EASE OF DOING BUSINESS/DISPUTE RESOLUTION
Clarity relating to Indirect transfer provisions
The existing provisions of section 9 of the Act deal with cases of income which are deemed to accrue or arise in India.
Sub-section(1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India Clause(i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India.
The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia,
included insertion of Explanation 5 in section 9(1)(i) w.r.e.f. 1.04.1962 . The Explanation 5 clarified that an asset or capital asset,
being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Considering the
concerns raised by various stakeholders regarding the scope and impact of these amendments an Expert Committee under
the Chairmanship of Dr. Parthasarathi Shome was constituted by the Government to go into the various aspects relating to the
The recommendations of the Expert Committee were considered and a number of recommendations (either in full or with
partial modifications) have been accepted for implementation either by way of an amendment of the Act or by way of issuance
of a clarificatory circular in due course. In order to give effect to the recommendations, the following amendments are proposed
in the provisions of section 9 relating to indirect transfer:-
(i) the share or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets
(whether tangible or intangible) located in India, if on the specified date, the value of Indian assets,-
(a) exceeds the amount of ten crore rupees ; and
(b) represents at least fifty per cent. of the value of all the assets owned by the company or entity.
(ii) value of an asset shall mean the fair market value of such asset without reduction of liabilities, if any, in respect of the
(iii) the specified date of valuation shall be the date on which the accounting period of the company or entity, as the case
may be, ends preceding the date of transfer.
(iv) however, if the book value of the assets of the company on the date of transfer exceeds by at least 15% of the book value
of the assets as on the last balance sheet date preceding the date of transfer, then instead of the date mentioned in (iii) above, the date of transfer shall be the specified date of valuation.
(v) the manner of determination of fair market value of the Indian assets vis-a vis global assets of the foreign company shall
be prescribed in the rules.
(vi) the taxation of gains arising on transfer of a share or interest deriving, directly or indirectly, its value substantially from
assets located in India will be on proportional basis. The method for determination of proportionality are proposed to be provided in the rules.
(vii) the exemption shall be available to the transferor of a share of, or interest in, a foreign entity if he along with its associated
(a) neither holds the right of control or management,
(b) nor holds voting power or share capital or interest exceeding five per cent. of the total voting power or total
share capital, in the foreign company or entity directly holding the Indian assets (direct holding company).
(viii) in case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly then the
exemption shall be available to the transferor if he along with its associated enterprises,-
(a) neither holds the right of management or control in relation to such company or the entity,
(b) nor holds any rights in such company which would entitle it to either exercise control or management of the direct
holding company or entity or entitle it to voting power exceeding five percent. in the direct holding company or entity.
(ix) exemption shall be available in respect of any transfer, subject to certain conditions ,in a scheme of amalgamation,
of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from
the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign
(x) exemption shall be available in respect of any transfer, subject to certain conditions, in a demerger, of a capital asset,
being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares
of an Indian company, held by the demerged foreign company to the resulting foreign company.
(xi) there shall be a reporting obligation on Indian concern through or in which the Indian assets are held by the foreign company
or the entity. The Indian entity shall be obligated to furnish information relating to the off-shore transaction having the effect
of directly or indirectly modifying the ownership structure or control of the Indian company or entity. In case of any failure
on the part of Indian concern in this regard a penalty shall be leviable. The proposed penalty shall be-
(a) a sum equal to two percent of the value of the transaction inrespect of which such failure has taken place in case
where such transaction had the effect of directly or indirectly transferring the right of management or control in
relation to the Indian concern; and
(b) a sum of five hundred thousand rupees in any other case.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year
2016-17 and subsequent assessment years.
[Clauses 5, 13, 14, 72, 75 & 76]