A communication issued by the Central Board of Direct Taxes, as F. No. 142/26/2015-TPL, dated 23 May 2016. Issued under section 9.
A draft amendment to the Income-tax Rules, 1962 put out by the Board for comment. Section 9 of the Income-tax Act, 1961 deems income arising from the indirect transfer of assets situated in India to accrue or arise in India, and section 285A places a reporting obligation on the Indian concern through or in which the foreign company or entity holds those assets. Both depend on a fair market value computation that the Act leaves to the rules, and this draft supplies it.
This one does not fall neatly into the Board's usual classes — it is a letter, a memorandum, a consultation paper or something else the department has published in this collection. What it is, and what weight it carries, is set out below.
The draft explains the statutory scheme it is serving and then proposes the rules. It records that a share or interest is said to derive its value substantially from assets located in India where the fair market value of the assets located in India is at least fifty per cent of the fair market value of the total assets of the company or entity. It then proposes the manner in which the fair market value of the assets of the foreign company or entity is to be computed, distinguishing listed from unlisted entities and prescribing how the Indian and the global asset values are to be arrived at and compared. Alongside the valuation, it proposes the form and the manner in which the Indian concern is to discharge the reporting requirement that section 285A casts on it, including the information and documents it must maintain and furnish.
The retrospective indirect transfer amendment left two questions open that no assessee could answer on its own. It was not possible to test whether the fifty per cent threshold was crossed without an agreed method of valuing assets located in India and the entity's total assets on the same basis. And the Indian concern, which is often a subsidiary with no visibility into its overseas parent's dealings, had a reporting duty under section 285A with no prescribed form. The Board circulated this draft to settle both before the provisions could operate.
A draft rule binds nobody and cannot be applied to a transfer. It is published so that the Board can be told where it is wrong. This is a different thing from the Board's directive material, which binds the department's officers alone: an assessee is entitled to reject a Board circular that goes against him, and the Tribunal and the courts decide the question for themselves.
Circulated on 23 May 2016 for comment. The document as read does not print a date from which the proposed rules would operate.
Work from the rules as notified, not from this draft; rules 11UB and 11UC and Form 49D as they finally emerged differ from what is proposed here. Note where the burden falls. The reporting duty under section 285A is on the Indian concern, which frequently cannot obtain the group valuation data it needs from its own parent, and the fifty per cent test is applied on fair market value and not on book value.
The share or interest is said to derive it value substantially from assets located in India, if fair market value (FMV) of assets located in India comprise at least 50% of the FMV of total assets of the company or entity.
— the Central Board of Direct Taxes, communication F. No. 142/26/2015-TPL, 23 May 2016. Read it in the department’s own PDF.
| Under the Income-tax Act, 1961 | Now, in the Income-tax Act, 2025 |
|---|---|
| section 9 | section 9 |
| section 285A | section 506 |
I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
A foreign professional worked on our matter in India but we neither briefed him nor paid him. Can we be treated as his agent and made liable for his tax?
We pay interconnect and port charges to another telecom operator — is that fees for technical services on which we must deduct tax under section 194J?
The TDS officer says I under-deducted under s.192. If my estimate was made honestly, does that answer the demand, the interest and the penalty?
I am a foreign company on a turnkey contract. I fabricated the platform abroad and only installed it in India. Can the Department tax the offshore fabrication profit because the contract was one indivisible whole?
What here is the Board’s and what is ours. The document is the Central Board of Direct Taxes’ own. Its number, its date and the words quoted above are reproduced from the Board’s own PDF, which is here. Everything else on this page is ours: the plain-English account of what the document is and what it does, the reading of which provision it turns on, the note on what to watch, and the choice of cases. Where our account and the document part, the document governs.
An order of the Board binds the department, not you and not a court. The Board writes to its own officers. An assessee may hold the department to an order or an instruction that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves. This is the most common mistake made with this material, and it is worth making twice: a direction of the Board is not a section of the Act.
We did not read all of it. The department’s file returned only part of this document to us, so what is written above is written from the part we could read. Open the PDF before you rely on it.
What we could not settle. The fetch returned the covering note setting out the statutory scheme, but not the text of the draft rules themselves or the draft form; the detailed valuation mechanics and the reporting format could not be read. No deadline or email address for comments was legible.