Incomes, which are deemed to accrue or arise in India – CBDT Clarification
CIRCULAR NO. 4/2015, Dated: March 26, 2015, Ministry of Finance, GOI
As per Section 9(1)(i) of the Income Tax Act, the following incomes shall be deemed to accrue or arise in India:-
all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India .
The Finance Act, 2012 inserted Explanation 5 to clause (i) of sub-section (1) of section 9.
This explanation reads as under:-
Explanation 5: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
It seems several doubts were raised about this new explanation.
1. the purpose of introduction of Explanation 5 was to clarify the legislative intent regarding the taxation of income accruing or arising through transfer of a capital asset situate in India.
2. the Explanation applies to the transactions not resulting in any transfer, directly or indirectly of assets situated in India.
A. the amendment of section 9(1)(i) was to reiterate the legislative intent in respect of taxability of gains having economic nexus with India irrespective of the mode of realisation of such gains.
B. Thus, the amendment sought to clarify the source rule of taxation in respect of income arising from indirect transfer of assets situated in India as explicitly mentioned in the Explanatory Memorandum.
C. Viewed in this context, Explanation 5 would be applicable in relation to deeming any income arising outside India from any transaction in respect of any share or interest in a foreign company or entity, which has the effect of transferring, directly or indirectly, the underlying assets located in India, as income accruing or arising in India.
D. Declaration of dividend by such a foreign company outside India does not have the effect of transfer of any underlying assets located in India.
Board emphatically states that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of the provisions of Explanation 5 to section 9 (1) (i) of the Act.
Though the amendment was to retrospectively nullify the Supreme Court judgement in the Vodafone case, many feared that it may affect several others in a different way, where dividends will get taxed.
Board has now clarified the issue.
Incomes which are deemed to accrue or arise in India
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