Clarification on indirect transfer provisions in case of redemption of share or interest outside INDIA under the income tax act 1961
Circular No. 28/2017 was issued by the Central Board of Direct Taxes on 7 November 2017. Its subject is Clarification on indirect transfer provisions in case of redemption of share or interest outside INDIA under the income tax act 1961.
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.
Takes the indirect transfer provisions of section 9(1)(i) read with Explanation 5 off income accruing to a non-resident on redemption or buyback of a share or interest held indirectly, through upstream entities registered or incorporated outside India, in an investment fund, venture capital company or venture capital fund, where that income arises from or in consequence of a transfer of shares or securities held in India by those specified funds and that income is chargeable to tax in India. The relief is capped: the redemption or buyback proceeds must not exceed the non-resident's pro-rata share in the total consideration realised by the specified funds on the Indian transfer. A non-resident investing directly in the specified funds continues to be taxed under the ordinary provisions. 'Investment fund' takes its meaning from clause (a) of Explanation 1 to section 115UB, and 'venture capital company' and 'venture capital fund' from the Explanation to section 10(23FB).
Investment funds, including private equity and venture capital funds, said that multi-tier non-resident structures suffered tax on the same income again at every upper level on a later redemption or buyback, and the Finance Minister's Budget speech of 1 February 2017 promised this clarification alongside the exemption for Category I and Category II Foreign Portfolio Investors.
| Under the 1961 Act | Now |
|---|---|
| s.9 | s.9 |
F.No.500/10/2017-FT&TR-IV
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Circular No.28/2017
Dated, the yth of November, 2017.
Sub: Clarification on Indirect Transfer provisions in case of redemption of share or
interest outside India under the Income-tax Act, 1961
Under the provisions contained in section 9(1 )(i) of the Income-tax Act, 1961 ('Act'),
all income accruing or arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property in India, or through or from any asset or
source of income in India or through the transfer of a capital asset situate in India, shall be
deemed to accrue or arise in India. Explanations 5, 6 and 7 of section 9(1 )(i) further define
the scope of said provision.
2. Concerns have been expressed by investment funds, including private equity funds and
venture capital funds, that on account of the extant indirect transfer provisions in the Act,
non-resident investment funds investing in India, which are set up as multi-tier investment
structures, suffer multiple taxation of the same income at the time of subsequent
redemption or buyback. Such taxability arises firstly at the level of the fund in India on its
short term capital gain/business income and then at every upper level of investment in the
fund chain on subsequent redemption or buyback. The Board has received representations
to exclude investors above the level of the direct investor, who is already chargeable to tax
in India on such income, from the ambit of indirect transfer provisions of the Act.
3. Addressing such concerns in his Budget speech on 1st February, 2017, the Finance
Minister had stated that Category I and Category II Foreign Portfolio Investors (FPI) will be
exempted from indirect transfer provisions. It was also stated that a clarification will be
issued that indirect transfer provisions shall not apply in case of redemption of shares or
interests outside India as a result of or arising out of redemption or sale of investment in
India which is chargeable to tax in India.4. Vide Finance Act, 2017, Category I and Category II FPIs have already been
exempted from indirect transfer provisions of the Act through insertion of proviso to
Explanation 5 to section 9(1)(i) of the Act, with effect from 01.04.2015.5. There could be situations in multi-tiered investment structures, where interest or
share held indirectly by a non-resident in an Investment Fund or a Venture Capital
Company or a Venture Capital Fund (hereinafter referred to as 'specified funds'), is
redeemed in an upstream entity outside India in consequence of transfer of shares or
securities held in India by the specified funds, the income of which have been subject to tax
in India. In such cases, application of indirect transfer provisions on redemption of share or
interest in the upstream entity may lead to multiple taxation of the same income. In respect
of Category I and Category II FPIs though, such multiple taxation will not take place on
account of the insertion of proviso to Explanation 5 to section 9(1)(i) of the Act, vide Finance
Act, 2017.6. The matter has been examined by the Board and it has been decided that the
provisions of section 9(1)(i) of the Act read with Explanation 5 thereof shall not apply in
respect of income accruing or arising to a non-resident on account of redemption or
buyback of its share or interest held indirectly (i.e. through upstream entities registered or
incorporated outside India) in the specified funds if such income accrues or arises from or
in consequence of transfer of shares or securities held in India by the specified funds and
such income is chargeable to tax in India. However, the above benefit shall be applicable
only in those cases where the proceeds of redemption or buyback arising to the non-resident do not exceed the pro-rata share of the non-resident in the total consideration
realized by the specified funds from the said transfer of shares or securities in India. It is
further clarified that a non-resident investing directly in the specified funds shall continue
to be taxed as per the extant provisions of the Act.For the purposes of this Circular,
(i) "Investment fund" shall have the meaning assigned to it in clause (a) of Explanation
1 to section 115UB of the Act.
(ii) "Venture capital company" and "venture capital fund" shall have the meanings
respectively assigned to them in Explanation to clause (23FB) of section 10 of the
Act.Copy to:-
1. PS to FM/OSO to FM/OSO to MoS(R)
2. PS to Revenue Secretary
(Amnt Agrahari)
Under Secretary [FT&TR-IV(1)]3. The Chairman, Members and officers of the CBDT of the rank of Under Secretary and
above
4. All Pr. Chief Commissioners of Income Tax, Pr. Directors General of Income Tax with a
request to circulate amongst all officers in their region/charges.
5. Pr. DGIT (NADT), Pr. DGIT (Systems), Pr. DGIT (Vigilance), Pr. DGIT (Admn.), Pr. DGIT
(L&R)
6. CIT (M&TP), CBDT
7. C&AG, New Delhi
8. Web Manager for uploading on incometaxindia.gov.in & placing on public domain
9. Data Base Cell for uploading on irsofficersonline.gov.in
10. Guard File
You meet it where an Assessing Officer treats a redemption or buyback in an offshore holding entity as an indirect transfer of Indian assets under Explanation 5 to section 9(1)(i), in a fund chain whose Indian gains were already taxed.
An Indian venture capital fund sells its Indian portfolio shares and the gain is taxed in India. An offshore feeder above the fund then redeems the interest of its non-resident investor. If the redemption proceeds do not exceed that investor's pro-rata share of the consideration the fund realised on the Indian sale, the indirect transfer provisions do not apply to the redemption. Anything above that pro-rata share is outside the circular.
It mentions. Circular No. 28/2017
Source: the Income Tax Department’s own published text — its page for this instrument.