[Opinion] Indirect Transfers Under Indian Income Tax Law – Easier Said Than Applied

Mitesh Thakkar, Gaurav Agarwal & Mukund Jindal – [2026] 186 taxmann.com 631 (Article)

1. Introduction

The indirect transfer provisions introduced in Indian income tax law seek to tax offshore transfers that directly or indirectly derive substantial value from assets located in India. While the legislative intent is clear—particularly following the introduction of detailed explanations to the charging provision. However, their application in real-world transactions continues to present material practical challenges for acquirers, sellers, and advisors.

Broadly, the process for determination of applicability of indirect transfer provisions for any offshore deal is as follows:

As mentioned above, many challenges are arising not from the charging provision, but from the mechanics prescribed for determining whether a transaction falls within section 9(10)(a) of the Income-tax Act, 2025 (‘the Act’).

Concepts such as the ‘specified date’, identification of ‘assets located in India’, and computation of FMV for the substantial value test frequently involve judgement, imperfect information, and timing gaps. This article discusses selected practical issues encountered while evaluating indirect transfer implications, particularly at pre-deal and transaction-execution stages.

2. Practical Difficulties in Determining the ‘Specified Date’

Determination of the ‘specified date’ is a threshold step in applying the substantial value test since the applicability of indirect transfer provisions is to be evaluated based on values as on the specified date.

Specified date for evaluating the applicability of indirect transfer provisions is determined as follows:

1. Ascertaining the actual date of transfer and book value of assets as on date of transfer

Indirect transfer implications or analysis often needs to be undertaken well before deal execution, when the exact transfer date may not be finalised and may depend on the fulfilment of conditions precedent to the transaction or regulatory approvals. However, the ‘specified date’ test requires a comparison of book values as on the actual date of transfer. This creates a practical difficulty, as reliable book values for that future date are not available at the time of undertaking the analysis.

For example, shares of a US company (holding shares in an Indian company) may be agreed to be sold in January 2026, but the transaction could close only after regulatory approval at a later date. At the time of signing, while book values as at the preceding financial year-end may be available, the book values as on the transfer date may not be available since the actual date of transfer itself is not finalised. Since the specified date determination depends on comparing these values—including whether the 15% threshold is met—it becomes uncertain at the pre-deal stage whether the specified date would be the earlier year-end or the actual date of transfer.

2. Financial statements versus interim accounting data

Another issue that arises is whether the book value of assets for the “specified date” should be derived from formally prepared financial statements or whether unaudited trial balances or MIS reports would suffice. The provision does not explicitly clarify the acceptable source of book values, thereby resulting in divergent practices being adopted in transactions.

Further, preparing financial statements as on the date of transfer is often impractical, especially where timing is driven by commercial constraints. Reliance on trial balances or MIS data may raise concerns around completeness, consistency of accounting policies, and finalisation of adjustments. The absence of guidance on acceptable source for the book value of assets raises ambiguity and concerns (especially in cases where increase is close to 15% threshold).

3. Whether liabilities are to be offset against assets

The term “book value of assets” is not defined for this purpose, leading to uncertainty on whether assets should be considered on a gross basis or net of asset-linked provisions such as depreciation, impairment, or obsolescence. A literal interpretation suggests no netting, whereas a purposive view supports adjusting for such provisions to reflect meaningful asset values. The lack of clarity can materially affect the specified date determination.

For example, whether for the purpose of book value of asset whether gross block of assets are to be considered or whether net block of assets i.e. after adjusting provision for depreciation from the gross block of assets is to be considered. Similarly whether provision for taxation is to be netted off against the prepaid taxes.

3. Issues in Determining ‘Assets Located in India’

Section 9(10)(a) of the Act provides that shares or interest of a foreign company shall be deemed to be situated in India if they derive value substantially from the assets located in India. Thus identification of “assets located in India” is another key determinant under the indirect transfer provisions. A literal reading suggests that only assets physically or legally situated in India should be considered, aligning with a situs-based approach.

An alternative interpretation considers that all assets owned by an Indian company irrespective of physical location should be included, on the basis that the Indian entity itself represents the economic nexus to India. This issue becomes particularly relevant in structures involving overseas subsidiaries, centrally held intangibles, or mobile digital assets. The absence of express clarification creates uncertainty and increases dependence on interpretational judgement.