India: First Landmark Ruling On Indian Indirect Transfer Taxes!

Delhi High Court restricts their applicability

  • The Delhi High Court upholds the non-taxability of gains from sale of shares of overseas entities by the Copal Group to the Moody's Group.
  • Interpretation of the indirect transfer tax provisions in a restrictive manner.
  • 50% threshold for substantiality based on guidance by OECD/ UN material and Shome Committee Report and DTC, 2010.

Earlier this week, the Delhi High Court came out with the first High Court ruling on the indirect transfer tax provisions, in DIT v. Copal Research Mauritius Limited, Moody's Analytics, USA & Ors.1 These tax provisions have long plagued the international investor community, particularly cross border M&A, and it was hoped that they would be removed/ clarified by the Modi government's recent maiden budget.2

The Delhi High Court has stepped in to finish the task that the Finance Bill left undone, in a lucid and landmark judgment that upholds the non-taxability (in India) of gains from the sale of shares of overseas entities by the Copal Group to the Moody's group. The primary issue underlying the writ petition filed by the Indian tax department ("Revenue"), against the order of the Authority for Advance Rulings ("AAR")3, pertained to whether the taxpayer's transaction amounted to a prima facie avoidance of tax. However, in dismissing the writ, the High Court also goes on to lay down important judicial dicta on the scope and extent of applicability of the indirect transfer tax provisions.


A. Group Structure

Copal Partners Limited, Jersey ("Copal Jersey") had various subsidiaries across the globe (UK, Middle-East & Cyprus), including a wholly owned subsidiary in Mauritius, Copal Research Limited ("Copal Mauritius 1"). Copal Mauritius 1 further owns shares of various global subsidiaries, an Indian company, Copal Research India Private Limited ("Copal India"), and a Mauritius based subsidiary – Copal Market Research Limited ("Copal Mauritius 2"). Copal Mauritius 2 had an underlying Indian subsidiary, Exevo India Private Limited ("Exevo India").

B. Description of the transaction:

The global acquisition of the Copal subsidiaries by Moody's group was carried out in the following order:

  • Transaction 1: Transfer of shares of Copal India by Copal Mauritius 1 to Moody's Cyprus
  • Transaction 2: Transfer of shares of Exevo Inc. (the US-based parent of Exevo India) by Copal Mauritius 2 to Moody's Inc.
  • Transaction 3: Transfer of shares of individual shareholders (to the extent of 67% stake) in Copal Jersey to Moody's Inc. Importantly, there was no direct or indirect transfer of Indian assets in this stage.

Therefore, as a part of a global acquisition of Copal's subsidiaries by the Moody's group, two underlying Indian subsidiaries were transferred to the Moody's group. A diagrammatic representation of the transaction structure is contained below in Figure 1.

C. Relevant Provisions

The Revenue's main contention was that Transaction 1 and Transaction 2 were carried out for the purpose of avoidance of capital gains tax arising from the indirect transfer of underlying Indian assets. It was further contended that had the transfer of underlying Indian subsidiaries been effectuated through Transaction 3, there would have been a tax incidence in India.

Therefore, the Revenue's position was based on the assumption that the indirect transfer tax would be applicable to the acquisition of indirect control of Indian entities.

To give a background, these indirect transfer provisions, under section 9 read with Explanation 5 of the of the Income-tax Act, 1961 ("ITA"), prescribe that when a non-Indian company is transferred by a non-resident, Indian capital gains taxes may apply if the non-Indian company derives "substantial value" from assets situated in India.

The meaning, scope and extent of the term "substantially", as provided under Explanation 5 were not clarified in the letter of law, as the provisions were introduced by Finance Act, 2012 as a knee jerk reaction to the Supreme Court's verdict in Vodafone case. While there have been indications on this in the Direct Tax Code (DTC) Bill, the Shome Committee Report, etc these recommendations are yet to form part of the law and therefore limited clarity on the issue has plagued taxpayers.

The judgment goes on to provide some valuable insights on this ambiguous subject.

Analysis of Judgment

The judgment throws light on issue of whether the transaction structure results in prima facie avoidance of tax, and provides a detailed analysis of the applicability and scope of indirect transfer taxes.

A. Whether the acquisition was structured prima facie for avoidance of tax

The Revenue contended that Transaction 1 and Transaction 2 were carried out for the purpose of tax avoidance, and should thus be disregarded. The High Court dismissed this contention on finding adequate commercial rationale behind Transaction 1 and 2 which was as follows:

  • Moody's group entities wanted to exercise 100% control over Exevo Inc. and Copal India while through Transaction 3, it would have been possible to gain control over only 67% of these entities and
  • The fund flows involved a payment of dividends to certain banks and financial institutions which were shareholders in Copal Jersey. This would not have been possible without Transaction 1 and Transaction 2.

The above commercial objectives could not have been met if the acquisition was structured only through Transaction 3. Thus, it was held that the transactions were not structure prima facie for avoidance of tax. This also demonstrates the Delhi High Court's affirmation of the Mauritius route provided that there is sufficient commercial rationale.

B. Restrictive application of indirect transfer tax provisions

While the High Court dismissed the contentions of the Revenue on the issue of prima facie avoidance of tax, it went on to elaborate on the applicability of Indian tax implications on account of the Revenue's contentions on Indian taxability.

The High Court was of the opinion that indirect transfer tax provisions should not apply to Transaction 3 on the basis of the following:

  • The High Court examined the consideration paid for all three transactions to come to the conclusion that, as USD 93.5 million was the consideration allocable to assets situated outside India and only USD 28.53 was allocable to the Indian assets, Copal Jersey cannot be said to derive substantial value from Indian assets.
  • The High Court has also expanded on how the term "substantially" as used in Explanation 5 should be interpreted to mean "principally", "mainly" or at least "majority". It has stated that a restrictive approach should be employed while interpreting a legal fiction such as Explanation 5 and concluded that for the indirect transfer tax provisions to apply, the overseas company should derive at least 50% of its value from Indian assets.
  • This is particularly significant considering the lower threshold of 20% recommended under the latest draft of the DTC. However, to reach this conclusion, the High Court relied on the following:

a) The object of section 9(1)(i) is to tax gains arising out of capital assets which are situated in India and thus, while interpreting Explanation 5, the scope of section 9(1)(i) should not be extended to tax income that has no nexus with India.

b) The Shome Committee Report and the Direct Tax Code Bill of 2010 both interpreted the term "substantially" to mean a threshold of 50% of the total value derived from Indian assets.

c) The OECD Model Tax Convention on Income and Capital as well as the UN Model Tax Convention provide that for the source country to exercise taxing rights over the disposal of shares of a company, the company should derive 50% or more of its value from immovable property situated in the source country.

On this basis, the High Court was of the opinion that there should be no Indian tax liability on Copal Group or withholding tax obligations on the Moody's group as a result of the acquisition.


This judgment provides much needed clarity to foreign investors on the applicability of indirect transfer tax provisions, as being one of the first judgments to have delved into the meaning, scope and extent of the term "substantially" in the context of indirect transfers. However, there are some key points on which we would need to continue to wait and watch.

What is substantial enough: By relying on the Shome Committee Report, OECD/ UN material and interpreting the statutory amendments in detail, the High Court has tied together several discussions on the indirect transfer provisions since they were first introduced in 2012. Unfortunately, while reliance was placed on the interpretation provided by the DTC Bill of 2010 which sets a 50% threshold, the latest draft of the DTC Bill was introduced by the previous government earlier this year lowering the threshold to 20%, has not been considered. On the basis of the High Court's reasoning, it is unlikely that the revised DTC Bill would have impacted the Court's decision – however, the point is now a subject of hypothesis.

How to value "substantial": The High Court has determined 'value' in terms of the share consideration paid for different legs of the transaction. However, there is currently no clarity on the manner in which 'value' of Indian subsidiaries may be determined i.e. whether it should be an asset value of the subsidiaries, revenue based value or some other value.

Impact on retrospective application – None: Importantly, the High Court did not (and was not required to) deal with the retrospective effect of the amendments to section 9. For this, one would need to wait for the matters pending at various High Courts challenging the constitutional validity of the retrospective amendments.

Interpretation of GAAR: While the Delhi High Court has confirmed that the commercial justification provided in the present case is sufficient to demonstrate prima facie avoidance of tax, one would need to wait and watch as to whether it would be sufficient to avoid the rigours of GAAR.

Overall, the tide seems to be shifting, slowly but steadily. This judgment is one of the several smaller changes being made towards improving the investor climate in India, by the regulatory authorities, Finance Minister or courts and has been much awaited for a while now.


1 W.P.(C) 2033/2013

2 For insights on Budget 2014-15, please click [here]

3 Moody's Analytics and Ors v. AAR, AAR No. 1186 of 2011, AAR No. 1187 of 2011, AAR No. 1188 of 2011 decision dated June 7, 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Shreya Rao
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.