Indirect Transfer of Assets Situated in India
Introduction
Section 9(1)(i), through Explanation 5, deems that a share or interest in a foreign entity shall be situated in India if it derives substantial value from assets located in India. Income arising from the transfer of such share or interest is taxable in India, to the extent attributable to Indian assets.
Taxability of Indirect Transfers
- If a foreign entity’s shares or interests derive at least 50% of their value from assets located in India, they are deemed to accrue in India.
- Taxability applies only if the value of Indian assets exceeds ₹10 crore.
- Proportionate taxation applies where not all assets of the foreign entity are in India.
Computation of Taxable Income
- Where Indian assets do not represent 100% of global assets, the taxable portion of gains is computed using the following formula:
Taxable Income = Income from transfer of share or interest × (FMV of Indian Assets / FMV of Total Assets)
- FMV of assets is determined under Rule 11UB , with valuation methods specified for listed shares, unlisted shares, partnership interests, and other assets.
- As per Rule 11UC , if the transferor fails to furnish necessary information to apply the above formula, the AO may determine proportionate income at his discretion.
- It is mandatory for the transferor to furnish a report electronically in Form No. 3CT from a Chartered Accountant.
Reporting Obligations (Section 285A)
- Indian entities holding Indian assets for a foreign company must furnish details in Form 49D within 90 days.
- Supporting documents, including ownership structures, financial statements, and valuation reports, must be maintained for 8 years.
Penalties for Non-Compliance
- Failure to file Form 49D attracts a penalty under Section 271GA.