Newsflash - Clarifications on Indirect Transfer of Capital Asset under the Income-tax Act, 1961

Under Section 9 of the Income-tax Act, 1961 (the IT Act), income arising from indirect transfer of assets situated in India is deemed to accrue or arise in India.

If any share of or interest in, a foreign company or entity derives its value substantially from the assets located in India, then such share or interest is deemed to be situated in India. Thereby, any income arising from transfer of such share or interest is deemed to accrue or arise in India. [Section 9(1)(i) of the Act read with Explanation 5]

The share or interest is said to derive it value substantially from assets located in India, if the fair market value (FMV) of assets located in India exceeds Rs. 10 crores; and FMV of assets located in India represents at least 50% of FMV of total assets of the foreign company or entity. [Explanation 6]

To avoid undue hardship to small shareholders, exemption has been granted 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. [Explanation 7]

In light of the various queries received by CBDT, about the scope of ‘indirect transfer provisions’, the CBDT had constituted a Working Group to examine the issues raised by stakeholders.

Recently, CBDT has provided certain clarifications on the issues of indirect transfer provisions. We have captured them in form of our newsflash.

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