India: Ruling on taxation of indirect transfer

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

India: Ruling on taxation of indirect transfer

nayak.jpg

jain.jpg

Rajendra Nayak


Aastha Jain

Under the Indian Tax Law (ITL), any income arising from the transfer of a capital asset situated in India would be taxable in India. In 2012, the ITL was retroactively amended to introduce an indirect transfer taxation rule (the rule), to tax the transfer of shares of a foreign company, if such shares directly or indirectly derived 'substantial' value from assets located in India. The ITL does not provide any guidance on what constitutes 'substantial'. Recently, the Delhi High Court (HC) adjudicated on the issue of determining what constitutes 'substantial' when applying the rule. In the facts of the case, a UK incorporated company (UK Co) wanted to acquire the participation in a company located in Jersey (Jersey Co) and its subsidiaries situated in Mauritius, India and the US. Consequently, the following share purchase agreements (SPA) were entered into:

  • SPA-I: Transfer of 100% stake in an Indian company (I Co) by its parent company in Mauritius to UK Co.

  • SPA-II: Transfer of 100% stake in a US company (which in turn held an Indian company) by its parent company in Mauritius to UK Co.

  • SPA-III: Transfer of 67% stake in Jersey Co which was held by individual residents of UK.

Following a ruling of the Authority for Advance Ruling on the non-taxability of the transaction, the HC was approached by the tax authority, which claimed that the arrangement was for the transfer of business and interest of Jersey Co which should be taxable in India under the rule as shares of Jersey Co derived their substantial value from India, through its (direct or indirect) subsidiaries. Further, routing the transactions through Mauritius (in SPA I, SPA II) was done with the object to avoid taxation and it should be disregarded.

The HC observed the following on the rule:

  • Legal fiction in the rule should be limited to income that has nexus with India;

  • 'Substantial' should be read as synonymous to 'principally', 'mainly', or at least 'majority'. For this purpose, 50% can be treated as reasonable threshold; and

  • Therefore, the rule can be invoked to tax transfers of overseas assets which derive 50% of their value from India.

In the present facts, HC held that each SPA has commercial rationale and is independent. It cannot be considered as a transaction structured to avoid taxes. Assuming SPA-I and SPA-II were not executed and if only shares of Jersey Co were transferred, the value of Jersey Co shares derived from India assets would only be 30.5% and it may not be regarded as 'substantial' in terms of the rule. Hence, it was held not taxable under the ITL.

Rajendra Nayak (rajendra.nayak@in.ey.com) & Aastha Jain (aastha.jain@in.ey.com)

EY

Tel: +91 80 6727 5275

Website : www.ey.com/india

more across site & shared bottom lb ros

More from across our site

Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
The US president also unveiled a new 50% levy on copper imports; in other news, a UK wealth tax proposal has been criticised by the Institute for Fiscal Studies
Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Gift this article