'Substantial value' from assets located in India - when does Sec 9 get triggered? - Finance Bill provides an answer

THE Finance Bill, 2015 has taken a substantial step ahead of the last amendment in Section 9 vide Finance Act, 2012 by proposing several changes to address the grey areas which could be potent grounds for conflicting interpretations and future litigations. For addressing these issues, several Explanations have been proposed to be added to Section 9.

A. When shares acquire "Substantial value" from assets located in India

While Explanation 5 in the present Section 9 already uses the expression "substantial value", however, it was left undefined. In this context, a new Explanation 6 has been proposed which explains the said terms in the following manner:

The Finance Bill, 2015 proposes that such share or interest acquired outside India in Company A will derive substantial value from assets located in India , only if

- the value of shares acquired in Company A derives its value exceeding Rs 10 Crores from the assets located in India i.e., Company B, AND

- Such value also represents atleast 50% of the value of the assets owned by Company A in Company B.

If the above conditions are met, then Section 9(1)(i) shall be triggered, i.e., income accruing or arising from transfer of such shares to the non-resident transferor shall be taxed in India.

When non-resident transferor shall not be liable for transfer of shares

Explanation 7 has been proposed to be inserted into Section 9 which provides exceptions i.e., circumstances when income arising to non-resident transferor from transfer of shares shall not be taxed in India.

Under both Situation 1 & 2 no tax shall arise,

if Non-resident + Associated enterprise - neither holds any management or control rights in Company A NOR holds voting powers or share capital or interest exceeding 5% in Company A.

With so many detailed Explanations proposed in Section 9, it appears that the Indian tax authorities has translated all its past bitter experiences from mammoth litigations like Vodafone , so as to reduce the scope of any future litigation arising from Section 9.

Interest paid by PEs to Head office

Finally, Section 9 intends to address another contentious issue regarding the payment of interest by PEs to their respective Head offices. Earlier when the PEs paid interest to their head offices, neither any TDS was deducted on such amount nor it was shown as an income in the books of such head office. However, the PE used to claim such interest paid as a deductable expenditure. Finance Bill, 2015 proposes to put this practice at rest in the new Section 9. Once this Bill is passed, such interest paid to head office shall be deemed to accrue or arise in India and shall be chargeable to taxable in addition to any income attributable to the PE in India.