UPSC Prelims 2022 Q8: Indian Economy – Taxation
- (a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
- (b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
- (c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
- (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Answer: (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Explanation
Indirect transfers — taxing offshore deals in Indian assets
An indirect transfer happens when shares of a foreign company change hands abroad, but those shares get their value mainly from assets in India.
| Point | Fact |
|---|---|
| Famous case | Vodafone–Hutchison (2007) — Vodafone bought a Cayman Islands company that owned Hutchison Essar in India |
| Supreme Court (2012) | Ruled India could not tax the deal under the law then |
| Retrospective amendment | Finance Act 2012 taxed such transfers back to 1962 |
| Fallout | Arbitration losses (Vodafone, Cairn) |
| Repeal | Taxation Laws (Amendment) Act, 2021 scrapped retrospective demands |
| Current rule | Section 9(1)(i): taxable if Indian assets make up at least 50% of the value and exceed ₹10 crore |
Answer: (d) A foreign company transfers shares and such shares derive their substantial value from assets located in India.
Why each option is right or wrong
- (a) Incorrect. An Indian company paying tax abroad on foreign profits is ordinary outbound investment.
- (b) Incorrect. A foreign firm paying tax in its home country is a double-taxation issue, not indirect transfer.
- (c) Incorrect. Selling foreign assets and bringing money home is a direct transaction abroad.
- (d) CORRECT. An indirect transfer is the offshore sale of shares that get their value from Indian assets.
Key point
Indirect transfer = offshore share sale deriving value from Indian assets (Vodafone case); retrospective tax of 2012 repealed in 2021.
Remember
An indirect transfer is a foreign share sale whose value comes from assets in India.
Common mistakes
- Confusing indirect transfer with transfer pricing between related companies.
- Forgetting the 2021 Act that ended retrospective tax demands.
- Thinking the deal must take place in India; the key is that the value comes from India.
Exam tip
'Indirect' = the Indian asset is sold indirectly, through a foreign parent's shares.
Sources
- Income-tax Act, 1961 — Section 9(1)(i), Explanation 5
- Vodafone International Holdings v. Union of India (2012)
- Taxation Laws (Amendment) Act, 2021