Transferring of assets in India through creating a company or entities outside India was a common practice to avoid Income tax liability in India. However, such transactions has come under income tax preview through the Finance Act, 2012.

Where foreign company or entity held assets in India through an Indian concern, then such Indian concern is required to file information in Form 49D about transfer of share or interest of such foreign company or entities with Income tax authorities of India India. However, many Indian Concerns fails to file such form and it results in imposition of penalties.

In this article, we have made an effort to discuss the key points related to Form 49D in detail:

1. Background:

• In Landmark judgement of Vodafone International Holding BV (Vodafone), apex court held that capital gain arising from transfer of shares of a foreign company to another foreign company is not taxable in India since there is no income accrued or arise in India.
• To overrule the judgement of Hon’ble Apex Court, Section 9 of Income tax Act, 1961 was amended vide Finance Act, 2012 with retrospective effect wherein an Explanation 5 was inserted.
• As per Explanation 5, any shares or interest in a company or entity, situated outside India, shall be deemed as situated in India, if such share or interest derives, directly or indirectly, its value substantially from the assets located in India.
• Finance Act, 2015 further inserted Explanation 6 to Section 9 provided an additional criteria to prevent genuine cases of transfer from unnecessary taxability in India.
• As per Explanation 6, share or interest, of company or entity situated outside India, shall be deemed to derive its value substantially from the assets located in India if the value of such assets:
  • exceeds the amount of INR 10 Crores; and
  • represents at least 50% of the value of all the assets owned by the company or entity

• Therefore, capital gain arising from transfer of such shares or interest, which drive its value from assets located in India, shall be considered as income accrued or arise in India and accordingly, shall be subject to Income Tax in India.
• E.g.
  • ABC Inc. is a company incorporated outside India.
  • ABC Inc. held assets worth INR 100 Crores in India out of its total assets of INR 120 Crores.
  • Shares of ABC Inc. is held by A, resident in India. Now, A intends to transfer such shares to another person outside India.
  • As per Explanation 6 to Section 9, these shares shall be considered as driving its value substantially from assets located in India as following conditions given under explanation 6 is satisfied:
    • Value of Assets held in India exceeds INR 10 Crores; and
    • Assets held in India exceed 50% of the total assets owned by the ABN Inc.
  • Accordingly, as per Explanation 5, Shares of ABC Inc shall be deemed as situated in India and therefore, profit arising on transfer of such shares shall be liable to capital gain tax.

2. Reporting requirement of Indirect Transfer:

a. Who is required to report under Section 285A:

Finance Act, 2015 inserted a new Section 285A in Income Tax Act wherein new reporting requirement was imposed on Indian entities whose shares are held by foreign companies or entities.

As per Section 285A, where shares or assets of a company or entity is deemed to be situated in India in accordance with Explanation 5 to Section 9 and such assets are held in India through an Indian Concern then Section 285A creates reporting requirements for such Indian concern.

For the purpose of determining Income accruing or arising in India through transfer of shares or interest of foreign company or entity, such Indian concern is required to File Form 49D with Income tax authorities.

b. When reporting is required under Section 285A?

Indian concern is required to report during the financial year in which shares or interest in foreign entity or company is transferred.

c. What is the time limit of reporting?

Detailed provisions related to reporting are given under Rule 114DB of Income tax rules read with Section 285A of Income Tax Act in following manner:

• Every Indian concern is required to furnish information in Form 49D electronically under digital signature to the Assessing officer having jurisdiction over the Indian concern.

• Such form should be filed within 90 days from the end of Financial year in which transfer of shares or interest of company or entity, situated outside India, takes place.

• Also, where such transfer has the effect of directly or indirectly transferring the rights of management or control  of Indian concern then such information shall be furnished in Form 49D within ninety days from the date of transaction.

• Indian concern is required to maintaining specified information and documents and shall produce the same before any income-tax authority, if required, such as :
  • details of the immediate holding companies or entities and ultimate holding company or entity of the Indian concern;
  • details of other entities in India of the group of which the Indian concern is a constituent;
  • the holding structure of the shares or interest in the foreign company or entity before and after the transfer;
  • any transfer contract entered into in respect of the share of or interest of foreign company or entity that holds any asset in India through, or in, the Indian concern
  • financial and accounting statements of the foreign company or entity for 2 years prior to the date of transfer of the share or interest;
  • the asset valuation report and other supporting evidence to determine the place of location of the share or interest being transferred;
  • the details of payment of tax outside India, which relates to the transfer of the share or interest.

• Such documents should be maintained in english transactions, if original documents are prepared in foreign language and these documents should be kept for 8 years from end of relevant assessment year.

• When foreign company or entity holds stake in more than one indian concern then information may be furnished by any one Indian concern which is designated by the group on behalf of all other Indian concerns.

D. What information is required to be reported?

Indian concern is required to furnish following information in Form 49D:

1. Part-A:
   1. General information related to Indian concern;
   2. Details of all the Indian concerns which are constituent of the group;
   3. Details of holding and immediate holding entities

2. Part-B:
   1. Details of transaction which resulted in transfer of right of management or control over the Indian concern such as:
      1. Name of the company or entity 
      2. Details of the transactions including consideration for such transaction 
      3. Details of transferor and transfree
      4. % of stake transferred including percentage holding of transferor during the period of 12 months preceding the transfer etc.

3. Part C:
   1. Details of transfer which has resulted in the income from which is deemed to accrue or arise in India under the provisions of section 9(1) of Income Tax, such as:
      1. Details of transferor and transfree;
      2. Details of transaction;
      3. % of shares and interest transferred including holding percentage of transferor during the period of 12 months preceding the transfer

E. Consequences of Non-compliances:

As per Section 271GA of Income Tax Act, If any  Indian concern fails to furnish form 49D within prescribed period of time then the income-tax authority may impose the penalty of:

1. 2% of the value of the transaction in respect of which such failure has taken place, if such transaction had the effect of transferring the right of management or control in relation to the Indian concern; or
2. INR 5 lacs, in any other case.