Taxation of Indirect Transfers – need for further clarity

March 11,2015
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Pavan Kakade (Associate Director,PwC India)
Puneet Putiani (Assistant Manager, PwC India)


Indirect transfer primarily means transfer of underlying assets located in a jurisdiction, through the transfer of an intermediate holding company located in a different jurisdiction. The controversy with respect to taxation of indirect transfer of assets located in India came into the limelight in the landmark case of Vodafone International Holdings BV[1] (‘Vodafone’). In this case, the Vodafone group purchased the Indian business of Hutchison group through the purchase of a single share of a Cayman Islands company. The Indian Revenue Authorities (‘IRA’) issued a notice to Vodafone alleging that such transaction of indirect transfer of Indian business is taxable in India and Vodafone ought to have withheld taxes on the payments to the Hutchison group. This culminated in the landmark judgment of the Supreme Court in January 2012 wherein the Court held that the source rules in the Indian tax laws do not have extra territorial application and hence such a transfer between two non-residents is not taxable in Indiain the absence of a ‘look through’ provision in the Indian tax laws. The IRA also filed a revision petition with the Supreme Court claiming the judgment as erroneous and requesting a revision of the judgment; however, such petition was also dismissed by the Supreme Court. 

Subsequently, vide the Finance Act, 2012, the Indian tax laws were amended retrospectively, wherein the indirect transfer provisions were specifically included in the Indian tax laws. Post this amendment, the IRA issued a fresh notice of tax demand to Vodafone. This litigation between the IRA and Vodafone persists till date and Vodafone has initiated international arbitration proceedings under the Bilateral Investment Protection and Promotion Agreement between India and the Netherlands.

Indirect transfer provisions in the Indian tax laws

The indirect transfer provisions in the Indian context were first introduced in the Direct Taxes Code Bill of 2010.


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