Section 9(1)(i)-Benefit of non-applicability of indirect transfer provisions in case of Category I and II FPIs – Provisions for avoidance of double taxation in case of such indirect transfer provisions, where direct transfer has already been subject to tax
Issue/Justification
The Finance Act, 2012 amended Section 9(1)(i) of the Act with retrospective effect from 1st April 1962 to provide that any share or interest in an entity incorporated outside India shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from assets located in India.
The Finance Act, 2017 provided that the aforesaid deeming provisions shall not apply to an asset or capital asset mentioned in Explanation 5 of section 9(1)(i), which is held by a nonresident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD and registered as Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act,
1992.
The Finance Act, 2017 exempted investors (direct / indirect) in category I (sovereign funds) and category II (broadbased funds) FPIs from the application of indirect transfer tax provisions.
The CBDT has, recently, issued a Circular No. 28/2017 dated 7 November 2017 clarifying that the indirect transfer provisions shall not apply to income arising to a non-resident on redemption or buy-back of shares held indirectly through specified funds, if such income is consequent to transfer of shares held in India by the specified funds and such direct transfer is taxable in India.
The Circular applies to specified funds (VCF, Category I or II – AIF) and not to offshore funds in general. Further, the exemption will be restricted to 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.
Suggestion
It is suggested that:
While issuance of Circular no. 28/2017 is a welcome clarification for non-residents in respect of redemption or buyback of shares held indirectly through specified funds (FPIs registered as Category -I or Category –II), in respect of other offshore funds the indirect transfer provisions may still lead to double taxation
Therefore, a suitable amendment should be brought in to the effect that exemption is extended to all offshore funds (interalia Category-III FPIs) and should not be restricted to specified funds.
