CASE LAWS

2018-TII-04-ARA-IT

MICHELIN TAMIL NADU TYRES PVT LTD: AUTHORITY FOR ADVANCE RULINGS (Dated: December 19, 2017)

Income Tax - Sections 9(1)(i) & 195 - India-France DTAA - Article 5.

Keywords: Business connection - Composite contract - Equipment purchase contract - offshore contract - Protocol - PE - Principle of apportionment - supervisory services - Service PE - territorial nexus.

Whether the expression 'business connection' in Section 9 is contemplated to be direct and real to determine the incidence of taxability - YES: AAR

Whether if the goods are to be consumed within India, the sale of goods outside India would not give rise to any taxable income in India - YES: AAR

Whether when there are two clearly demarcated contracts of offshore equipment supply and onshore services from which income arises and both are distinguishable, no income arising from such offshore contract can be held to be chargeable to tax in India - YES: AAR

Whether when the group company of the applicant sets up a Service PE for carrying on its supervisory activities through its personnel at the fixed place, payments received from the applicant would be liable to withholding tax provisions u/s 195 - YES: AAR

The applicant is the Indian subsidiary of a French MNC. The Applicant is Chennai-based resident company. From the year 2009-10, it started taking steps to set up a factory for production of Bus and Truck tyres and also a manufacturing facility for mixtures and semi-finished products necessary for the production of tyres. For this purpose it entered into an Umbrella Agreement as an "Equipment Purchase Contract" on 1 April 2011 with M/s. Manufacture Francaise des Pneumatiques Michelin (MFPM), a closely associated group company, for design, engineering, manufacturing, inspection and packing, forwarding and dispatch from outside India of machinery and equipment for setting up its new manufacturing facility in India. MFPM is a company incorporated under the laws of France and is a tax resident of France. MFPM would supply the equipment in three phases. As regards Phase I, the total price for the equipment is stated as EURO 9,31,90,452 (approx. INR 580 cr) and the purchase of the same was completed upto February 2013. Further, supply of equipment under Phase II and Phase III have not yet started. Subsequently it also entered into a Services Agreement on 1 February 2013, for providing supervisory services during installation, with Michelin France, after the supply of machinery and equipment was completed and after installation work had commenced. These installation services were rendered by different third party suppliers.

The Applicant sought a Ruling for taxability and withholding obligations on the payments made for off-shore supply of equipment to MFPM. It has also taken support from various cases to argue that on the facts of the case, the payments made to MFPM towards offshore supply of equipment cannot be taxed in India.

The thrust of Revenue's contention was that the supply of equipment as well as the services rendered outside India (design engineering) and also the services rendered within India (supervision charges) constituted a composite contract. As the supply of the equipment and its installation in India was in 3 phases over a period of seven years, the supplying foreign company can be said to have a permanent establishment in India in terms of Para 3 of Article 5 of India-France DTAA. The stand of the Department was that the income arising to MFPM France from supply of the equipment and their installation in India was taxable in India in the hands of its permanent establishment, as also within the meaning of section 9(1)(i) of the Act.

The AAR held that,

+ from a perusal of the Ocean Bill of Lading issued by transporting container company, in the name of Michelin India, describing the equipment being shipped from Shanghai to Michelin India and a copy of the Bill of Entry issued by Indian Customs in favour of Michelin India describing equipment imported from MFPM, it is clear that the title in the property was transferred outside India. The sample copies of Bill of Lading, Purchase order and Invoice also show that the delivery of the equipment took place outside India on FOB basis. The consideration for supply of plant and equipment was paid by Michelin India to MFPM in Euros to a bank outside India. All the custom duties and other charges levied at the port of importation were borne by Michelin India. Further, MFPM obtained transit insurance policy for supply of equipment till the port of Chennai on behalf of Michelin India, and also the risk and rewards were transferred to Michelin India at the port of shipment. It was clearly an offshore equipment supply contract;

+ the Transfer Pricing Officer (TPO) has accepted that the payment for such import of equipment from MFPM is at arm's length in the Transfer Pricing assessments for the year ended on 31 March 2012, 31 March 2013 and 31 March 2014, when such transactions were before him. This is clearly indicative that the price paid is only for the equipment, and cost and services related to such manufacture, prior to shipment, and is not for installation or any services post shipment or other than those covered by the Umbrella Agreement, as alleged by the Revenue;

+ the second agreement is the Service Agreement, which as per its terms, was to supervise the installation services at the factory premises, and to coordinate the start-up and ramp-up services rendered by those suppliers. But there is no mention in this agreement also regarding any installation services to be provided to the Applicant by the MFPM personnel, and in the absence of any evidence being brought on record, it cannot be assumed that the personnel sent by MFPM under this Agreement were involved in installation work. Revenue's submission that the installation would have been done only by MFPM personnel to whom payment would have been made as part of the Administrative expenses, is also merely an assumption and bereft of any evidence whatsoever;

+ 'Schedule II - Price List' of the Equipment Purchase Contract 2011, gives the details of the equipment purchased from MFPM. It is seen that most of these are not huge and complex machines that require manufacturing personnel to install. Most appear to be pre-fabricated, shipped as such in plywood cartons (as the invoices suggest) and ready to use. These were fabricated and assembled in France itself or other places through third party suppliers of MFPM, and for which the Applicant has been billed, being within the scope of "Schedule 1 - Price Computation" of the Umbrella Agreement. The cost worked out as incurred by MFPM for being charged to the Applicant is mentioned in the Agreement itself, and includes full engineering costs, full production and external purchase costs of the equipment, designing, project steering, transportation, administrative costs relating to production and sales, supervision and short term financing etc. That is, cost involved in their production and till the time of shipment. There is no mention of any installation cost included or charged with the price, nor any evidence has been brought on record, to this effect. In this situation their installation by the Applicant through its employees, expats and third party contractors under the supervision of MFPM personnel seems a realistic assertion by the Applicant;

++ as regards the qualifications of the 169 Indian employees and 79 Expats involvement in installation and commissioning, Revenue's questioning their competence is rather sweeping. Such evaluation can only be done by a technical person at the factory. Most of the personnel are Engineers, and the rest are mostly Managers. The expats employed by the Applicant on a long term basis are mostly Engineers, technical persons, maintenance personnel, quality managers etc. who have been employed from inception to assist in the installation stage and later in production, as stated by the Applicant. They are specialists drawn from different countries, such as from UK, USA, Italy, Netherlands, Germany, Romania, Canada, France, Poland, Hungary, Spain etc.We do not find any material brought on record to suggest that all these technical people did not do installation work or that they were not qualified enough. Only a broad assumption has been drawn by the Revenue, which appears not to be accurate and is bereft of any evidence;

++ on the other hand, 33 technicians visited India for short durations and Michelin India paid an amount of about Rs 9.95 crore to MFPM in respect of services of supervision rendered by them, as per the Service Agreement. Revenue has not brought on record anything to establish that they were involved in installation or were paid for that purpose, nor do the agreements show this. Considering the large scale of the project spread over 100 acres, it is highly improbable thatthe work could have been completed by just 33 technicians from MFPM, when they have stayed for very short periods. There is no evidence also to show that more such MFPM technicians had visited India, or payment made for more personnel. It appears therefore, that installation was done by the third parties, local technicians and expats employed by the Applicant on long term basis only, trained at a high cost, under the supervision of the 33 MFPM specialist technicians who were paid Rs 9.95 crore for the same;

+ it has to be said that, as held in the case of Linde AG 2014-TII-14-HC-DEL-INTL, in this case also the subject matter of taxation was not the contract between the parties but the income that MFPM derived from the contract. Thus, the situs of the object of the contract would not be as relevant as determining the situs where the income of the applicant had accrued or arisen. In this connection, we may add that though various cases have been cited by both sides on the issue of composite contracts, we are of the view that the number of contracts or parties to the contract are of limited significance. What is important is whether from the contracts and activities undertaken thereunder, in the normal course of business, the taxable events and the situs of income are clearly determinable or not, and whether they can clearly demonstrate a business connection under section 9 of the Act, and taxability under sections 4 and 5 of the Act. Where this becomes difficult, for reasons of blurred connecting points in the chain of events, overlapping arrangements, unclear terms and obligations, intermixed pricing, or unsegmented continuity etc., being some of the illustrative examples, the need to treat the entire arrangement of multiple contracts as composite may become necessary. That is, even if there are fewer parties and fewer segments, if the income generating events are not crystal clear, we may have to treat the entire contract as composite for the different segments. Or, also if the case is one which is designed for tax avoidance, it may be needed to look through the whole arrangement;

+ the Applicant has made payments of about Rs 580 crore for the offshore supply of equipment under the Umbrella Agreement. There is no way that it can be contended that since MFPM had a role in the supervision of setting up the same, the transfer of the property extended beyond the shores of France such as to have income arisen or accrued in India. The point at which the property is passed to the Applicant, on the shore of the supplier country, the taxable event in respect of such supply of equipment is over, there itself. Business connection through supervision on the Indian premises later has no connection with this supply, and there is no justification to mix up the considerations received by MFPM from its offshore supplies and onshore services, as held by the Delhi High Court in the case of LG Cable. In the instant case, there is no such point of contact in these two acts of supply and services that make it difficult for us to set apart the non taxable and taxable events, ie. Offshore supply, onshore supply and installation and on shore supervision, each being clearly demarcated. We had similarly held in LS Cable Ltd. that when the prices for the equipment were clearly specified, as in the instant case, it can be well separated from the whole. Such segregation may be essential also, as held by the Supreme Court in Huyndai Industries Co. Ltd., to separate the PE from the other transactions so that income can be correctly attributed to the PE. The business connection as contemplated under Section 9 of the Act has to be direct and real. In the present case, the sale of goods, simplicitor, outside India would not give rise to any taxable income in India even though the said goods are to be utilized within India. Hence, no part of the income from the offshore supply of equipment can be brought to tax in India, on the facts of this case;

+ in both the cases of Ishikawajima Harima (SC) as well as Linde AG (Del), which followed Ishikawajima Harima, there was a single composite contract but the project was undertaken by several different parties coming together on turnkey basis. The instant case is actually on a better footing in that here there are only two parties, apart from the third parties engaged in manufacture, supply and installation, there are two clearly demarcated contracts, the events from which income emanates are distinguishable, one is for offshore supply and the other for onshore services, there is no overlap or haziness about the activities undertaken such that make apportionment of income difficult. In view of this position, respectfully following the decision in the case of Ishikawajima Harima, we are clear that no income arising in the hands of MFPM from the offshore supply of equipment can be held to be chargeable to tax in India, under the Income tax Act 1961;

+ by the same reasoning under the provision of Sec 9, we have to hold that income derived from the discharging of its obligations by MFPM, namely provision of services of supervision in India at the factory site where the plant has been set up, is chargeable to tax in India as the income arising therefrom can be said to have arisen or accrued in India. There is a direct and real nexus between the terms of the contract, the activities of supervision undertaken at the site, and hence the income earned in India through the provision of the services and would be covered by section 9, as a business connection clearly exists between these supervisory services and the business of MFPM of assisting in setting up of manufacturing units in the field of bus and truck tyres. In fact, a service PE is also formed since the MFPM is carrying on its supervisory activities through its personnel at the fixed place,that is the factory premises, and this income can be fastened to this PE. Hence, the payments made by the applicant to MFPM's 33 supervisory staff and engineers, amounting to Rs 9.95 crore, would be chargeable to tax in India, and would also attract the provisions of section 195 of the Act.

Application partly ruled in favour of Applicant

 

2018-TII-03-ARA-IT

PRODUCTION RESOURCE GROUP: AUTHORITY FOR ADVANCE RULINGS (Dated: November 8, 2017)

Income tax - Sections 9(1)(vii) & 90 - Article 12 of DTAA between India-Portugal & India-Belgium DTAAs - Articles 7 & 12.

Keywords - FTS - fees for technical services - make available - on site space - PE - permanent establishment - turnkey contract - technical service & withholding tax liability

The Applicant, a company registered in Belgium, is engaged in the business of providing technical equipment and services for events including lighting, sound, video and LED technologies. It entered into a Service Agreement with the Organizing Committee of the Commonwealth Games, Delhi, for a term of four months, to provide, on a turnkey basis, the lighting and searchlight services during the opening and closing ceremonies of the Commonwealth Games Delhi, 2010. As a consideration, OCCG agreed to pay fees of USD 3.5 million, inclusive of the withholding and service tax, in installments. Four invoices were raised, of which payments were made against three, after withholding tax at source, and issued a certificate u/s 203 in form number 16A. Since, the employees and equipments of the Applicant were in India for a period of only 66 days for preparatory, installation and dismantling of equipment, the Authority had been approached seeking ruling on the taxability of payments received/to be received by the Applicant for rendering such lighting services to the OCCG, in view of the India Belgium DTAA r/w India-Portugal DTAA.

It was the stand of the Applicant that the services supplied by it were of standard nature involving operation of a normal facility and not a technical service as postulated in Explanation 2 to section 9(1)(vii). In any event, even if technology was regarded as having been used by the applicant, this should not make it fees for technical services. It was urged that even if rendering of lighting and searchlight services to OCCG were to be taxable in India under the provisions of the Act, the same would not be taxable in view of the India Belgium DTAA r/w India Portugal DTAA. Referring to Article 12 of the India Portugal DTAA, where the domain of "FTS" was confined to cases where the service was made available to recipient to enable the latter to apply the technology, the Applicant contended that the payments received by it were not fees for technical services. It was also submitted that even if the beneficial owner of the royalties and fees for included services was a resident of the other contracting State, the tax so charged should not exceed 10% of the gross amount. As per the Applicant, such payments could only be taxed as 'business profits', and they could be taxed in India only if the Applicant had a PE or business connection in India. It was therefore submitted that the said payments were completely saved from Indian taxation by virtue of the provisions of the DTAA. Hence, by virtue of Section 90(2) of the I-T Act, even if it was assumed, while denying, that the said payments were taxable under the provisions of the Act, they would not be liable to Indian taxation by virtue of the more beneficial provisions of the DTAA.

The Revenue Department however opposed the contentions of Applicant, by observing that the Applicant had a PE in India, and therefore, its income was also assessable as 'Royalty'.

On application, the AAR held that,

Whether 'space' placed at disposal of a 'foreign resident' with exclusive right of access, controlled by it and used for its business, is sufficient to be treated as "PE" - YES: AAR

Whether 'attachment to soil' is crucial for treatment of any erection of a foreign entity as 'PE', if it forms an intrinsic part of its income generating apparatus, and remain at a particular site - NO: AAR

+ it is an admitted position that the Applicant is engaged in the business of providing technical equipment and services for events including lighting, sound, video and LED technologies. In providing these services, it has to do all related activities, such as abiding by and obtaining all authorizations, permits and licenses; engaging personnel with the requisite skills, ensuring their availability; supply and / or procure all necessary equipment for its business; subcontracting; and shipping and loading, insurance etc. For carrying such activities, over which it has full right and power to perform, the Applicant has been provided among other facilities, office space as well as on-site space. Further Applicant and its subcontractors’ has been provided with lockable space for storing its tools and equipments inside the Stadium. This space is not merely for storage alone, but it is for carrying out the business itself, and hence cannot be discarded. Thus, as long as there is a space placed at its disposal with exclusive right of access, controlled by it and used for its business, it would form a PE. The Applicant’s plea that it had no place where it could otherwise enter and make use of in the premises of Delhi 2010 and have control over, is thus not found to be correct. In fact, coupled with the space, the lighting facilities created and erected by the Applicant would also be part of the place of business as it is not necessary that they may be fixed to the soil, as long as they form an intrinsic part of its income generating apparatus, and remain at a particular site. As pointed out by the Revenue, that the various clauses therein indicate the tasks performed by the Applicant, including providing 3 phase supply, multiple synchronized generators, mains distribution and mains cabling, till its equipments were handed over or shipped. All these were part of the turnkey project, and hence to say that it provided services only during the opening and closing services, is incorrect;

Whether factum of a foreign company entering into contracts for purpose of its business in a contracting state, and employing technical and other manpower for use at its site, is sufficient to conclude extension of foreign entity on Indian soil - YES: AAR

Whether income arising to Belgium entity from its PE in India, is chargeable to tax in India as business income, and will be dealt with as per provisions of Article 7 of India Belgium DTAA - YES: AAR

+ there are some other clauses in the Agreements also, which indicate that the Applicant had a PE in India. One is that the Applicant subcontracted some of its activities. In our view this is clearly indicative of the fact that the Applicant had an address, an office, from which it could call for and award subcontracts. It is difficult to assume that without any premises under its control, it could hire and house key technical and other personnel, who would need regular and ongoing instructions during the entire period. Similarly, the fact that it was mandatory for the applicant to acquire all authorizations, permits and licenses is indicative of the fact that it had a definite place at its disposal, as it could otherwise not be made liable for any default in the absence of the same. In conclusion it has to be said that the Applicant had indeed met each of the criterion for establishing a PE, namely place of business, power of disposition, permanence of location, business activity and business connection which cumulatively and collectively are the sine qua non of a PE. In view of this position, the Applicant’s income arising from this PE was chargeable to tax in India as business income, and will be dealt with as per the provisions of Article 7 of the India - Belgium DTAA. This income is also covered within the meaning of section 9(1)(i) of Income tax Act, since the same has arisen and accrued from a business connection, which is wider in scope than a PE, and from a source in India. Since it is held that the income of Applicant is taxable in India having been earned through a PE, as also under the Income tax Act, yet, it is important to know, whether the same would be taxable in India as Business Profits, or as Royalty and FTS earned through that PE;

Whether consideration received by foreign entity for rendering lighting services in India, will constitute "royalty", when there is no assignment of any right to use technical knowhow & expertise - NO: AAR

Whether such consideration can be treated as 'fees for technical services', in the absence of transmitting any technical knowledge such that the recipient can derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider - NO: AAR

+ the term "royalties" as used in Article 12 of the India Belgium DTAA, means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or scientific equipment or for information concerning industrial, commercial, or scientific experience. Referring to Model Conventions, Klaus Vogel in his Double Taxation Conventions, states that in principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. This implies that the intangible asset, the IPR remains with the service provider, but the right to use the same may be granted or let to someone for a consideration, which would be receipt in the nature of Royalty. In the case at hand, the Applicant is providing "services" of lighting/searchlight and also earns rental for the supplied items, installation, maintenance, dismantling etc. Vide the Deed of Assignment, the Applicant assigns to Delhi 2010, all the rights, title and interest, etc. in (a) any materials, works and other subject matter created or supplied by it, and / or by its personnel for use in the Games; and also (b) the results and proceeds of all other activities undertaken in connection with the games. Thus, what has been assigned are the rights to use the final product, the Works, ie. providing equipment and services, including lighting, sound, video and LED etc., for use of the Delhi 2010, and for which the consideration has been received by the Applicant. There is no assignment of any right to use the knowhow, technical experience, skill, processes and methodology, or even the copyright, patent, trade mark, design or model, or any intellectual input comprised therein. Delhi 2010 cannot and does not get to know how they were designed or developed, or acquires any knowledge of any intellectual input, nor is it enabled or empowered to do that work by itself in future. Hence, the payment received as a consideration for the services rendered and equipment etc. supplied does not constitute Royalty;

+ as regards fees for included services, both the Applicant and the Revenue agree that the consideration received did not constitute fees for included services, although for different reasons. We do not agree with the Applicant that the services rendered were of a standard nature, since they were one of a kind, customized for use by a particular customer, Delhi 2010. We also do not agree that they were not technical in nature. As against the use of telephony and cell phone services for use of the public at large, as referred to in the case of Skycell Communications, from which the Applicant has taken support, here is a case where the services of lighting, search lights, LED technology etc. were provided by the Applicant along with technical personnel to operate the same during the opening and closing ceremonies of the games. The same did not involve mere pressing of a button and receiving the service, but were complex and could not be availed without the assistance of highly trained technical personnel, as they were not routine and mechanical, as stated by the Applicant. Also, "rendering" does not necessarily imply going on forever. As long as the Applicant was present in India, it was rendering these services, till the events, starting with the preparatory work, since the laying of cables, switching systems etc. were also highly technical in nature, and were part and parcel of the project. Even if we consider the final product, and the lighting display itself, the same were highly technical, complex and not such that the Delhi 2010 officials and staff could operate them on their own. Hence, the services rendered were in the nature of technical services, as contemplated under the Act. However, when we consider the Applicant’s submission with regard to the provisions of the India Belgium DTAC, read with its Protocol and also read with the DTAC between India and the Portuguese Republic, we cannot escape from limiting the scope of Article 12, as applicable in this case. Since the Treaty with Portugal speaks of "make available", in the context of the definition of “fees for technical services”, the same needs to be imported into the India Belgium Treaty, and the definition of fees for technical services needs to be re-examined in this light;

Whether consideration received by Belgium entity for rendering lighting services under Commonwealth Games, is taxable in India as "Business Profits" as per Article 7 of Indo Belgium DTAA as well as u/s 9(1)(i) of Income tax Act, having accrued and arisen from its business connection and source in India - YES: AAR

+ taking a restricted view of the term, it cannot be said that the Applicant had made available technical knowledge, experience, skill, knowhow or processes, which enable the development and transfer of a technical plan or technical design, and which enable the person acquiring the services to apply the technology contained therein. The services were not made available to Delhi 2010, in a manner that it acquired the knowhow or the ability to use it, or that the service rendered enabled or empowered it to carry out the task in future all by itself. Make available connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider. In this case Delhi 2010 only utilised the services for its events during the Common Wealth Games, and the consideration was paid for the same. Hence, the consideration received by the Applicant for the technical services rendered could not be considered to be in the nature of fees for technical services as referred to in the India Belgium DTAC and the Protocol thereto, as read with the DTAC between India and the Portuguese Republic, which would have otherwise been taxable under Article 12 and Article 7, as the Applicant has a PE in India. In conclusion, since it has been held that the Applicant has a PE in India, within the meaning of Article 5 of the DTAC between India and Belgium, and further that the same was not in the nature of Royalty or Fees for included services, the consideration received by the Applicant for rendering lighting and searchlight services to Delhi 2010, can only be held to be taxable in India as Business Profits, as per the provisions of Article 7, as also under section 9(1)(i) of the Income tax Act, having accrued and arisen from its business connection and source in India.

Partly in favour of Applicant

2018-TII-02-ARA-IT

GEA REFRIGERATION TECHNOLOGIES GMBH: AUTHORITY FOR ADVANCE RULINGS (Dated: November 28, 2017)

Keywords: Finance Act, 2012 - Indirect transfer of shares - Indian subsidiary & Purchase of shares.

The Assessee, a German company of the GEA Group AG (GEA) and also a tax resident of Germany, is engaged in the business of industrial refrigeration. The Assessee had entered into a share purchase agreement to acquire an unrelated German company, Bock Kaltemaschinen GmbH (Bock GmbH), which was a family owned business at a purchase price of Euro 40.50 mn which converted to about Rs. 2533 million and the same was paid to the shareholders of Bock GmbH, all of whom were residents of Germany. Bock GmbH was engaged in manufacturing compressors and condensing units for refrigerators and air conditioners and had subsidiaries and investments in companies in Europe, Asia and Australia. In India the Bock GmbH had a wholly owned subsidiary, Bock India Pvt. Ltd. (Bock India). The Assessee had acquired Bock GmbH, ie. the company which had 100% stake in Bock India, through a share purchase agreement and hence, due to the said acquisition, there was a change in the ownership of Bock India, and indirect transfer of all its shares to the Assessee. Therefore, in the transaction between the two German companies, the shares in the Indian company got indirectly transferred from Bock GmbH to the Assessee.

After hearing the parties, the AAR held that,

Whether the applicant's income is taxable in India if a transferee company fails to derive FMV from its Indian subsidiary and also the requirement of 50% as per explanation 6 to Section 9(1)(i) - NO: AAR

+ the report from the independent valueris a detailed one and can be relied upon, especially in view of the fact that the value of the assets of Bock India against the total assets of Bock GmbH ranges between 5.23% to 5.57% of the value of Bock GmbH, which is miniscule, as against the requirement of 50% mentioned in Explanation 6. Even some variation in the valuation, as apprehended by the Revenue, is unlikely to enhance this ratio to the extent that it can be classified as substantially derived. In fact the same may only go down when the liabilities of Bock GmbH are taken into account. Be that as it may, there is hardly any need to emphasise, that this Ruling is based on the facts and figures brought before us, and if subsequently the same are found to be at variance such as to exceed 50%, the Ruling would not apply to the new set of facts and figures that may come before the Revenue, and it would not be bound by this Ruling;

+ the Assessee's income cannot be brought to tax in India under the provisions of the Act, 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.

Whether the profits arising from the alienation of shares from the non-resident transferee company is chargeable to tax in India read with the provisions of India-Germany DTAA - NO: AAR

Whether therefore, the applicant is entitiled to take the advantage of the provision of section 90(2) of the I-T Act - YES: AAR

Whether there is any obligation to withhold tax u/s 195 even if the applicant's income derived from the sale of shares is not taxable under I-T Act - NO: AAR

+ since it have already ruled 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), the Assessee 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, the same needs a discussion;

+ as far as the 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 Assessee, 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 Germany;

+ even if a view was taken that some other rights were transferred, other than shares, though the same cannot be endorse the said view in view of the decision in the case of Vodafone cited by the Assessee, then paragraph 5 of Article 13 would come into operation, and then again tax could be charged only in the country of the alienator, ie. the shareholders of Bock GmbH, that is in Germany;

+ since the shares of Bock GmbH were sitting in Bock India, that is in India, and got indirectly transferred to the Assessee in Germany when it acquired Bock GmbH, gains arising from the same could be taxed in India. However, it is seen that a similar matter under similar provisions of the DTAA, was decided in the case of Sanofi Pasteur Holding SA (AP), wherein shares of a French company which held 80% shares in an Indian company 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, stands as of date and has to be respectfully followed;

+ as per section 195(1), the liability to deduct arises only if the sum so paid was chargeable to tax. This view was upheld by the Supreme Court in the case of GE Technology Centre P. Ltd. wherein it was held 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 the said decision, it is held that there is no obligation on an Assessee to withhold tax in a case, as the one in hand, when it is already ruled that the gain arising from the alienation of shares was not chargeable to tax in India.

Ruled in favour of Applicant

2018-TII-01-ARA-IT

DIPANKAR MOHAN GHOSH: AUTHORITY FOR ADVANCE RULINGS (Dated: December 22, 2017)

Income tax - Sections 45, 49(1)(ii) & 54.

Keywords: Amendment - Finance(No. 2) Act, 2014 - Long term capital gains - Residential house & Roll over benefit.

The Applicant, an individual, is an NRI and a holder of British Passport and had been regularly assessed to tax in India. As per the Applicant, his deceased father was allotted leasehold rights in residential land admeasuring 2000 Sq. yds in New Delhi and he constructed a residential house there upon. However, he expired on 28 September 2002, leaving a Will, in accordance with which his wife was granted life interest in the property, having no disposable interest, and thereafter upon her demise, the property devolved equally upon the Applicant and the wife of his deceased brother.

Thereafter, the Applicant sold his 50% undivided share in such residential property to one Umra Securities Ltd for a consideration of Rs 85,09,00,000 and after reducing the proportionate expenses and withholding tax and adding other income, net amount of Rs. 69,42,05,025 was remitted to the Assessee in GBP vide RBI approval. Accordingly, the Applicant treated the same as LTCG and filed his return for the relevant AY. Consequently, the Applicant purchased a residential flat in London and accordingly claimed deduction u/s 54 of the Act, amounting to Rs 24,77,86,100 being the INR equivalent of GBP28,64,974 being purchase consideration of leasehold rights for 971 years.

Now, the Applicant filed the application seeking a ruling on the question - whether he was, being an NRI, justified in claiming deduction u/s 54 of the Act to the extent of reinvested amount.

After hearing the parties, the AAR held that,

Whether when before the amendment to section 54 by the Finance (No. 2) Act, 2014, there was no requirement of making the investment in India to take the benefit provided by such section, the assessee is entitled to benefit on purchase of residential house in London, out of the capital gains made in India - YES: AAR

Whether since roll over benefit is applicable on long term capital gains arising from the sale of a capital asset and investment in a residential house, benefit would be available even if such investment is made outside India - YES: AAR

++ the assessee has purchased a residential house in London out of the capital gain on sale of the inherited property in India, within two years from the date of sale and the capital gains. There was no condition mentioned in the Income tax Act at the relevant time that the capital gain arising out of transfer of capital asset should be invested in a residential house situated “in India”. It is only after the amendment to section 54 of the Income-tax Act by the Finance(No. 2) Act, 2014, which came into effect with effect from 1.4.2015, and was made applicable from the Assessment Year 2015-16, that the assessee was required to invest the sale proceeds arising out of sale of capital asset in a residential house situated in India within the stipulated period. Thus on a plain reading of section 54 of the Income tax Act before its amendment by the Finance (No. 2) Act, 2014 it appears that there was no restriction that the assessee should make his investment within India. The only condition mentioned in the Act was that the assessee should invest in a residential house.

++ even as these proceedings were pending, the Gujarat High Court decided a matter in the case of Leena Jugalkishore Shah, on a similar issue, though this is disputed by Revenue, in favour of the assessee, and the assessee has sought to take support from that case and to claim that prior to such amendment, there was no requirement of making the investment in India to take the benefit u/s 54, and that being so he had fulfilled all the requirements of the Act and was entitled to the deduction.

++ the Revenue accepts that one issue that is common to both the provisions is that the roll over benefit is applicable on long term capital gains arising from the sale of a capital asset and investment in a residential house. To authority that is indeed the key issue in this case, and the language of the two provisions with regard to this are similar, and which has been squarely dealt with by the Gujarat High Court, namely whether the benefit would be available if such investment is made outside India. Both these provisions have been referred to by both the sides before the High Court in this case, and were very much within its purview. The thrust of the whole decision is on this issue itself. Even when the amendment of 2014 was discussed and the Explanatory notes referred to, both the sections 54 and 54F have been considered together by the High Court. Such was also the finding of the ITAT, Mumbai Bench in the case of Nishant Lalit Jadhav, cited by the Applicant, wherein the finding was that the two sections 54 and 54F were pari materia. On this issue, therefore, the authority is of the view that as far as the issue raised by the assessee is concerned, the decision cited by it was as much applicable to section 54, as to section 54F.

++ the words “in India” should be read into the charging sections has also been considered by the Gujarat High Court in the Leena Jugalkishore Shah case. It is possible that every argument taken now by the Revenue may not have been taken by either side before the High Court,or in such detail, but nonetheless, the decision is exactly on the point that we cannot read into the Act what was not written therein, before the amendment of 2014. Also, since the issue involved is a legal one and the law as it stood then has been interpreted in this decision, and not on facts, the authority is unable to find any ground for distinguishing the same from the case in hand. This decision was reached after examining the arguments that, at the relevant time, the Act did not mention the words “in India”, such as is mentioned in the Exemption provisions for charitable trusts in section 11 of the Act, with regard to investment and application of income for charity. The intent of legislature in not only introducing the provisions of section 54 initially, ie. the un-amended section, as also the reasons for the amendment of 2014, as contained in the Explanatory Notes thereto, were also before the High Court when it considered and decided this matter in favour of the assessee. The High Court’s refusal to accept that the words “in India” should be read into the charging sections cannot be ignored as being on distinguishable, incomplete or erroneous facts.It cannot be assumed that in giving this finding, the High Court would not have been aware of the construction of the charging sections, especially with regard to capital gains.

++ the income in the present cases arises under the Income tax Act, 1961, and is chargeable to tax under sections 4 and 5, read with sections 45 and 54. Any income arising under the Act even under the roll over provision, would be chargeable to tax in India since the benefit is provided by the Act in India. Once, the High Court has held in the Leena J Shah case that the provision, as existed prior to the amendment, is applicable for investments outside India also, any such situation as apprehended by the Revenue cannot have the effect of discarding the provision as a whole. In this view of the matter, the authority would respectfully follow the decision of the Gujarat High Court in Leena Jugalkishore Shah and rule that the assessee was entitled to the benefit provided by section 54, on account of his investment in a residential house in London, out of the capital gains arisen in India.

++ section 49(1)(ii) provides that in the case of an assessee acquiring an asset under a gift or will, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee as the case may be. Benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the "real" or actual 'gain' and not on the increase in the capital value of the property due to inflation. This is the object or purpose in allowing benefit of indexed cost of improvement, even if the improvement was by the previous owner in cases covered by Section 49. Accordingly the assessee will be allowed the benefit of indexation to the fair market value of the asset on 01.04.1981 and the cost of improvement incurred by the assessee. However, the exact computation of Capital Gains and valuation would have to be examined by the Assessing Officer, and is not for this Authority to go into.

Ruled in favour of Applicant