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Applicability of indirect transfer provisions
The Delhi High Court recently ruled on the applicability of indirect transfer provisions introduced by the Finance Act 2012. Taxand India takes a look at this case and what it means for companies.
The Delhi High Court has held that the term 'substantially' in explanation 5 to section 9 of the Finance Act 2012 has to be interpreted restrictedly to mean at least a majority. While coming to such a conclusion the Delhi High Court relied on the report of the Expert Committee constituted by the Prime Minister in 2012, the OECD Model Convention and the UN Model Convention.The decision is an important decision as it seeks to provide clarity on the ambiguous language of Explanation 5 to Section 9 of the Act.
Furthermore, the Delhi High Court has considered the actual sale considerations as the value for the purpose of checking the test of 'substantially' and the applicability of the indirect transfer provisions. It needs to be seen how the value would be considered in a transaction between related parties, since the sale consideration may not be at arm’s length and could be altered with a view to escape the indirect transfer provisions.
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Although the Delhi High Court has interpreted the term ’substantially’ in a logical manner, it needs to be seen whether the proposed High Level Committee suggested by the Finance Minister in his Budget Speech in July 2014 would consider the principles laid down by the Delhi High Court in determining applicability of indirect transfer provisions to cases referred to them.
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