Analysis of Substantial value of Assets under the Income Tax Act

According to Section 9 (1)(i) of the Income Tax Act of 1961, “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 situated in India.”[1] shall be deemed to arise or accrue in India. Now, if a non-resident transfers assets outside India, such transfer would not be taxable under this section. The same was upheld by the court in Vodafone International Holdings BV vs. Union of India[2]. The court did not remove the corporate veil and claimed that such transactions could not be taxed owing to the absence of the words ‘indirect transfer of capital’ in the section. This led to Vodafone losing faith in the Indian market and its laws, in turn making it withdraw from India.[3]

Therefore, some clarity had to be provided regarding the intent of the section. Owing to this, in 2012,  a memorandum of the Finance bill clarified that the intention of the section was to tax transactions which has an economic nexus with India irrespective of where the entity resided. Consequently, the Finance Act of 2012 introduced Explanation 5 while the Finance Act of 2016 introduced Explanations 6 and 7 respectively. These explanations first brought ‘substantial value’ of assets into the picture and focused on assets owned by a non-residents outside the territory of India. 

Explanation 5 states that for the purposes of this act, an entity would be deemed to be situated in India if its shares are being transferred to India and these shares derive ‘substantial value’ from assets located in India.[4] Explanation 6 of the act, further clarifies what ‘substantial value’ encompasses. It states that such assets from which the shares derive value and which are located in India must exceed 10 crores and represent at least 50% of the value of all assets owned by the company whose shares are being transferred. This must not just be the book value, but the share market value.[5]However, Explanation 7 of the act provides an exemption to application of Explanation 5. It states that at the time or transfer or 12 months prior to the same, if such non-resident making the transfer of shares does not hold the right of control and management of company nor does he/she hold the power to vote or share interest exceeding 5%, then such an transaction would fall outside the purview of Section 9 of the said act.[6]


[1] Income Tax Act [1961], s. 9 (1)(i). 

[2] Vodafone International Holdings BV vs. Union of India [2012] 6 SCC 613. 

[3] Vodafone International Holdings BV vs. Union of India[2012] 6 SCC 613. 

[4] Income Tax Act [1961], s. 9 (1)(i), Explanation 5.

[5] Income Tax Act [1961], s. 9 (1)(i), Explanation 6. 

[6] Income Tax Act [1961], s. 9 (1)(i), Explanation 7. 

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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