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TMI BlogClarifications on Indirect Transfer provisions under the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... d in India. Explanation 6 provides that the said Explanation 5 will be applicable, if on the specified date the value of such assets exceeds the amount of ₹ 10 crore and represents at least 50% of the value of all the assets owned by the company/ entity. Explanation 7, however, provides a carve out from the applicability of Explanation 5 to small investors holding no right of management or control of such company / entity and holding less than 5% of the total voting power/ share capital/ interest of the company/ entity that directly or indirectly owns the assets situated in India. Section 285A of the Act casts a reporting obligation on the Indian concern whose shares are substantially held directly or indirectly by a company or entity registered or incorporated outside India. 2. Queries have been received by the Board about the scope of the indirect transfer provisions. In this regard, the Board constituted a Working Group on 15th June, 2016 to examine the issues raised by stakeholders. The Board has considered the comments of the Working Group on the said issues and the following clarifications are issued: Question No. 1 : A Fund is set-up in a popular jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n no. 3: ABC Co. acting as nominee/ distributor is engaged in pooling of funds for the Offshore Fund registered as FPI. None of the investors investing through nominees/ distributors have right of control or management in the Offshore Fund or hold voting power or share capital or interest, directly or indirectly, exceeding 5% in the Offshore Fund. ABC Co. is recorded as registered unit holder/ shareholder in the books of Offshore Fund. The value of assets in India i.e. share of Indian companies held by the Offshore Fund constitute more than 50% of its total assets and exceed ₹ 10 crores. Will indirect transfer provisions apply to investors in nominee-distributor type structures, which are merely used to pool monies from investors where none of the ultimate investors hold or will hold right of control or management or voting power or share capital or interest, directly or indirectly, exceeding 5% in the fund and a declaration to this effect is furnished by the nominee or distributor to the Fund registered as FPI? Answer: Since conditions of Explanation 7(a)(ii) to section 9(1)(i) of the Act are prima facie fulfilled by the investors in the nominee/ distributor compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try A, Consequent to the merger, investors of Fund P became investors in Fund Q. Will the shareholders or investors of Fund P liable to tax in India on account of indirect transfer provisions, though the amalgamation of Fund P and Fund Q is not regarded as 'transfer' under section 47(viab) of the Act ? Answer : Under section 47(viab) of the Act , any transfer in a scheme of amalgamation of a share of an offshore company deriving its value substantially from the shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company is not regarded as transfer, subject to the conditions specified therein. Under the existing provisions, this exemption does not extend to the shareholders/ investors of the amalgamating foreign company. Hence, such shareholders/ investors will be liable to tax in India under section 9(1)(i) of the Act . Question no.7: Fund X and Fund Y are 'non-corporate' entities formed in Country A Company Z is a SPV formed in a tax efficient jurisdiction exclusively for Indian investments, Fund X holds 100% of shareholding of Company Z. On account of a scheme of amalgamation, Fund X is merged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly with this provision. Answer: Reporting requirement under section 285A triggers when shares of the foreign company / entity derive their value substantially from assets located in India. Since section 285A and Rule 114DB are recently introduced, their practical implementation should first be seen. Question no. 10: FPIs are mainly portfolio investors and not strategic investors. The gains earned by FPIs on sale or transfer of Indian securities is liable to tax in India in accordance with provisions of the Income-tax Act 1961 .if indirect transfer provisions are made applicable to these FPIs, then there is a possibility of double taxation of the same income i.e. tax on gains earned on direct transfer of Indian securities by the FPIs and tax on gains earned by investors of the FPIs on redemption of units in the FPIs. Hence, exemption should be provided for FPIs. Answer : Carve-out is already available for small investors in Explanation 7 to section 9(I)(i) of the Act . Question no. 11: The 5% threshold for exempting small shareholder should be increased. Additionally, the meaning of the term 'associated enterprise' in the context of FPIs should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of Indian assets vis-a-vis global assets should be prescribed. Answer: Vide notification S.O.2226(E) dated 28 th June, 2016 , Rule 11UB and Rule 11UC have been inserted in the IT Rules, 1961 to provide for method of determination of the fair market value of assets and apportionment of income for the purposes of section 9(1)(i) of the Act . Question no. 16: Indirect transfer provisions are to be applied if, on a specified date, the fair market value of Indian assets exceeds a specified threshold. Specified date for this purpose generally means the date on which accounting period of the company or entity ends, preceding the date of transfer of share or an interest. The specified date should be the date of transfer. Answer: Clause (d) of the Explanation 6 to section of the Act provides for two situations for the determination of the specified date, i.e. the date on which the accounting period of such entity ends preceding the date of transfer and, where the book value of the assets of the entity on the date of transfer exceeds the book value of the assets on the abovementioned accounting period end date by 15%, the date of transfer will be taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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