The existing provisions of section 9 of the Act deal with cases of income which are deemed to accrue or arise in India. Sub-section(1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India Clause(i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that 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.
The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1 )(i) w.r.e.f. 1.04.1962 . The Explanation 5 clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Considering the concerns raised by various stakeholders regarding the scope and impact of these amendments an Expert Committee under the Chairmanship of Dr. Parthasarathi Shome was constituted by the Government to go into the various aspects relating to the amendments.
The recommendations of the Expert Committee were considered and a number of recommendations (either in full or with partial modifications) have been accepted for implementation either by way of an amendment of the Act or by way of issuance of a clarificatory circular in due course. In order to give effect to the recommendations, the following amendments are proposed in the provisions of section 9 relating to indirect transfer:-
(i) the share or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets,-
(a) exceeds the amount of ten crore rupees ; and
(b) represents at least fifty per cent. of the value of all the assets owned by the company or entity.
(ii) value of an asset shall mean the fair market value of such asset without reduction of liabilities, if any, in respect of the asset.
(iii) the specified date of valuation shall be the date on which the accounting period of the company or entity, as the case may be, ends preceding the date of transfer.
(iv) however, if the book value of the assets of the company on the date of transfer exceeds by at least 15% of the book value of the assets as on the last balance sheet date preceding the date of transfer, then instead of the date mentioned in (iii) above, the date of transfer shall be the specified date of valuation.
(v) the manner of determination of fair market value of the Indian assets vis-a vis global assets of the foreign company shall be prescribed in the rules.
(vi) the taxation of gains arising on transfer of a share or interest deriving, directly or indirectly, its value substantially from assets located in India will be on proportional basis. The method for determination of proportionality are proposed to be provided in the rules.
(vii) the exemption shall be available to the transferor of a share of, or interest in, a foreign entity if he along with its associated enterprises,
(a) neither holds the right of control or management,
(b) nor holds voting power or share capital or interest exceeding five per cent. of the total voting power or total share capital, in the foreign company or entity directly holding the Indian assets (direct holding company).
(viii)in case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly then the exemption shall be available to the transferor if he along with its associated enterprises,-
(a) neither holds the right of management or control in relation to such company or the entity,
(b) nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or entity or entitle it to voting power exceeding five percent. in the direct holding company or entity.
(ix) exemption shall be available in respect of any transfer, subject to certain conditions ,in a scheme of amalgamation, of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company.
(x) exemption shall be available in respect of any transfer, subject to certain conditions, in a demerger, of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company.
(xi) there shall be a reporting obligation on Indian concern through or in which the Indian assets are held by the foreign company or the entity. The Indian entity shall be obligated to furnish information relating to the off-shore transaction having the effect of directly or indirectly modifying the ownership structure or control of the Indian company or entity. In case of any failure on the part of Indian concern in this regard a penalty shall be leviable. The proposed penalty shall be‑
(a) a sum equal to two percent of the value of the transaction inrespect of which such failure has taken place in case where such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; and
(b) a sum of five hundred thousand rupees in any other case.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years.
Note On Relevant Clauses of Finance Bill 2015
Clause 5 of the Bill seeks to amend section 9 of the Income-tax Act relating to income deemed to accrue or arise in India.
Clause (i) of sub-section (1) of the aforesaid section provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. Explanation 5 to the said clause provides that an asset or 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 interest derives, directly or indirectly, its value substantially from the assets located in India.
It is proposed to amend the said clause (i) by insertion of Explanation 6 to provide that the share or interest shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets is more than ten crore rupees and represents at least fifty per cent. of the value of all the assets owned by the company or entity, as the case may be. The definition of value of assets and the specified date is also proposed to be provided in the said Explanation.
It is further proposed to insert Explanation 7 in the said clause (i) so as to provide that the income shall not accrue or arise to a non-resident in case of transfer of any share or interest referred to in Explanation 5, unless––
(a) he along with its associate enterprises,––
(i) neither holds the right of management or control;
(ii) nor holds voting power or share capital or interest exceeding five per cent. of the total voting power or total share capital, in the foreign company or entity directly holding the Indian assets (direct holding company);
(b) he along with its associate enterprises, in case of the transfer of shares or interest in a foreign entity which does not hold the Indian assets directly,––
(i) neither holds the right of management or control in relation to such company, as the case may be, or the entity;
(ii) nor holds any rights in such company which would entitle it to either exercise control and management of the direct holding company or entitle it to voting power exceeding five per cent. in the direct holding company or entity .
Clause (v) of sub-section (1) of section 9 relates to the interest income and provides that the income by way of interest, if payable by persons specified in the said clause, shall be deemed to accrue or arise in India.
It is proposed to amend the said clause in order to provide that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly.
It is further proposed to provide that “permanent establishment” shall have the same meaning assigned to it in clause (iiia) of section 92F.
These amendments will take effect from 1st April, 2016 and accordingly apply in relation to the assessment year 2016-17 and subsequent years.
Clause 13 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.
The existing provisions contained in section 47 of the Act provide that capital gains are not applicable to the transfers specified in the said section.
Clause (via) of the said section provides that transfer of capital asset being shares of an Indian company by a foreign company to another foreign company under scheme of amalgamation shall not be treated as transfer subject to conditions provided in the said clause. Clause (vic) of the said section provides that transfer of capital asset being shares of an Indian company by a foreign company to another foreign company under a demerger shall not be treated as transfer subject to conditions provided in the said clause.
It is proposed to amend the said section in order to provide that the following transfers shall not be regarded as transfer under said section, namely:—
(i) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause(i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, subject to conditions provided therein;
(ii) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause(i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares ofan Indian company, held by the demerged foreign company to the resulting foreign company, subject to conditions provided therein.
It is further proposed to amend section 47 so as to provide that capital gains shall not apply to any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, if the transfer is made in consideration of the allotment to him of any unit or units in the consolidated scheme of the mutual fund under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992. Provided, the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.
It is further proposed to define the terms “consolidating scheme”, “consolidated scheme”, “equity oriented fund” and “mutual fund”.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016- 17 and subsequent years.
Clause 14 of the Bill seeks to amend section 49 of the Income-tax Act relating to cost with reference to certain modes of acquisition.
The existing provisions contained in sub-section (1) of the aforesaid section provide that where the capital asset became the property of the assessee under certain situations the cost of acquisition of the asset shall be deemed to be cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
It is proposed to amend sub-clause (e) of clause (iii) of said sub-section (1) so as to include the transfer referred to in clause (vib) of section 47.
It is proposed to amend the aforesaid sub-clause (e) to provide for determination of cost of acquisition in respect of shares or interest of foreign company or entity in certain cases.
It is also proposed to amend the said section so as to provide that where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, became the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016- 17 and subsequent years.
Clause 72 of the Bill seeks to insert a new section 271GA relating to penalty for failure to furnish information or document under section 285A.
It is proposed to provide that if any Indian concern which is required to furnish any information or document under the proposed section 285A, fails to do so, the Income-tax authority as may be prescribed in the said section 285A, may direct that such Indian concern shall pay, by way of penalty,–
(i) a sum equal to two per cent. of the value of the transaction, in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern;
(ii) a sum of five hundred thousand rupees in any other case.
This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent years.
Clause 75 of the Bill seeks to amend section 273B of the Income-tax Act relating to penalty not to be imposed in certain cases.
The section provides for non-levy of penalty under various sections of the Income-tax Act enumerated in the said section, if the assessee is able to show existence of reasonable cause for the failure for which penalty is leviable.
It is proposed to amend the aforesaid section so as to include the proposed new section 271 FAB relating to penalty for failure to furnish statement or information or document by an eligible investment fund.
It is further proposed to amend the said section to include the reference of the proposed new section 271 GA relating to penalty for failure to furnish information or document under section 285A.
These amendments will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016- 17 and subsequent years.
It is also proposed to amend the aforesaid section so as to include the reference of new section 271-I.
This amendment will take effect from 1st June, 2015.
Clause 76 of the Bill seeks to insert a new section 285A relating to furnishing of information by an Indian concern in certain cases.
It is proposed to provide that where any share or interest in a company or entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India as referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, and such company or, as the case may be, entity holds such assets in India through or in an Indian concern, then, any such Indian concern shall, for the purposes of determination of income accruing or arising in India, under the clause (i) of sub-section (1) of section 9, furnish within the prescribed period to the prescribed income-tax authority the relevant information or document, in such manner and form as is prescribed in this behalf.
This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent years.
Extract of Relevant Clauses from Finance Bill 2015 proposing amendment to Income tax Act, 1961
5. Amendment of section 9.
Amendment of section 9.
5.In section 9 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2016,— (A) in clause (i), after Explanation 5, the following Explanations shall be inserted, namely:—
‘Explanation 6.—For the purposes of this clause, it is hereby declared that—
(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets—
(i) exceeds the amount of ten crore rupees; and
(ii) represents at least fifty per cent. of the value of all the assets owned by the company or entity, as the case may be;
(b) the value of an asset shall be the value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed;
(d) “accounting period” means each period of twelve months ending with the 31st day of March:
Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a period of twelve months ending on a day other than the 31st day of March for the purpose of—
(i) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or
(ii) reporting to persons holding the share or interest, then, the period of twelve months ending with the other day shall be the accounting period of the company or, as the case may be, the entity:
Provided further that the first accounting period of the company or, as the case may be, the entity shall begin from the date of its registration or incorporation and end with the 31st day of March or such other day, as the case may be, following the date of such registration or incorporation, and the later accounting period shall be the successive periods of twelve months:
Provided also that if the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist.
Explanation 7.— For the purposes of this clause,—
(a) no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5,—
(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent. of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or
(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent. of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;
(b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed;
(c) “associated enterprise” shall have the meaning assigned to it in section 92A;’;
(B) in clause (v), after sub-clause (c), the following Explanation shall be inserted, namely:—
‘Explanation.—For the purposes of this clause,—
(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;
(b) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F.’.
13. Amendment of section 47.
In section 47 of the Income-tax Act, with effect from the 1st day of April, 2016,—
(a) after clause (viaa), the following clause shall be inserted, namely:—
“(viab) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if—
(A) at least twenty-five per cent. of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and (B) such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated;”;
(b) after clause (vicb), the following clause shall be inserted, namely:—
“(vicc) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if,—
(a) the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated:
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to in this clause;”;
(c) after clause (xvii), the following clause shall be inserted, namely:—
‘(xviii) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund:
Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.
Explanation.— For the purposes of this clause,—
(a) “consolidating scheme” means the scheme of a mutual fund which merges under the process of consolidation of the schemes of mutual fund in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 made under the Securities and Exchange Board of India Act, 1992;
(b)”consolidated scheme” means the scheme with which the consolidating scheme merges or which is formed as a result of such merger;
(c) “equity oriented fund” shall have the meaning assigned to it in clause (38) of section 10;
(d) “mutual fund” means a mutual fund specified under clause (23D) of clause 10.’.
14. Amendment of section 49.
In section 49 of the Income-tax Act, with effect from the 1st day of April, 2016,—
(I) in sub-section (1), in clause (iii), in sub-clause (e), for the words, brackets, figures and letters “or clause (viaa) or clause (vica) or clause (vicb)”, the words, brackets, figures and letters “or clause (viaa) or clause (viab) or clause (vib) or clause (vica) or clause (vicb) or clause (vicc)” shall be substituted;
(II) after sub-section (2AC), the following sub-section shall be inserted, namely:—
“(2AD) Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, became the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund.”
72. Insertion of new section 271GA.
After section 271 G of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2016, namely:—
“271GA. If any Indian concern, which is required to furnish any information or document under section 285A, fails to do so, the income-tax authority, as may be prescribed under the said section, may direct that such Indian concern shall pay, by way of penalty,—
(i) a sum equal to two per cent. of the value of the transaction in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern;
(ii) a sum of five hundred thousand rupees in any other case.”.
75. Amendment of section 273B.
In section 273B of the Income-tax Act,—
(I) for the words, figures and letters “section 271 FB, section 271 G”, the words, figures and letters “section 271 FAB, section 271 FB, section 271 G, section 271 GA” shall be substituted with effect from the 1st day of April, 2016;
(II) after the word, figures and letter “section 271H”, the word, figures and letter “section 271-I,” shall be inserted with effect from the 1st day of June, 2015.
76. Insertion of new section 285A.
After section 285 of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2016, namely:—
“285A. Where any share of, or interest in, a company or an entity registered or incorporated outside India derives, directly or indirectly, its value substantially from the assets located in India, as referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, and such company or, as the case may be, entity, holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such Indian concern shall, for the purposes of determination of any income accruing or arising in India under clause (i) of sub-section (1) of section 9, furnish within the prescribed period to the prescribed income-tax authority the information or documents, in such manner, as may be prescribed.”.
( Compiled by CA Ankit Banka & Taxguru Team)
