Income through transfer of a capital asset situated in India -Explanation to section 9(1)(i)

Income through transfer of a capital asset situated in India -Explanation to section 9(1)(i) (d)

Capital gains arising through or from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of the fact whether

  1. the capital asset is movable or immovable, tangible or intangible;
  2. the place of registration of the document of transfer etc., is in India or outside; and
  3. the place of payment of the consideration for the transfer is within India or outside.
  • Accordingly, the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.[Explanation 4 to section 9(1)(i)]
  • Further, an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.[Explanation 5 to section 9(1)(i)]

However, the following shall NOT be deemed to be or deemed to have been situated in India [Proviso to Explanation 5 to section 9(1)(i)]

  • any asset or capital asset being investment held by non-resident, directly or indirectly, in a Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD for any assessment year commencing on or after 1st April 2012 but before 1st April 2015.
  •  an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors)Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992.

 

  • Declaration of dividend by a foreign company outside India does NOT have the effect of transfer of any underlying assets located in India.
  • Circular No. 4/2015, dated 26-03-2015, therefore, clarifies that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would NOT be deemed to be income accruing or arising in India by virtue of the provisions of section 9(1)(i).

 

Explanation 6 to section 9(1)(i) provides that the share or interest in a company or entity registered or incorporated outside India, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets, –

  • exceeds the amount of Rs 10 crore; AND
  • represents at least 50% of the value of all the assets owned by the company or entity, as the case may be;

     

 

Value of an asset =

The fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in prescribed manner.

Specified Date =

The date on which the accounting period of the company or, as the case may be, the entity ends preceding the date of transfer of a share or an interest.

However, the date of transfer shall be the specified date of valuation, in a case where the book value of the assets of the company or entity on the date of transfer exceeds by at least 15%, the book value of the assets as on the last balance sheet date preceding the date of transfer.

Accounting Period =

Each period of 12 months ending with 31st March.

However, where a company or an entity, referred to in Explanation 5,

regularly adopts a period of 12 months ending on a day other than 31st March for the purpose of—

(a)  complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or

(b)  reporting to persons holding the share or interest,

then, the period of twelve months ending with the other day shall be the accounting period of the company or, as the case may be, the entity:

  • First Accounting Period –

First accounting period of the company or, as the case may be, the entity shall begin from the date of its registration or incorporation and end with the 31st March or such other day, as the case may be, following the date of such registration or incorporation.

  • Later accounting period –

Later accounting period shall be the successive periods of twelve months.

  • Accounting period of an entity which ceases to exist –

If the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist.


 

Explanation 7 to section 9(1)(i) provides that no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, in the following cases;

1..Foreign company or entity directly owns the assets situated in India AND

the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold

  • the right of management or control in relation to foreign company or entity; or
  •  the voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the foreign company or entity; or

2. Foreign company or entity indirectly owns the assets situated in India AND

the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold

  • the right of management or control in relation to foreign company or entity; or
  • any right in, or in relation to, foreign company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India; or
  • such percentage of voting power or share capital or interest in foreign company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;

 

The Exemption shall be available to the transferor of a share of, or interest in, a foreign entity if he along with its associated enterprises, –

  • neither holds the right of control or management,
  • nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, in the foreign company or entity directly holding the Indian assets (direct holding company).

    In case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly then the exemption shall be available to the transferor if he along with its associated enterprises,-

    • neither holds the right of management or control in relation to such company or the entity,
    • nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or entity or entitle it to voting power or share capital or total interest exceeding 5% in the direct holding company or entity.

      Further, where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity registered or incorporated outside India, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in the foreign company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in the prescribed manner.

       

    “Associated enterprise”, in relation to another enterprise, means an enterprise—

    •  which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
    • in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

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