Indirect Transfer of Indian Assets in Bangalore | Section 9, Form 163 and Vodafone indirect transfer India
A US private equity fund holds its Indian portfolio investment through a Cayman Islands holding company, which in turn owns a Singapore SPV that owns the Indian operating company. After a successful five year hold, the fund sells the Cayman holding company to a strategic acquirer for USD 400 million.
No Indian shares are transferred. The transaction is signed in New York, with payment between two non Indian banks. The fund assumes Indian tax does not apply.
The Indian tax authority’s view is different. According to the authority, the Cayman company’s value derives substantially from the Indian operating company. This makes the transaction an indirect transfer of Indian assets. Capital gains are therefore chargeable in India, and the buyer was obliged to withhold tax at the time of the share purchase.
For businesses involved in cross border transactions, understanding the framework for an Indirect Transfer of Indian Assets in Bangalore and other jurisdictions is important because the tax implications can arise even when the underlying Indian shares are not directly transferred.
The framework emerged from the Vodafone case, was retroactively legislated in 2012, prospectively reformed in 2021, and now operates under the Income tax Act, 2025 with a dedicated reporting form. The framework is narrower than its original retrospective scope, but it remains an active consideration for any cross border M&A involving Indian operations.
What Did Vodafone Establish and What Did the Law Become?
The Vodafone judgment
In January 2012, the Supreme Court held in Vodafone International Holdings BV v. Union of India that the transfer of shares of a foreign company, CGP, incorporated in the Cayman Islands and holding the Indian Hutchison telecom interest indirectly, between two non resident entities outside India was not taxable in India under Section 9(1)(i) as it stood.
The court read Section 9 as covering only direct transfers of capital assets situated in India, not indirect transfers of foreign shares deriving value from Indian assets.
The retrospective response
The Finance Act, 2012 introduced Explanation 5 to Section 9(1)(i), with retrospective effect from 1 April 1962. It deemed a foreign share or interest to be situated in India where it derives, directly or indirectly, its value substantially from assets located in India.
The amendment was widely criticised, triggered international arbitration claims involving Vodafone and Cairn, and damaged India’s investor reputation.
The 2015 clarification
The Finance Act, 2015 introduced thresholds for the term “substantially”.
The value of Indian assets must exceed INR 10 crore and must represent at least 50% of the global value of assets of the foreign entity.
Below either threshold, the indirect transfer provisions do not apply.
The 2021 prospective rollback
The Taxation Laws (Amendment) Act, 2021 retroactively removed the retrospective effect of the 2012 amendment.
The current position is that indirect transfer provisions apply prospectively from 28 May 2012, which was the date of the Finance Act, 2012’s enactment, and not retrospectively.
The Vodafone and Cairn arbitrations were settled.
The Income tax Act, 2025 framework
The substantive provisions are carried into Section 9 of the 2025 Act, preserving the framework with the applicable thresholds and exceptions.
The reporting requirement, previously under Section 285A of the 1961 Act, is now under Section 506 of the 2025 Act. The prescribed form is Form 163 under the Income tax Rules, 2026.
For businesses and investors evaluating an Indirect Transfer of Indian Assets in Bangalore, understanding the interaction between Section 9 and Form 163 is therefore an important part of cross border transaction planning.
When Are Indirect Transfers Taxable and Who Has to Report?
The taxability test
An indirect transfer of Indian assets is taxable in India where the following conditions are met.
The transaction involves the transfer of shares or an interest in a foreign company or entity.
The share or interest derives, directly or indirectly, its value substantially from assets located in India.
The term “substantially” is met where the value of Indian assets exceeds INR 10 crore and the Indian assets represent at least 50% of the global asset value of the foreign entity at the specified date.
The transferor is a non resident. Where the transferor is an Indian resident, direct taxation applies under the standard rules.
Where the test is met, the gains from the transfer are deemed to accrue or arise in India and are subject to capital gains tax.
The gain is computed based on the proportion of the global gain attributable to Indian assets.
Exceptions and Exclusions
Small shareholder exemption
Where the transferor, along with associated enterprises, holds 5% or less of the voting power, share capital, or interest in the foreign company at any time during the 12 months before the transfer, no Indian tax applies.
Tax neutral reorganisations
Certain qualifying amalgamations and demergers of foreign companies are exempt where Indian assets are passed in continuity to the resulting foreign entity, subject to applicable conditions.
Treaty protection
Many of India’s DTAAs grant the exclusive right to tax capital gains to the residence country, providing protection from Indian indirect transfer tax.
The India Mauritius and India Singapore treaties, following the 2016 protocols and 2024 amendments, do impose Indian tax on shares acquired on or after specified dates.
These treaty provisions should therefore be examined carefully when assessing Section 9, Form 163 and Vodafone indirect transfer India issues in a cross border transaction.
Reporting Obligation: Form 163
Section 506 of the Income tax Act, 2025, previously Section 285A of the 1961 Act, requires the Indian concern, meaning the Indian company whose shares or assets are indirectly transferred, to file Form 163 reporting the indirect transfer.
Filing is required within 90 days of the transaction where the transaction results in the transfer of management or control of the Indian concern.
The reporting requirement is mandatory regardless of whether the transaction is taxable. Even non taxable indirect transfers, such as transactions below the applicable threshold or transactions protected by a treaty, trigger the reporting obligation in many readings of the provision.
The framework distinguishes between the substantive tax, which applies to the foreign transferor, and the reporting obligation, which applies to the Indian concern.
For this reason, an Indian business should not assume that there is no compliance obligation simply because no Indian shares were directly transferred.
What Should Buyers, Sellers and Indian Concerns Actually Do?
For sellers and transferors
Before signing any sale of foreign shares whose value may derive from Indian assets, the seller should conduct an indirect transfer analysis.
The thresholds of INR 10 crore for Indian asset value and 50% of global value are tested at a specified date. Mapping the foreign entity’s asset structure to these tests is the starting point.
Where the test is met, the seller should evaluate the applicable treaty position and small shareholder exemption.
Where neither provides protection, the seller should plan for the Indian tax liability, including PAN registration, return filing, and payment.
For buyers and transferees
The buyer of foreign shares with potential indirect transfer exposure has its own concerns.
Under Section 195, now Section 393(2) of the 2025 Act, the buyer may have a withholding obligation on the payment to the seller if the income is chargeable in India.
Where the indirect transfer is taxable, the buyer is potentially treated as an assessee in default for tax not withheld.
Buyers should require representations and warranties regarding the seller’s tax position and appropriate indemnities for any indirect transfer exposure.
Ideally, buyers should also consider obtaining a no objection or Section 197 lower withholding certificate before closing.
For Indian concerns
The Form 163 reporting obligation falls on the Indian company whose shares or assets are indirectly transferred.
The Indian concern must monitor changes in the upstream foreign ownership chain and file Form 163 within 90 days where the transaction results in the transfer of management or control.
Indirect transfer taxation can therefore affect Indian concerns even when they are not parties to the underlying transaction.
The Indian CFO should have a process for monitoring beneficial ownership changes that affect Indian operations.
Coordinate With FEMA Reporting
Cross border M&A typically involves FEMA relevant transactions, including FDI exit, changes in beneficial ownership, and downstream investment implications.
The indirect transfer analysis should therefore be coordinated with FEMA compliance, including applicable reporting obligations of the Indian concern under the Foreign Exchange Management (Non Debt Instruments) Rules, 2019.
A coordinated review of income tax and FEMA requirements can help identify reporting and compliance obligations before the transaction is completed.
Role of a Transfer Pricing & International Tax Lawyer
Transactions involving foreign holding companies, Indian operating companies, cross border acquisitions and changes in beneficial ownership can involve multiple tax and regulatory considerations.
A Transfer Pricing & International Tax Lawyer can assist with reviewing the structure, assessing the applicability of Section 9, examining treaty protection, evaluating withholding obligations, and reviewing Form 163 reporting requirements.
The analysis becomes particularly relevant where the transaction involves multiple jurisdictions and a significant portion of the foreign entity’s value is derived from Indian assets.
Frequently Asked Questions
Q1. Are pre 28 May 2012 indirect transfers taxable in India?
No. The Taxation Laws (Amendment) Act, 2021 removed the retrospective effect of the 2012 indirect transfer amendments.
Indirect transfers completed before 28 May 2012 are not taxable, and the Vodafone and Cairn arbitration claims were settled on this basis.
Q2. Does the 5% small shareholder exemption apply to private equity funds?
The exemption tests the transferor’s holding, along with associated enterprises, at any time in the 12 months before the transfer.
PE funds typically hold larger stakes. The exemption is more often relevant to portfolio investors, founders selling small residual stakes, or co investors with minority positions.
Each transferor’s position is tested separately, with attribution to associated enterprises.
Q3. Is Form 163 required where the indirect transfer is exempt under a treaty?
The reporting requirement is broadly framed, and many practitioners take the position that reporting is required regardless of taxability.
The position has not been fully clarified in jurisprudence under the 2025 Act framework. The conservative approach is to file Form 163 for any indirect transfer involving the Indian concern, with a note explaining the treaty position.
The framework distinguishes between the substantive tax, which applies to the foreign transferor, and the reporting obligation, which applies to the Indian concern.
Q4. How is the capital gain computed for partial value derived from Indian assets?
Where the foreign entity has a mix of Indian and non Indian assets, the gain attributable to India is computed proportionally based on the value of Indian assets relative to the global value of assets, applied to the total global gain on the transaction.
The detailed computation rules are contained in the Income tax Rules.
For complex multi asset structures, an independent valuation supporting the apportionment is advisable.
Conclusion
Indirect transfer taxation remains an important consideration in cross border M&A involving Indian operations.
The post Vodafone framework has changed significantly from the retrospective regime introduced in 2012. The 2021 amendments removed the retrospective application, while the current framework continues to apply where the prescribed thresholds and conditions are satisfied.
Businesses considering an Indirect Transfer of Indian Assets in Bangalore or elsewhere in India should therefore examine the structure, applicable thresholds, treaty position, withholding requirements, Form 163 reporting, and FEMA implications before completing the transaction.
Understanding Section 9, Form 163 and Vodafone indirect transfer India is particularly important for buyers, sellers and Indian concerns involved in transactions where the value of a foreign entity is substantially connected to Indian assets.