Which one of the following situations best reflects "Indirect Transfer

Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?

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An Indian company investing in a foreign enterprise and paying taxes to the foreign country arising out of its investment

A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment

An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India

A foreign company transfers shares and their substantial value derive from assets located in India

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This question was previously asked in

UPSC IAS – 2022

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Option D is correct.

“Indirect Transfer” refers to the transfer of ownership of shares or interests in a foreign entity, where the value of that foreign entity is primarily derived from assets located in India. This allows for taxing gains arising from such transfers within India.

This concept became prominent in India, particularly in the context of the Vodafone tax dispute. In that case, a foreign company (Vodafone) acquired shares of another foreign company (Hutchison), which indirectly controlled an Indian telecommunications company. The Indian government amended tax laws to clarify that gains from the transfer of shares of a foreign company would be taxable in India if those shares derived their value substantially from assets located in India.
Options A, B, and C describe direct investments or transfers of tangible assets or profits in a straightforward manner, which are taxed based on source rules or residency rules but do not fit the definition of an ‘indirect transfer’ involving a foreign entity whose value is intrinsically linked to underlying Indian assets.

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