Indirect Transfers – Evolution of Law & Recent Dicta

Posted On - 27 December, 2023 • By - Vidushi Maheshwari

Indirect transfer controversy has been the most discussed issue in the Indian tax ecosystem. It began when Vodafone International Holdings Ltd acquired an indirect holding in an Indian entity, to the recent ruling of the Hon’ble High Court of Delhi in Augustus Capital Pte Ltdᶦ (dealing with small investor exemption). The controversy has spanned for over a decade and has involved various Courts and Tribunals in India. To add fuel to this controversy, a retrospective amendment was introduced in 2012 to tax the indirect transfer of shares in India, with the provision being effective from 1962. Although this retrospective amendment was eventually withdrawn in 2021, certain issues arising from the amendment continue to require clarity.

Beginning of the controversy

The controversy began when Vodafone International Holdings Ltd acquired a single share of CGP Investment Holdings Ltd (which was the entire shareholding) from Hutchison Group, thereby indirectly acquiring 67% holding in an Indian entity. Indian Income-tax Department (IITD) contended that the transaction is taxable in India, as there is an indirect transfer of shares of an Indian entity. This contention was eventually overturned by the Hon’ble Supreme Court in Vodafone International Holdings BVᶦᶦ, which held that the transaction was not liable to tax in India, in the absence of any provision taxing indirect transfer of shares under the Income-tax Act, 1961 (IT Act).

This landmark ruling led to the introduction of the controversial provision taxing indirect transfer of shares (Explanation 5 to Section 9(1)(i)ᶦᶦᶦ, wherein it was retrospectively provided that gains arising from the transfer of shares of a foreign entity is taxable in India, if it derives substantial value from the assets located in India.  Though retrospective amendment was introduced, certain critical terms such as “share or interest”, “substantial” and “value” were not introduced, which were only introduced in 2015. Before these clarificatory amendments were introduced, the term “substantial” got the attention of the Hon’ble High Court of Delhi in Copal Research Ltdᶦᵛ, wherein it was concluded that to trigger taxability under indirect transfer provisions, value derived from the assets located in India should be more than 50% of its total value. This term “substantial” was introduced in the statute with a 50% threshold along with a monetary threshold in 2015.

Impact of beneficial tax treaty provisions

Another critical aspect that raised concerns was on taxability of a non-resident coming from a treatyᵛ country with beneficial tax treaty provisions. It should be noted that the provisions of a tax treaty will prevail over the provisions of the domestic tax laws of India if the former are more favorable compared to the latter. This was the main issue that arose before the Hon’ble High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SAᵛᶦ, wherein a French company acquired the shares of a French company, which had majority holding in India, from another French company. Thus, the Seller, Buyer and Target were all tax residents of France. On these facts, having regard to Article 14(5) of the India France Tax Treaty, the Court held that “Qua Art.14(5)ᵛᶦᶦ, where shares of a company which is a resident of France are transferred, representing a participation of more than 10% in such entity, the resultant capital gain is taxable only in France”, rejecting the underlying assets theory (based on the assets located in India) contended by the Revenue. This ruling re-affirmed the position that a tax treaty will prevail over the Indian income tax laws if the provisions of the tax treaty are more beneficial. The case reached finality with the withdrawal of appeals by the IITD before the Hon’ble Supreme Court. However, such withdrawal indicates that finality on the taxability of indirect transfers with beneficial tax treaty provisions is still awaited.

Taxability based on beneficial tax treaty provisions, was once again upheld by the Income-tax Appellate Tribunal, Mumbai in Sofina SAᵛᶦᶦᶦ, wherein the interpretation of Article 13(5)ᶦˣ and 13(6)ˣ of the India Belgium Treaty was in question. In this case, a Belgium entity had transferred the shares of a Singapore entity, which held a 100% holding in an Indian company. The Tribunal, while interpreting Article 13(5), held that one of the conditions for taxability is that the company whose shares are transferred should be a tax resident of either of the States i.e. India or Belgium. This condition was not fulfilled in this case, as the shares transferred were that of a Singapore entity. Accordingly, it was held that the transaction was not liable to tax in India as it does not fall within the provisions of Article 13(5). On account of the residuary clause i.e., Article 13(6), the taxability will arise in the country of which the transferor is a resident. Revenue has challenged the decision of the ITAT before the Hon’ble High Court of Bombay. Certainty on treaty applicability is relevant for all foreign investors (including offshore funds) investing indirectly in India (i.e., through an intermediary investment vehicle).

Small investor exemption

Another critical aspect that raised concerns was whether transfer of even a single share of a company incorporated outside India, which derived its value substantially from the assets located in India, would have resulted in taxable gains in India. In order to cure the unintended consequences flowing from the indirect transfer provisions, clarificatory amendments were carried out in 2015 (Explanation 6 and 7 to Section 9(1)(i) of the IT Act). However, on account of the 2015 amendments, another concern was raised: whether these provisions are prospective or retrospective in nature. The clarificatory amendments introduced in 2015 not only clarified the terms “share or interest”, “substantial” and “value”, but it also provided exemption to small investors. Small investors would mean those 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. If an interpretation is adopted that these clarificatory amendments were prospective, such interpretation would lead to adverse tax consequences on small shareholders concerning transactions preceding 2016.

This was the primary issue before the Hon’ble High Court of Delhi in Augustus (supra), wherein it was ruled that Explanation 6 & 7 have not been introduced as substantive provisions and will not have any meaning, if not read with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which operates from 01.04.1962, then these Explanations would also have to be construed as clarificatory, curative and operating from 1962. The High Court also observed that “The legislature took recourse to the mischief rule to clarify Explanation 5, which otherwise was in danger of being struck down as vague and arbitrary. If Explanations 6 and 7 are not read along with Explanation 5, no legislative guidance would be available to the AO regarding what meaning to give to the expression “share/interest” or “substantially” found in Explanation 5”.

The ruling in Augustus certainly provides the intended relief to small investors who were at the risk of taxation when transferring even a single share of a foreign entity deriving substantial value from India. It would be interesting to see if IITD would continue to contest this issue before the Hon’ble Supreme Court of India or this issue has reached its finality with the Hon’ble High Court of Delhi ruling.


Indirect transfer controversy has certainly diluted in recent years, largely due to the withdrawal of the retrospective amendment and rulings confirming the availability of treaty benefit as well as entitlement of exemption to small investors. However, global investors should continue to keep a watch of these provisions as well as the judicial developments at the time of investing in India, through intermediary entities to determine their tax impact in India. Though the judiciary has taken a favorable stand on account of the tax treaty language, however, each and every tax treaty entered into by India is worded differently. Hence, being cognizant of the applicable provisions will result in correct evaluation of the applicable taxes. A correct evaluation becomes even more significant with the introduction of anti-avoidance provisions under the domestic laws as well as under the tax treaties.

Author: Vidushi Maheshwari, Partner – Direct Tax 

This Article was published by Taxsutra on 26-12-2023

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

 i Augustus Capital Pte Ltd vs. DCIT (TS-535-ITAT-2020DEL)

ii Vodafone International Holdings BV vs. Union of India (TS-23-SC-2012)

iii For the removal of doubts, it is hereby clarified that 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:

iv DIT v Copal Research Ltd., Mauritius (TS-509-HC-2014(DEL)

v Double Taxation Avoidance Agreement entered between India and other countries

vi Sanofi Pasteur Holding SA v. Department of Revenue (TS-57-HC-2013(AP)

vii Gains from the alienation of shares other than those mentioned in paragraph 4 representing a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State.

viii Sofina SA v ACIT (TS-5620-ITAT-2020(MUMBAI)-O)

ix Gains from the alienation of shares other than those mentioned in paragraph 4, forming part of a participation of at least 10 per cent of the capital stock of a company which is a resident of a Contracting State may be taxed in that State.

x Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.