Delhi High Court rules 50% as the benchmark to evaluate ‘substantial value’ on taxation of indirect transfers

 

This Tax Alert summarizes a ruling of the Delhi High Court (HC) in a batch of cases, with the lead case being that of Copal Research Limited, Mauritius (Taxpayer) on the issue of taxability of direct/ indirect transfer of shares in certain Indian companies. In a series of transactions, shares of India and US entities were transferred by Mauritius companies. The Taxpayer had approached the Authority for Advance Rulings (AAR) which ruled, among other things, that the transaction would not be taxable in India. Against this ruling, the Tax Authority filed a writ petition in HC whereby, HC was required to evaluate implications under the Indirect Transfer Provision (ITP) of the Indian Tax Laws (ITL). ITP taxes sale of shares of an overseas entity if the same derives “substantial” value from underlying assets in India. The HC ruled that the requirement of “substantial value” for ITP is met if the underlying value of Indian assets exceeds 50% of the total value of the overseas entity. Where however, if the underlying value is less than 50% then, there shall be no tax liability. Further, having regard to the facts of the case, the HC held that the corporate veil of the Mauritius companies cannot be pierced for the reason that such entities had independent corporate personality, and business purpose, and was not a device for avoiding Indian tax.