India: CBDT Releases Draft Rules For Indirect Transfer Provisions And Notifies Equalization Levy Rules



Under Indian domestic tax law, capital gains earned by a non-resident on transfer of shares or interest in a foreign company (Foreign Target) which derive 'substantial value' from underlying Indian assets (Underlying Indian Assets) are liable to tax in India. These provisions were introduced by the Finance Act, 2012 by way of a retrospective amendment in order to negate the ruling of the Hon'ble Supreme Court of India (SC) in the Vodafone case. Thereafter, to clarify the applicability of this retrospective amendment, the Finance Act, 2015 made certain critical amendments including laying down of criteria for 'substantial value', providing for taxability of only income attributable to Indian assets and introducing a reporting requirement for underlying Indian entities. In furtherance of these amendments, which are briefly discussed below, the specific rules as regards the methods and related filings (as applicable) were pending which have now been released in the form of draft rules:

  • Criteria for 'substantial value' laid down

    The share or interest of the Foreign Target shall be deemed to derive its value substantially from Underlying Indian assets, if on the specified date, the value of the Underlying Indian assets:

    • exceeds INR 100 million; and
    • represents at least 50% of the value of all the assets owned by the Foreign Target (Target's Total Assets)
    The manner of determining value of assets was to be prescribed and guidance in this regard was awaited.
  • Only 'reasonably attributable' income would be taxable in India

    If the Foreign Target has assets located in India as well as outside India, the transferor of the share/interest in Foreign Target (Foreign Transferor) would be taxed in India only on such income as is reasonably attributable to the Underlying Indian Assets and determined in the prescribed manner.
  • 'Reporting Requirement' for the Indian concern

    If the Underlying Indian Assets are held by the Foreign Target through an Indian concern (Indian Concern), the Indian Concern is mandated to furnish the prescribed information in the prescribed manner. Failure to comply with this reporting requirement attracts penalty of 2% of the value of the transaction in respect of which failure takes place or INR 0.5 million, depending on the nature of the transaction.

Draft Rules

The Central Board of Direct Taxes (CBDT) which is the apex body for direct taxes in India has released draft rules in relation to the aforesaid provisions on 23 May 2016 (Draft Rules).

The key aspects of the Draft Rules are summarised below:

1. Computation of fair market value (FMV) of assets (Rule 11UB)

1.1 Value of Underlying Indian Assets:

The manner of computation in respect of the Underlying Indian Assets proposed in the Draft Rules is as under:

Nature of Underlying Indian Assets FMV of such Underlying Indian Assets
Listed shares (where the shares do not confer any right of management or control) Price quoted on the stock exchange
Listed shares (where the shares confer right of management or control) Price computed in accordance with the market capitalisation plus book value of liabilities
Unlisted shares Price determined by a merchant banker or an accountant in accordance with internationally accepted pricing methodology plus liabilities, if any, considered in such valuation
Interest in a partnership firm or Limited Liability Partnership of an Association of Persons Proportionate enterprise value as determined by a merchant banker or an accountant in accordance with internationally accepted pricing methodology plus liabilities, if any, considered in such valuation
Any other asset Price it would fetch if sold in the open market as determined by a valuation report from a merchant banker or an accountant plus liabilities, if any, considered in such valuation

1.2 Value of the Target's Total Assets:

The manner of computation in respect of the Target's Total Assets proposed in the Draft Rules is as under:

Nature of Target's Total Assets FMV of such Target's Total Assets
Where the transfer of share/interest in the Foreign Target is between unrelated parties and the sale consideration is determined on the basis of a report generated by an accountant or merchant banker of international repute Value determined in such report plus liabilities, if any, that have been reduced for computing the value of assets for determination of such consideration
In any other case:
  • Where the shares of the Foreign Target are listed on a stock exchange
  • Where the shares of the Foreign Target are not listed on a stock exchange
  • Price computed in accordance with the market capitalisation plus book value of liabilities
  • Value of the Foreign Target and its subsidiaries on a consolidated basis as determined by a merchant banker or an accountant as per the most appropriate internationally accepted valuation methodology plus book value of liabilities of the Foreign Target

2. Gains derived from transfer of share/interest in Foreign Target attributable to Underlying Indian Assets (Rule 11UC)

The Draft Rules propose that the gains derived by the Foreign Transferor from the transfer of share/interest in Foreign Target are to be attributed in proportion to the FMV of the Underlying Indian Assets and the Overall Assets (as per the valuation method prescribed in Rule 11UB).

The onus is on the taxpayer (i.e. the Foreign Transferor) to submit a report in Form 3CT (duly certified by an accountant) certifying that the income attributable to Underlying Indian Assets has been correctly computed. If the Foreign Transferor fails to provide the information necessary for the application of the formula prescribed for attribution of gains to Underlying Indian Assets, the 'whole' of such gains would be deemed to be attributable to Underlying Indian Assets, and accordingly, taxable in India.

3. Reporting Requirement in case of certain types of Underlying Indian Assets (Rule 114DB)

3.1. The Indian Concern is mandated to furnish, in Form 49D to its jurisdictional tax officer, the details of the transfer of share/interest in the Foreign Target within 90 days of the end of the financial year in which such offshore transfer takes place. However, where this offshore transfer of Foreign Target transfers the management or control rights in relation to the Indian Concern, the details would need to be furnished within 30 days of the offshore transfer.

3.2 The Draft Rules propose that the Indian Concern is required to keep and maintain the following information and documents for a period of 8 years:

3.2.1 Details of its holding company, ultimate holding company, and any intermediate holding company;

3.2.2 Details of other Indian entities of the group;

3.2.3 Holding structure of the Foreign Target before and after the transfer;

3.2.4 Transfer contract in relation to the offshore transfer of the share/interest in the Foreign Target;

3.2.5 Past 2 years' financial and accounting statements of the Foreign Target;

3.2.6 Information relating to the decision or implementation process of the overall arrangement of the offshore transfer;

3.2.7 Information relating to (a) the business operation, (b) personnel, (c) finance and properties, and (d) internal and external audit or valuation report, if any, forming basis of the consideration of the share/interest in the Foreign Target and its subsidiaries which hold the Underlying Indian Assets through the Indian Concern;

3.2.8 Asset valuation report and other supporting evidence to determine the place of location of the offshore transfer;

3.2.9 Details of payment of tax outside India which relates to the offshore transfer;

3.2.10 Valuation report in respect of Underlying Indian Assets and Overall Assets duly certified by a merchant banker or accountant with supporting evidence; and

3.2.11 Documents which are issued in connection with the offshore transfer under the accounting practice followed.


These guidelines in relation to indirect transfers were long awaited. As regards the manner of computing FMV, while there is flexibility to use any internationally acceptable valuation method, the adding back of liabilities to arrive at FMV of assets may result in uncertainties. Further, the definition of liabilities excludes only paid up share capital and not reserves (distributable or others).

As regards compliances, as part of a mandatory reporting requirement, Indian Concerns have been saddled with an onerous obligation to keep and maintain the voluminous details/information for complex multi-level and multi-jurisdictional structures, which would certainly increase the compliance and administrative burden. Going forward, during transaction negotiations, one may need to factor such reporting requirements and where there are more than one underlying Indian entities, it seems that each entity would be required to undertake the required reporting which creates duplication. Interestingly, the Draft Rules seek to treat a situation where management or control rights are transferred differently from other scenarios. Further, usage of phrases like 'international repute' (in relation to computation of the value of Target's Total Assets) could lead to a bit of subjectivity.  It is hoped that in the final set of rules to be prescribed in this regard, the CBDT takes a holistic re-look at the situation and addresses these uncertainties.

Ritu Shaktawat (Principal Associate) and Raghav Bajaj (Senior Associate)



India has implemented equalisation levy on digital transactions in consonance with the initiative of the Organisation for Economic Co-operation and Development (OECD) to address the base erosion and profit shifting (BEPS). OECD defines BEPS as the tax planning strategies which exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. The Finance Act, 2016 (Act) has introduced equalisation levy of 6% in respect of certain specified services involving payments exceeding INR 100,000 in the online marketing and advertising domain rendered by non-residents who do not have a permanent establishment (PE) in India. This is in the form of a withholding obligation. The Act provides for the application of equalization levy on business-to-business (B2B) transactions between the service provider and a resident who carries on any business or profession in India or a non-resident having a PE in India (being the service recipient). The provisions of equalisation levy are not within the ambit of the Income Tax Act, 1961 but form part of a separate code contained under the Act.

Equalisation Levy Rules, 2016

The CBDT has notified Equalisation Levy Rules, 2016 (Rules) which are effective from 1 June, 2016.

The Rules cover procedures for payment of levy and prescribed forms (for statements, appeals, etc.) and provide as under:

  • Payments of equalisation levy

    A taxpayer is required to deduct equalisation levy and pay it to the credit of the central government by remitting it into the Reserve Bank of India or any branch of the State Bank of India or any authorised bank accompanied by a challan. For the purpose of the levy, the amount of consideration for specified services and amount of equalisation levy, interest, penalty payable and refund due shall be rounded off to the nearest multiple of ten.
  • Statement of Specified Services

    The statement of specified services is required to be furnished electronically in the prescribed form on or before 30 June immediately following the relevant year.
  • Non-compliance

    Notice of Demand: The tax authorities shall serve upon the taxpayer the notice of demand in the prescribed form where any levy, interest or penalty is payable in consequence of any order passed under the provisions of the Act.

    Notice calling for the statement of services: If the taxpayer fails to furnish the statement of services, the tax authorities shall issue a notice to the taxpayer requiring him to furnish the statement within a period of 30 days from the date of receipt of the notice.
  • Appeals

    Forms have been prescribed for filing appeals to the Commissioner of Income-tax (which shall be filed electronically) and the Income Tax Appellate Tribunal.


Since the provisions and procedures under the Income Tax Act, 1961 (other than the provisions which are specifically made applicable for the purposes of the Act) do not govern the equalisation levy, the Rules have been notified to lay down the procedure and prescribe necessary forms.

Ritu Shaktawat (Principal Associate) and Vyoma Mehta (Articled Clerk)

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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