CBDT sets up a Committee to deal with retroactive “indirect transfer” taxation

This Tax Alert summarizes a recent Order issued by the income tax administrative body, the Central Board of Direct Taxes (CBDT). The CBDT has set up a Committee to decide on cases relating to “indirect transfer” provisions of the Indian Tax Laws (ITL). For all transactions of “indirect transfer” falling prior to 1 April 2012, and where no action has been initiated as on 28 August 2014, the Tax Authority would need to make a reference to and obtain prior approval of the Committee. The Committee will accord an opportunity to the taxpayer to present its case and will endeavor to take a decision within 60 days of the reference. The Tax Authority needs to proceed in accordance with the directions of the Committee.

While taxpayers and the investor community were expecting amendments/ clarifications in respect of wide and obscure indirect transfer tax provisions, the FM, in his Budget Speech of 2014, proposed constitution of a high-level committee to scrutinize initiation of action to deal with new cases of indirect transfers. The present Order constituting the Committee translates this assurance of the FM to reality and requires the Tax Authority to seek prior written approval before initiating action in relation to income from indirect transfers. The Committee is required to give an opportunity of hearing to the taxpayer. As the directions of the Committee are binding on the Tax Authority, the taxpayer may wish to make best use of the same. While the directions are binding on the Tax Authority, a taxpayer, aggrieved by the direction, would need to evaluate the possibility of filing a writ or pursuing the conventional appellate remedy.

Incidentally, vide its clarification dated 29 May 2012, the CBDT had already directed the Tax Authority not to re-open tax proceedings completed as of 28 August 2014 for cases covered by retroactive amendments, including indirect transfer provisions. The said clarification continues to be operative. Read with the present Order, the reference to the Committee will essentially be applicable to new cases where no proceedings are pending against the payer or the payee in relation to income from indirect transfers.

Incidentally, in a recent decision of the Delhi High Court in the case of Copal Research, the Delhi High Court has held that the reference to “substantially” in indirect transfer provisions is synonymous to principally, mainly or at least majority. While the Committee may also be guided by such a legal position, suitable clarifications on the scope of indirect transfer provisions (such as, meaning of substantial, basis of value determination etc.) will go a long way in providing the desired certainty to taxpayers.