(2014) 371 ITR 114 (Del)
Income deemed to accrue or arise in India
Only where the Indian element is substantial. Shares must derive their value substantially from assets in India, which the Court read as requiring the Indian assets to represent at least half of the total value.
Does the indirect transfer provision reach every transfer of foreign shares that derive some value from Indian assets, or only those where the Indian element is substantial?
Shares of foreign companies within a research services group were transferred as part of a global acquisition. The group had Indian subsidiaries, so a portion of the value of the shares transferred was referable to Indian assets, but that portion fell well short of half the total. The Revenue contended that the deeming provision, as extended by the retrospective amendments following Vodafone, applied to any transfer of foreign shares deriving value from assets situated in India, without any threshold, and sought to tax a proportionate part of the gain.
The matter came before the Delhi High Court, which considered the meaning of the word 'substantially' in the amended deeming provision at a time when the statute itself prescribed no numerical threshold.
For the assessee
The provision applies where shares derive their value substantially from Indian assets. 'Substantially' imports a requirement of predominance, and on any view the Indian component here was a minority of the total value. Reading the provision without a threshold would bring within the Indian charge every global transaction involving a group with any Indian presence, which cannot have been intended.
For the Revenue
The amendment deliberately used broad language to capture indirect transfers of Indian assets. No threshold is prescribed in the provision, and the Court should not read one in. Where value is derived from Indian assets, a proportionate part of the gain is chargeable.
The Court held that the word 'substantially' must be given meaning and cannot be treated as surplusage. Examining international practice and the material explaining the amendment, including the recommendations of expert committees that had considered the provision and the approach taken in other jurisdictions and in model conventions, it concluded that a share derives its value substantially from assets in India where those assets represent the principal part of its value. It adopted a threshold of at least half the total value, holding that where the Indian assets account for less than that, the provision is not attracted at all. The Court reasoned that an unlimited reading would expose every cross-border transaction involving a group with any Indian operations to Indian tax, producing results that would be unworkable in practice and inconsistent with the evident purpose of the amendment, which was to reach transactions whose real subject matter is an Indian business. Since the Indian component fell below the threshold, the gains were held not chargeable.
The threshold this decision read into the provision was subsequently adopted in the statute itself, together with valuation rules and reporting obligations, and carries into the indirect transfer regime in Section 9 of the IT Act 2025. The case therefore explains where the current threshold came from and remains useful on the interpretive approach. Read with Vodafone, Sanofi Pasteur and Tiger Global for the full arc of the indirect transfer story.