December 2022
Background
In India, non-residents are taxed on income which accrues, arises or received or is deemed to accrue, arise or received in India. However, many developing countries including India have concerns with non-residents avoiding capital gains on assets located in source country, by transferring those assets indirectly, i.e. by transferring interests in entities that own such assets, rather than the assets themselves. This is possible where global businesses are held through multi-tiered structures with intermediate holding company outside India deriving substantial value from assets/business carried on in India.
In order to tax such offshore indirect transfer deriving value from Indian business/assets/entities, India has deemed such indirect transfer to accrue in India so as to tax them in certain circumstances.
The Coverage of the article is as under:
1. What is indirect transfer?
When shares of foreign company or interest in any entity incorporated or registered outside India is transferred and if such shares or interest derives its substantial value from assets located in India directly or indirectly, then such transfer is commonly referred to as ‘Indirect Transfer’.
In case of such indirect transfer, the income shall be deemed to accrue or arise in India and would be taxable for all including not ordinarily residents as well as non-residents.
2. When Share/Interest is said to derive its substantial value from assets located in India?
The share or interest would be regarded as deriving substantial value from assets located in India if on specified date, fair market value of such assets:
For the above purpose, specified date shall be -
Note – Accounting period means 12 months period ending 31st March. If a foreign company/entity follows any other 12 months period for complying with tax provisions or reporting to shareholders/ interest holders, then such period shall be considered as the accounting period.
Note – The above deeming provision of indirect transfer does not cover declaration of dividend by such foreign company/entity.
3. Exceptional situations where indirect transfer provisions are not applicable to non residents
a. does not hold management or control rights
b. does not have voting power or interest or share in capital exceeding 5% of total voting power or interest or share capital, as the case may be.
As per Rule 11C of Income Tax Rules, the above attribution shall be based on the following formula :-
Note – If above formula is not applied, then assessing officer shall determine such income attributable to Indian assets as he/she may deem fit.
4. Reporting Requirements FOR Transferor
5. reporting requirements FOR indian concern
The Indian concern in/through which the foreign company /entity derives its substantial value shall have following reporting requirements as per Section 285A of income Tax Act, 1961 and rules laid down under Rule 114DB –
A. Indian Concern shall electronically furnish information in Form 49D within 90 days from the end of financial year in which any indirect transfer has taken place.
B. However, when above transfer has resulted in transferring the right of management or control in relation to Indian concern, then Form 49D shall be furnished within 90 days from the date of transfer.
C. Various information has to be provided by Indian Concern, few details that are required are –
6. computation of value of assets
The valuation of assets is necessary to determine the income attributable to assets located in India. The value of assets shall be Fair Market value without reduction of liabilities and shall computed as per provisions of Rule 11UB of Income Tax Rules. The summary of such rules is given as follows:-
Nature of Asset |
Manner of Computation |
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FMV = [(market cap of the company on the basis of observable price on stock exchange)+(book value of liabilities on specified date)]/Total no. of outstanding shares. (If listed on more than one stock exchange, then take the price of stock exchange which recorded highest volume of trading in the share) |
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FMV = Observable Price of such share on stock exchange (If listed on more than one stock exchange, then take the price of stock exchange which recorded highest volume of trading in the share during the said period) |
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Determination to be done by a merchant banker or an accountant as per internationally accepted valuation methodology. The above shall be increased by value of liability, if any, considered in such determination. |
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Determination of value of partnership firm to be done by a merchant banker or an accountant as per internationally accepted valuation methodology. The above shall be increased by value of liability, if any, considered in such determination. Allocation The above value of partnership firm shall be apportioned to the extent of capital in the ratio of capital contribution and balance to be distributed in accordance with agreement as per asset distribution ratio on dissolution or in absence thereof, in the profit sharing ratio. |
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Price it would fetch if sold in the open market as determined by a merchant banker or an accountant as per internationally accepted valuation methodology. The above shall be increased by value of liability, if any, considered in such determination. |
Note – For determining FMV of above Indian Assets, all the assets/business operations shall be taken into account, even if such assets/business operations are located outside India. |
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FMV = (market cap of the foreign company/entity on the basis of full value of consideration for transfer)+(book value of liabilities on specified date, as certified by a merchant banker or accountant)
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FMV = (market cap of the company/entity on the basis of observable price)+(book value of liabilities on specified date). (If listed on more than one stock exchange, then take the price of stock exchange which recorded highest volume of trading in the share) |
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Determination to be done by a merchant banker or an accountant as per internationally accepted valuation methodology. The above shall be increased by value of liability, if any, considered in such determination. |
Note: Observable Price shall be higher of average of the weekly high and low of the closing prices for
[1] Circular No 28 of 2017 dated 07th November 2017