India: AAR Holds Indirect Transfer Tax Inapplicable To Sale Of Shares Of A German Company

Last Updated: 30 January 2018
Article by Shashwat Sharma and Shipra Padhi
  • AAR holds that the German company does not derive its value substantially from Indian assets as the prescribed threshold of 50% of value was not met.
  • Applies the India-Germany tax treaty to confirm no Indian tax consequences
  • Reaffirms that withholding tax provisions are not applicable when income is not taxable in India.

Recently, the Authority for Advance Rulings ("AAR") in the case of GEA Refrigeration Technologies GmbH, In re,1 ruled that the income derived by German shareholders from the sale of equity shares of a German company (holding shares of an Indian company) to another German purchaser is not chargeable to tax in India under the provisions of the Income Tax Act, 1961 ("ITA") read with the provisions of the India Germany Double Taxation Avoidance Agreement ("Treaty").


The applicant before the AAR in this case, GEA Refrigeration Technologies GmbH (the "Taxpayer"), is a German company and a part of the GEA Group AG, one of the largest system providers for food and energy processes.

In order to grow its business by gaining access to a wider range of cooling applications and to enhance the know-how with regard to environment friendly solutions, the Taxpayer entered into a Share Purchase Agreement dated December 16, 2010 to acquire an unrelated German company, Bock Kaltemaschinen GmbH ("Bock Germany") at a purchase price of Euro 40,504,000 (approximately INR 2533 million, as on 31 March 2011) (the "Transaction"). This purchase consideration was paid to the shareholders of Bock Germany, all of whom are German residents.

Bock Germany held 100% of the equity shares of its Indian subsidiary, Bock India Private Limited ("Bock India"), an operating company with manufacturing facilities in India. In addition to Bock India, Bock Germany held investments in several group companies in Europe and the Asia Pacific region.

The Taxpayer had obtained a fair market valuation report which valued the shares of Bock India at INR 136.7 million (as on December 31, 2010), while the total value of Bock Germany was determined to be INR 2544 million.


The Taxpayer filed an application before the AAR regarding the below questions relating to the tax treatment of the Transaction in India:

  1. Whether the income derived by the shareholders of Bock Germany from the sale of shares of Bock Germany is chargeable to tax in India as per the provisions of the ITA read with the Treaty?
  2. Whether the Taxpayer is liable to deduct tax at source on the payments made by it to the shareholders of Bock Germany as per the provisions of the ITA read with the Treaty?

Analysis of the key provisions:

After the Supreme Court of India issued an order in favour of the taxpayer in the landmark Vodafone BV International Holdings v. Union of India case,2 the Indian Government had amended the Section 9 of the ITA to include indirect transfer provisions which "clarify" that if an asset, being a share or interest in a company or entity registered or incorporated outside India, derived its value, directly or indirectly, substantially from an asset situated in India, the gains arising from the transfer of such share or interest would be taxable in India, with retrospective effect. As per Explanation 6 to section 9(1)(i) of the ITA, 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:

  1. exceeds INR 100 million; and
  2. represents at least 50% of the value of all the assets owned by the foreign company or entity.

Based on a sustained and loud outcry from the industry and various stakeholders, these provisions were further modified to include a de minimis threshold along with further clarifications. Detailed rules on the valuation aspects of indirect transfers have been put in place under Rule 11UB of the Income Tax Rules, 1962.

The indirect transfers provisions continue to remain a matter of concern for foreign taxpayers, and have been discussed in our hotline on the recent circular issued by the Central Board of Direct Taxes on the subject which may be accessed here. It is in this backdrop that the AAR has pronounced this ruling.


Non-Applicability of Indirect Transfer Provisions: The AAR relied upon the fair valuation report submitted by the Taxpayer which clearly brought out the fact that Bock Germany derived only 5.40% of its total value from Bock India with the rest of its value being derived from its holdings in other subsidiaries. This valuation report was consistent with the formula prescribed under Rule 11UB of the Income Tax Rules, 1962. Since this figure was far short of the threshold of 50% mentioned in Explanation 6 to Section 9(1)(i) of the ITA, the AAR held the indirect transfer provisions under the ITA should not apply to the Transaction.

Interestingly, while the tax authorities admitted that these figures along with the positions taken by the Taxpayer may be correct, they contended that in case any discrepancy was subsequently found in the valuations (leading to the conclusion that the threshold of 50% was being met), the assessing officer should be entitled to act as per the provisions of the ITA and not as per the ruling of the AAR. The AAR agreed with this contention on the basis that the ruling was being given in respect of a specific fact-pattern and would not be valid for another set of facts.

Taxation under the Treaty: The AAR also examined the relevant provisions of the Treaty to examine whether the Transaction would lead to any Indian tax consequences. Article 13(4) and 13(5) of the Treaty read as follows:

"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."

In the instant case, it was not disputed that the company whose shares were being alienated, i.e., Bock Germany, was resident in Germany. Also, all the 9 selling shareholders of Bock Germany, as well as the Taxpayer, were German residents and the payment of the purchase consideration was also made in Germany. As a result, the AAR held that the Transaction could only be taxed in Germany as per Article 13(4) of the Treaty.

With respect to the application of Article 13(5) of the Treaty to the facts of the instant case, the AAR referred to the judgement of the Supreme Court of India in the Vodafone case (Supra), where it was held that controlling interest does not constitute a capital asset distinct from the shares, to hold that the instant case simply involved a transfer of shares which would not attract Article 13(5). The AAR further clarified that even if it were to accept a view that some other rights other than shares were transferred, to apply Article 13(5), tax could still only be charged in the country of the transferor (the shareholders of Bock Germany) i.e., Germany. Therefore, even on this ground the gains arising from the Transaction could not be brought to tax in India.

The AAR placed reliance on the judgement of the Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance3 in this regard, which had a similar fact pattern and required an analysis of the India-France tax treaty. In Sanofi, it was held that the transfer of shares was not taxable in India owing to Article 14(6) of the India-France Double Tax Avoidance Agreement. This Article 14(6) is analogous to Article 13(5) of the Treaty and provides that in case of a transfer of shares other than those covered in the other paragraphs, the country of which the alienator is the resident shall have the right to tax.

No Applicability of Withholding Tax provisions: The AAR placed reliance on the judgment of the Supreme Court of India in the case of GE Technology Centre P. Ltd. v. CIT,4 and held that since it had already concluded that the capital gains arising out of the Transaction are not taxable in India, the question of applicability of Sec 195 of the ITA does not arise.


Given the concern and uncertainty persisting in the minds of non-resident taxpayers on account of the indirect transfer provisions of the ITA, this ruling from the AAR is most certainly a welcome one. Importantly, it re-iterates the position laid down by the Andhra Pradesh High Court in Sanofi (supra) that if a particular transaction involving the indirect transfer of an Indian company is covered by a tax treaty, the provisions of Section 9(1)(i) will no longer apply. Further, where it is clearly demonstrated through a fair market valuation report that a foreign company does not derive it value substantially from assets located in India, the Indian courts will not apply the indirect transfer provisions to a transfer of shares of such a company. However, the AAR cannot delve into a question which involves determination of fair market value of any property due to the bar under Section 245R of the ITA. While this aspect has not been dealt with in detail in the ruling, the AAR has clarified that the ruling is based on the facts presented in terms of the valuation, and will not apply to all factual circumstances.

The ruling should boost confidence amongst non-resident taxpayers and remove some of the uncertainty surrounding the application of these provisions once the valuation of the company whose shares are being transferred is examined.


1 A.A.R. No 1232 of 2012

2 Vodafone BV International Holdings v. Union of India [2012] 6 SCC 613

3 [2013] 354 ITR 316 (Andhra Pradesh).

4 327 ITR 456 (SC).

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions