Two non-residents sold shares of a foreign company that draws only part of its value from Indian assets. Does Explanation 5 to section 9(1)(i) make those gains taxable in India, and must the buyer withhold?
No. The Delhi High Court dismissed the Revenue's writ petitions and upheld the Authority for Advance Rulings. Explanation 5 to section 9(1)(i) is a legal fiction confined to its purpose, and 'substantially' in it must be read as principally, mainly or at least a majority. Gains on the sale of shares of a company incorporated overseas which derives less than 50 per cent of its value from assets in India are not taxable under section 9(1)(i) read with Explanation 5. The Court also rejected the case that the structure was a device: the transactions had a commercial rationale, and the Mauritian companies were not shell companies whose corporate identity could be ignored.
Decided by the High Court (High Court of Delhi at New Delhi, Division Bench — Vibhu Bakhru J (author) and S. Ravindra Bhat J) on 2014-08-14, reported as W.P.(C) 2033/2013, 2470/2013, 2590/2013 and 2597/2013 (Delhi High Court). It bears on section 9(1)(i), section 195, section 245R of the Income Tax Act 1961, in Capital Gains and TDS Defaults matters.
This is the judgment that put a number on 'substantially' in the indirect transfer provisions before the legislature did. The reasoning is worth having: Explanation 5 was enacted for the removal of doubts and is clarificatory, a legal fiction must be restricted to the purpose for which it was enacted, and the object was to tax income with an Indian nexus, not to reach gains on foreign assets that happen to carry some Indian value. The Court drew the 50 per cent threshold from the Shome Committee's draft report, from the Direct Taxes Code Bill 2010, and from Article 13(4) of the UN and OECD Model Conventions, which cede taxing rights to the situs State only above that line. It is equally useful on substance over form: a structure is not a device merely because it is tax-efficient if the Revenue's suggested alternative would not achieve the same commercial result, and a company that earns real revenue, including from intra-group services, is not a shell whose veil may be lifted. On residence, the presence of a dominant individual resident elsewhere does not shift place of management where the Board in fact manages.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Copal group was held through Copal Partners Limited, a Jersey company. Its Mauritian subsidiary Copal Research Limited held all the shares of Copal Research India Private Limited, having subscribed 92 per cent of them in 2004 and bought the balance in 2010. Another Mauritian company, Copal Market Research Limited, held all the shares of Exevo Inc., a United States company, which in turn held all the shares of Exevo India Private Limited. By two share purchase agreements dated 3 November 2011, Copal Research Limited sold its entire holding in the Indian company to Moody's Group Cyprus Ltd for USD 31,406,740 plus an earn-out, and Copal Market Research Limited sold all the shares of Exevo Inc. to Moody's Analytics, Inc. A day later, shareholders holding 67 per cent of Copal Partners Limited sold those shares to Moody's Group UK Ltd for USD 93,509,220, the remaining 33 per cent being held by banks and financial institutions who were not selling. The proceeds of the first two sales were routed up as dividends. The Authority for Advance Rulings ruled on 31 July 2012 that the Mauritian sellers' gains were not taxable in India and that the purchasers need not withhold under section 195. The Revenue challenged that ruling, contending that the real transaction was a sale of the Jersey company's shares structured only to avoid tax, that the Mauritian companies were shells, and that their place of management was the United Kingdom.
The writ petitions were dismissed, parties bearing their own costs, and the ruling of the Authority upheld. Gains arising from the sale of a share of a company incorporated overseas which derives less than 50 per cent of its value from assets situated in India are not taxable under section 9(1)(i) read with Explanation 5. On the figures, only a fraction of the value of the Jersey company's shares was derived indirectly from the Indian companies, so even on the Revenue's own reconstruction of the transaction there would have been no charge, and its case that the sales at the Mauritius level were structured only to avoid tax was ex facie flawed. The transactions as structured could not have been achieved at the Jersey level and were not shown to be other than bona fide. The Mauritian companies could not be called shell companies so as to ignore their corporate identities, and the material was insufficient to treat the residence of the individual said to control the group as their situs.
Section 9(1)(i) deems income from the transfer of a capital asset situated in India to accrue in India, and a share of a company incorporated outside India is not such an asset; as Vodafone held, such a sale between non-residents falls outside the provision even where the entire value is derived from Indian assets. Explanations 4 and 5, inserted by the Finance Act 2012 and described in the notes on clauses and in their own terms as being for the removal of doubts, created a legal fiction deeming a share in a foreign company to be situated in India where it derives its value substantially, directly or indirectly, from assets located in India. A legal fiction must be restricted to the purpose for which it was enacted. The object of Explanation 5 was to tax income having a nexus with India, not to reach gains on overseas assets which do not derive the bulk of their value from India, so 'substantially' must be read as principally, mainly or at least a majority, and being clarificatory it must be read restrictively, covering cases where in substance Indian assets are transacted through the shares of an overseas holding company. The Court supported that threshold from the Shome Committee's draft report, which recommended defining 'substantially' as more than 50 per cent, and from Article 13(4) of the United Nations and OECD Model Conventions, which cede taxing rights to the situs State only above that line. On the avoidance case, had the group simply sold the Jersey shares, Moody's would have obtained only a 67 per cent indirect interest rather than full ownership, and the banks holding 33 per cent would not have shared in the proceeds, so the Revenue's alternative was not a real alternative. On substance, the Mauritian companies held category-I Global Business Licences and earned substantial revenues from research services, and serving related enterprises does not justify lifting the veil; on residence, the presumption that control and management rests with the boards was not rebutted.
the expression "substantially" occurring in Explanation 5 would necessarily have to be read as synonymous to "principally", "mainly" or at least "majority".
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court dismissed the Revenue's writ petitions and upheld the Authority for Advance Rulings. Explanation 5 to section 9(1)(i) is a legal fiction confined to its purpose, and 'substantially' in it must be read as principally, mainly or at least a majority. Gains on the sale of shares of a company incorporated overseas which derives less than 50 per cent of its value from assets in India are not taxable under section 9(1)(i) read with Explanation 5. The Court also rejected the case that the structure was a device: the transactions had a commercial rationale, and the Mauritian companies were not shell companies whose corporate identity could be ignored. This was decided by the High Court (High Court of Delhi at New Delhi, Division Bench — Vibhu Bakhru J (author) and S. Ravindra Bhat J) and bears on section 9(1)(i), section 195, section 245R of the Income Tax Act 1961. It is reported as W.P.(C) 2033/2013, 2470/2013, 2590/2013 and 2597/2013 (Delhi High Court). This is the judgment that put a number on 'substantially' in the indirect transfer provisions before the legislature did. The reasoning is worth having: Explanation 5 was enacted for the removal of doubts and is clarificatory, a legal fiction must be restricted to the purpose for which it was enacted, and the object was to tax income with an Indian nexus, not to reach gains on foreign assets that happen to carry some Indian value. The Court drew the 50 per cent threshold from the Shome Committee's draft report, from the Direct Taxes Code Bill 2010, and from Article 13(4) of the UN and OECD Model Conventions, which cede taxing rights to the situs State only above that line. It is equally useful on substance over form: a structure is not a device merely because it is tax-efficient if the Revenue's suggested alternative would not achieve the same commercial result, and a company that earns real revenue, including from intra-group services, is not a shell whose veil may be lifted. On residence, the presence of a dominant individual resident elsewhere does not shift place of management where the Board in fact manages. If it applies to you, the first step is this: Value the foreign target and work out what proportion of its value comes from Indian assets before conceding an indirect transfer charge; below the majority threshold the charge does not arise on this reasoning.
The Copal group was held through Copal Partners Limited, a Jersey company. Its Mauritian subsidiary Copal Research Limited held all the shares of Copal Research India Private Limited, having subscribed 92 per cent of them in 2004 and bought the balance in 2010. Another Mauritian company, Copal Market Research Limited, held all the shares of Exevo Inc., a United States company, which in turn held all the shares of Exevo India Private Limited. By two share purchase agreements dated 3 November 2011, Copal Research Limited sold its entire holding in the Indian company to Moody's Group Cyprus Ltd for USD 31,406,740 plus an earn-out, and Copal Market Research Limited sold all the shares of Exevo Inc. to Moody's Analytics, Inc. A day later, shareholders holding 67 per cent of Copal Partners Limited sold those shares to Moody's Group UK Ltd for USD 93,509,220, the remaining 33 per cent being held by banks and financial institutions who were not selling. The proceeds of the first two sales were routed up as dividends. The Authority for Advance Rulings ruled on 31 July 2012 that the Mauritian sellers' gains were not taxable in India and that the purchasers need not withhold under section 195. The Revenue challenged that ruling, contending that the real transaction was a sale of the Jersey company's shares structured only to avoid tax, that the Mauritian companies were shells, and that their place of management was the United Kingdom. The matter was decided on 2014-08-14 by the High Court (High Court of Delhi at New Delhi, Division Bench — Vibhu Bakhru J (author) and S. Ravindra Bhat J). On those facts the High Court held as follows. The writ petitions were dismissed, parties bearing their own costs, and the ruling of the Authority upheld. Gains arising from the sale of a share of a company incorporated overseas which derives less than 50 per cent of its value from assets situated in India are not taxable under section 9(1)(i) read with Explanation 5. On the figures, only a fraction of the value of the Jersey company's shares was derived indirectly from the Indian companies, so even on the Revenue's own reconstruction of the transaction there would have been no charge, and its case that the sales at the Mauritius level were structured only to avoid tax was ex facie flawed. The transactions as structured could not have been achieved at the Jersey level and were not shown to be other than bona fide. The Mauritian companies could not be called shell companies so as to ignore their corporate identities, and the material was insufficient to treat the residence of the individual said to control the group as their situs.
Section 9(1)(i) deems income from the transfer of a capital asset situated in India to accrue in India, and a share of a company incorporated outside India is not such an asset; as Vodafone held, such a sale between non-residents falls outside the provision even where the entire value is derived from Indian assets. Explanations 4 and 5, inserted by the Finance Act 2012 and described in the notes on clauses and in their own terms as being for the removal of doubts, created a legal fiction deeming a share in a foreign company to be situated in India where it derives its value substantially, directly or indirectly, from assets located in India. A legal fiction must be restricted to the purpose for which it was enacted. The object of Explanation 5 was to tax income having a nexus with India, not to reach gains on overseas assets which do not derive the bulk of their value from India, so 'substantially' must be read as principally, mainly or at least a majority, and being clarificatory it must be read restrictively, covering cases where in substance Indian assets are transacted through the shares of an overseas holding company. The Court supported that threshold from the Shome Committee's draft report, which recommended defining 'substantially' as more than 50 per cent, and from Article 13(4) of the United Nations and OECD Model Conventions, which cede taxing rights to the situs State only above that line. On the avoidance case, had the group simply sold the Jersey shares, Moody's would have obtained only a 67 per cent indirect interest rather than full ownership, and the banks holding 33 per cent would not have shared in the proceeds, so the Revenue's alternative was not a real alternative. On substance, the Mauritian companies held category-I Global Business Licences and earned substantial revenues from research services, and serving related enterprises does not justify lifting the veil; on residence, the presumption that control and management rests with the boards was not rebutted. In the words reproduced by the source cited on this page: "the expression "substantially" occurring in Explanation 5 would necessarily have to be read as synonymous to "principally", "mainly" or at least "majority"."
It was decided by the High Court on 2014-08-14 and is reported as W.P.(C) 2033/2013, 2470/2013, 2590/2013 and 2597/2013 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 9(1)(i), section 195, section 245R, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The writ petitions were dismissed, parties bearing their own costs, and the ruling of the Authority upheld. Gains arising from the sale of a share of a company incorporated overseas which derives less than 50 per cent of its value from assets situated in India are not taxable under section 9(1)(i) read with Explanation 5. On the figures, only a fraction of the value of the Jersey company's shares was derived indirectly from the Indian companies, so even on the Revenue's own reconstruction of the transaction there would have been no charge, and its case that the sales at the Mauritius level were structured only to avoid tax was ex facie flawed. The transactions as structured could not have been achieved at the Jersey level and were not shown to be other than bona fide. The Mauritian companies could not be called shell companies so as to ignore their corporate identities, and the material was insufficient to treat the residence of the individual said to control the group as their situs. It arises in Capital Gains and TDS Defaults matters, on section 9(1)(i), section 195, section 245R of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi, Division Bench — Vibhu Bakhru J (author) and S. Ravindra Bhat J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document the commercial rationale for holding through an intermediate company and for transacting at the level you chose, and be ready to show that the Revenue's alternative structure would not have achieved the same result. Keep evidence that the intermediate company has substance — licences, revenues, financial statements — since earning revenue from related parties does not make it a shell. Show that the board in fact meets and manages in the treaty jurisdiction; the influence of a dominant promoter resident elsewhere is not enough by itself to shift place of management. Verify the current statutory definition of 'substantially' and the reporting and valuation rules before relying on this judgment for a live transaction.
Still good law. indiankanoon's citedby index returns nothing for this judgment, so a fallback name search was run. It shows the judgment followed by a coordinate bench of the same Court in CIT v Augustus Capital Pte Ltd (Delhi High Court, 30 November 2023), where the Bench said at para 24: 'as correctly pointed out on behalf of the respondent/assessee, a coordinate bench of this Court in Copal, even before the amendment was brought about by FA 2015, has taken the view that Explanation 5 had to be construed narrowly.' That endorsement is a ground of the Court's own decision, not a recital of argument. No Supreme Court decision deals with it and no Supreme Court challenge is traceable. Practitioners should note that the threshold Copal read into Explanation 5 by construction was afterwards put on the statute by Explanations 6 and 7 inserted by the Finance Act 2015, so for transfers on or after 1 April 2015 the statutory test governs; Copal remains the authority for the pre-amendment years and, on Augustus Capital, for the restrictive approach to Explanation 5 generally. Nothing overruling or doubting it was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The record does not set out the Court's treatment of the India-Mauritius treaty for the first transaction; the parts read decide the case on section 9(1)(i) with Explanation 5, on the commercial reality of the structure, and on substance and residence, and the Court upheld the Authority's ruling that neither seller was taxable and neither buyer had to withhold. The Court expressly declined to decide whether gains on the sale of the Jersey shares would have been taxable assuming the Mauritian-level sales had not happened, addressing that only because the Revenue's argument assumed it. The earn-out consideration was left out of the value computation because it was payable after the Jersey sale. The source page carries no reporter citation, so the writ petition numbers are given instead. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petitions were dismissed, parties bearing their own costs, and the ruling of the Authority upheld. Gains arising from the sale of a share of a company incorporated overseas which derives less than 50 per cent of its value from assets situated in India are not taxable under section 9(1)(i) read with Explanation 5. On the figures, only a fraction of the value of the Jersey company's shares was derived indirectly from the Indian companies, so even on the Revenue's own reconstruction of the transaction there would have been no charge, and its case that the sales at the Mauritius level were structured only to avoid tax was ex facie flawed. The transactions as structured could not have been achieved at the Jersey level and were not shown to be other than bona fide. The Mauritian companies could not be called shell companies so as to ignore their corporate identities, and the material was insufficient to treat the residence of the individual said to control the group as their situs.
TaxSphere, “DIT v Copal Research Limited, Mauritius”, https://taxnotice.vittsphere.com/caselaw/case/dit-v-copal-research-ltd/ (validity last checked 2026-08-29)
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