Understanding the concept of Indirect Transfer:

Indirect Transfer:

Indirect Transfer means transfer of shares of company resident of one jurisdiction having investment in India to another company resident of either that jurisdiction or another jurisdiction.

The following illustration will help understand the concept:

•US Co. 2, a resident of USA, holds 100% shares in US Co.1 registered in USA

•US Co.1 has a wholly owned subsidiary, I Co. in India

•Now, US Co. 2 sells his shares in US Co.1 to another company in USA, say A Ltd

Taxability for the Indirect Transfer under Income Tax Act 1961:

Taxability for the Indirect Transfer under Income Tax Act 1961

As per explanation 5 to section 9(1)(i), an Indirect Transfer is taxable in India when a share or interest in a foreign entity (‘Company’) derives its value substantially from the assets situated in India.

Further, explanation 6 to section 9(1)(i) explains the following concepts mentioned herewith:

Substantial value:

The share or interest shall be derived substantially from the asset located in India when value of asset on specified date is more than INR 10 crore and the asset represent at least 50% of the value of all the assets of the company

Value of Asset:

The value of an asset shall be the fair market value as on the specified date

Specified date:

• Either The date on which accounting period of the company (US Co. 1) ends preceding the date of transfer

• Or date of transfer if book value of asset of the company on transfer date exceeds the book value as on date of accounting period of the company ends by 15%

Accounting period:

The period of 12 months ending on March 31st or the period of 12 months regularly followed by the company other than March 31st for tax purpose in its country (i.e. 31st December for US Company in the instant case)

Compliances for the Indirect Transfer under Income Tax Act 1961:

Compliances for the Indirect Transfer under Income Tax Act 1961

Following compliances are required to be done if the transfer is taxable in India

For Transferor (US Co. 2):

• Transferor is required to calculate capital gain as per section 48 of the Act

• If the Capital gain is Long Term then taxable at 12.5%

• If the Capital gain is Short Term then taxable at 35%

• Transferor is required to file ITR

For Transferee (A Ltd):

• Transferee is required to withheld tax under section 195 of the Act

• Form 15CA/CB are also required

• Payment of tax withheld within 7 days of starting of next month

• TDS return is also required to be submitted