Circular No.41 of 2016
Circular No. 41/2016 was issued by the Central Board of Direct Taxes on 21 December 2016. Its subject is Circular No.41 of 2016.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Clarifies how the indirect transfer provisions of section 9(1)(i) apply to funds and their investors. The framework it sets out is that Explanation 5 deems a share or interest in a company or entity registered or incorporated outside India to be, and always to have been, situate in India where it derives its value substantially, directly or indirectly, from assets located in India; Explanation 6 confines that to cases where, on the specified date, the value of those Indian assets exceeds Rs. 10 crore and is at least 50 per cent of the value of all the assets owned by the company or entity; and Explanation 7 carves out a small investor who holds no right of management or control and less than 5 per cent of the total voting power, share capital or interest of the entity that owns the Indian assets. Section 285A separately casts a reporting obligation on the Indian concern whose shares are substantially held by such a foreign company or entity. On the questions answered here: where a foreign portfolio investor fund holds Indian shares worth more than 50 per cent of its assets and over Rs. 10 crore, and redeems units at an investor's request, Explanation 5 applies to the investors in the fund as well, since the case falls within clause (a) of Explanation 6, except for investors covered by Explanation 7(a)(i). In a master-feeder structure where no ultimate investor has any right of control or management or holds more than 5 per cent, and the feeder fund furnishes a declaration to that effect, the conditions of Explanation 7(a)(ii) are prima facie met and the non-resident investors' income from transfer of their interests in the feeder funds is not deemed to accrue in India.
Queries were received on the scope of the indirect transfer provisions; the Board constituted a Working Group on 15 June 2016 to examine the issues raised by stakeholders and issued these clarifications on its comments.
Circular No.41 of 2016
F.no. 500/43/2012-FT&TR
Government of lndia
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
(FT&TR-Division)
Clarifications on Indirect Transfer provisions under the lncome Tax Act. 1961
Under the indirect transfer provisions contained in section 9(1Xi) of the Income Tax
Act, 1961 (.Act'), all income accruing or arising, whether directly or indirectly, through or from
any business connectiofi in India, or through or from any property in India, or through or irom
any asset or source of income in India or through the tfansfer of a capital asset situate in
India, shall be deemed to accrue or arise in India. Explanation 5 thereof clarifies 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 interesi derives, directly or indifectly, its value substantially
from the assets located in India. Explanation 6 provides that the said Explanation 5 will be
applicable, if on the specified date the value of such assets exceeds the amount of Rs_10
crore and represents at least 50% of the value of all the assets owned by the company/
entity. Explanation 7, however, provides a carve out from the applicability of Explanation 5 to
small investors holding no ight 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. Section 285A of the Act casts a
reporting obligation on the Indian concern whose shares are substantially held directly or
indirectly by a company or entity registered or incorporated outside India.
2. Quefies have been received by the Board about the scope of the indirect transfer
provisions. In this regard, the Board constituted a Working Group on 15'" June, 2016 to
examine the issues raised by stakeholders. The Board has considered the comments of the
Working Group on the said issues and the following clarifications afe issued:
Question No.l : A Fund is set-up in a popular jurisdiction and registered as FPI for
unde.iaking portfolio investmeni in lndian securities. lt pools monies
from retail/ institutional investors and invesis in shares of lndian
listed companies. The value of asseis in India i.e. shafes of Indian
companies held by the Fund constitute more than 50% of its total
assets and exceed Rs.'10 crofes. The Fund buys and sells shares on
the Indian stock market and pay taxes as per section 1'15 AD of the
Act or applicable tax treaty rates. On the ongoing basis, the Fund, on
request of its unit holders/ shareholders, redeems their units/ shares.
Does Explanation 5 to section 9(1)(i) of the Act apply to above
redemption made by the Fund?
Answer: Explanation 5 to section 9('1Xi) of the Act will be applicable in respect
of investors in the Fund also, as their case falls within the ambit of
clause (a) of Explanation 6 of the said section. However, the investors
covered under Explanation 7(a)(i) of the Act are excluded.
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Question no. 2:
Answer:Fund I and Fund ll are feeder funds set-up in countfy X and country Y
respectively. Both the feeder funds pool monies from investors and
feed that into a lvlaster Fund set-up in countfy X. None of ihe
investors of the feeder funds have the right of control or managemeni
in the Master Fund or hold voting power or share capital or intefesi,
directly or indirectly, exceeding 5% in the Master Fund. The l\4aster
Fund is registered as FPI for undertaking portfolio investment in Indian
securities. The value of assets in India i.e. shares of Indian
companies held by the Master Fund constitute more than 50% of its
toial assets and exceed Rs.10 crores. Will indirect transfer provisions
apply to investors in mastef-feeder structures, where feeder funds are
merely used to pool monies from investors, where none of the ultimate
investors hold or will hold right of control or management or voting
power or share capital or interest, directly or indirectly, exceeding 5%
in the fund and a declaration to this effect is furnished by the feeder
fund to the Fund registered as FPl.?
Since conditions of Explanation 7(a)(ii)to section 9(1Xi) ofthe Act are,
prima facie, fulfilled by the investors in the Feeder Funds I and ll,
income of such non-resident investors from transfer of their interests
in the Feeder Funds would not be deemed to accrue or arise in India.
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On a notice treating a redemption or an offshore transfer as taxable in India under section 9(1)(i), and in a section 285A reporting default raised on the Indian concern.
It mentions. Circular No. 41/2016
Source: the Income Tax Department’s own published text — its page for this instrument.