions of Article 13(5) of India-Germany Tax Treaty. 
  • In light of the above, the AAR held that the liability to withhold tax does not arise as the sum so paid was not chargeable to tax in India. In this regard, reliance was placed on the decision of GE Technology Centre P. Ltd. [3]


[1] AAR No. 1232 of 2012

[2] 354 ITR 316 (AP)

[3] 327 ITR 456 (SC)

SKP's comments

This ruling by the AAR clarifies the position that tax treaty benefits would be available in the case of indirect transfer. Global investors planning overseas acquisition, having an Indian limb, would now have tax certainty as they would be in a position to avail tax treaty benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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