Sub-clause (vi) — not of underlying assets Under Transfer in Relation to a Capital Asset

In the realm of Indian income tax law, the provision under sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset holds significant importance. It pertains to the computation of capital gains arising from the transfer of a capital asset and plays a crucial role in determining the tax liability of individuals, businesses, and other entities. In this article, we delve into the intricacies of this provision, analyzing its legal context, implications, and practical application.

Understanding the Legal Framework

Sub-clause (vi) of the income tax law pertains to the definition of the term “transfer” in the context of a capital asset. It emphasizes that the transfer of shares of a company not being a company in which the public are substantially interested, shall include the transaction where the transfer is made directly or indirectly to a person not being a resident in India. Furthermore, it outlines that such transfer should not include the transfer of a capital asset representing the beneficial interest in such shares.

This provision assumes significance in scenarios where the underlying assets of a company or entity consist predominantly of immovable property located in India. In such cases, the transaction involving the transfer of shares to a non-resident individual or entity is subjected to close scrutiny under sub-clause (vi). The legislative intent behind this provision is to prevent the avoidance of tax liability through the transfer of shares that effectively results in the transfer of underlying Indian assets.

Implications and Interpretation

The interpretation of sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset has been a subject of judicial scrutiny, with courts addressing various aspects and nuances of its application. One of the key areas of contention has been the determination of whether the transfer of shares to a non-resident entity results in the indirect transfer of underlying Indian assets and consequently attracts capital gains tax liability.

In the landmark case of Vodafone International Holdings B.V. v. Union of India, the Supreme Court of India grappled with the issue of indirect transfer of Indian assets through the transfer of shares of a foreign company. The court ruled in favor of the taxpayer, emphasizing that the transaction in question did not entail the direct or indirect transfer of underlying Indian assets, and therefore, could not be subjected to capital gains tax under the provisions of sub-clause (vi).

However, subsequent amendments to the income tax law, notably the introduction of the concept of “significant economic presence” and the taxation of indirect transfers under the Finance Act, 2018, have further expanded the scope of sub-clause (vi). These amendments seek to address concerns related to tax avoidance through cross-border transactions and to bring within the purview of Indian tax laws, transactions that have a substantial economic nexus with India, even if they involve the transfer of shares of foreign entities.

Practical Application and Compliance

In practice, the application of sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset requires a careful examination of the nature of the transaction, the composition of the underlying assets, and the residency status of the transacting parties. Taxpayers, particularly multinational corporations and foreign investors, are advised to conduct thorough due diligence and seek expert advice to ensure compliance with the provisions of the income tax law and to mitigate potential tax liabilities arising from cross-border transactions involving the transfer of shares of foreign entities.

It is imperative for taxpayers to consider the implications of sub-clause (vi) in structuring their cross-border transactions and to assess the potential tax exposure arising from the transfer of shares to non-resident entities. Owing to the evolving legal and regulatory landscape, proactive tax planning and adherence to compliance requirements are essential to minimize the risk of tax disputes and potential litigation.

Conclusion

Sub-clause (vi) — not of underlying assets under transfer in relation to a capital asset constitutes a pivotal provision within the Indian income tax law, presenting complex legal and practical considerations for taxpayers engaged in cross-border transactions. Its application requires a nuanced understanding of the legislative intent, judicial interpretations, and the evolving regulatory framework. As the scope and implications of this provision continue to evolve, taxpayers and businesses must remain vigilant and seek expert guidance to navigate the intricacies of cross-border tax implications and ensure compliance with the prevailing legal and regulatory requirements.