Question map
Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?
Explanation
The correct answer is Option 4. Indirect transfer refers to a transaction where a foreign entity transfers shares or interest in a foreign company which, in turn, derives its substantial value from assets located in India.
According to the Income Tax Act (amended post the Vodafone-Hutchison case), such transactions are taxable in India because the underlying economic value being transferred is situated within Indian territory. The key components are:
- The transfer happens between two non-resident entities outside India.
- The asset being transferred (shares) derives at least 50% of its value from Indian assets.
Why other options are incorrect:
- Options 1 and 3 describe direct investments or asset liquidations by Indian companies abroad, which are governed by standard capital gains and FEMA rules.
- Option 2 refers to routine Foreign Direct Investment (FDI) where profits are taxed in the home country, missing the "indirect" structural element involving offshore share transfers.
PROVENANCE & STUDY PATTERN
Guest previewThis question is a direct fallout of the Vodafone/Cairn retrospective tax controversy. While standard books define FDI/FPI, the specific legal definition of 'Indirect Transfers' comes from the Finance Act amendments discussed heavily in newspapers. It tests if you understood the technical 'bone of contention' in a major economic news story rather than just the political noise.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: In the Indian tax/media context, does the term "Indirect Transfers" refer to an Indian company investing in a foreign enterprise and paying taxes in the foreign country on profits arising from that investment?
- Statement 2: In the Indian tax/media context, does the term "Indirect Transfers" refer to a foreign company investing in India and paying taxes in its country of residence on profits arising from its investment in India?
- Statement 3: In the Indian tax/media context, does the term "Indirect Transfers" refer to an Indian company purchasing tangible assets in a foreign country, later selling those assets at a profit, and repatriating the proceeds to India?
- Statement 4: In the Indian tax/media context, does the term "Indirect Transfers" refer to a transfer of shares of a foreign company when those shares derive substantial value from assets located in India?
- Explicitly links 'indirect transfers' to transfers of shares of a foreign company that have underlying assets in India — i.e., concerns non-resident transfers implicating Indian assets.
- Says the computation mechanism does not deal with taxation of indirect transfers, indicating the term relates to cross-border share transfers with Indian connections rather than an Indian company investing abroad and paying foreign tax.
- Describes 'indirect disposal of asset' under section 2(47) in the context of transfers of shares and capital gains to non-residents.
- Connects the concept of 'indirect' to capital gains arising to a non-resident on transfer of shares, again tying the term to non-resident/foreign-share scenarios with Indian asset implications — not to an Indian company paying foreign tax on its foreign investments.
Explicitly names a distinct term—'Overseas Direct Investment (ODI)'—for when an Indian company invests abroad, showing there is specific terminology for outbound investment.
A student could compare the formal meaning of ODI with media/tax uses of 'Indirect Transfer' to see if they are conflated or distinct.
Gives a plain definition of FDI as 'an investment that a parent company makes in a foreign country...to increase capacity or change management control', which is the usual commercial phenomenon when a resident invests abroad.
Using this, a student can ask whether 'Indirect Transfer' language in tax law refers to FDI/ODI transactions or to a different legal mechanism (e.g., transfer of shares of foreign companies).
Describes 'Round Tripping' where money flows out to a foreign jurisdiction (e.g., for tax advantages) and returns as FDI, indicating cross-border routing for tax reasons is recognised in these texts.
A student could use this pattern to investigate whether 'Indirect Transfers' refers to such routed transactions (i.e., transfers structured through foreign entities) rather than a simple domestic investor paying tax abroad on profits.
States that companies pay corporate tax on profits and that domestic corporations are liable to Indian corporate tax, highlighting that profit taxation has residence/source rules.
A student could combine this with knowledge of residence/source tax principles to test whether profits from an Indian resident’s foreign investment would typically be taxed abroad, in India, or both—thus assessing the plausibility of the statement.
Defines Net Factor Income from Abroad (NFIA) as the difference between factor income earned by residents abroad and by non-residents in India, showing that income arising from cross-border investments is a recognized category in national accounts.
A student could use NFIA concept plus a world map or tax treaty basics to judge whether profits from an Indian entity’s foreign investment are likely to be treated as foreign-source income (and thus taxed abroad) or as Indian-source for 'Indirect Transfer' rules.
This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
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This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
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This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
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