In its landmark judgment given on August 14, 2014, the Delhi High Court in the case of DIT v. Copal Research Limited, Mauritius and Ors has held that the incidence of capital gains pursuant to provisions relating to indirect transfer of shares as per section 9 of Income Tax Act, 1961 (“Act”) would arise only if the overseas entity which is transferring its shares derive not less than 50% if its value from Indian assets.

Relying on the Shome Committee Report, the Direct Tax Code Bill 2010, OECD and the UN Model Tax Convention, the Court held that the term “substantially” as used in explanation 5 to section 9 of the Act indicated a threshold of at least 50% of the total value derived from Indian assets.


Section 9 of the Act provides cases of income, which are deemed to accrue or arise in India. Subsection 1(i) provides a set of circumstances in which income accruing or arising, directly or indirectly is taxable in India including income arising through indirect transfer of a capital asset situated in India.

After the Supreme Court’s ruling in the land mark Vodafone’s case, the Finance Act, 2012 brought several retrospective amendments effective April 1, 1962. Two of the most important amendments brought were as under:

Clarifying that the word ‘transfer’ under the Act includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India; and ii. Amending section 9(1)(i) by way of explanation to clarify 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.

The Act does not provide meaning to the word “substantially” and in absence of any Court’s judgment in this regard, it remained unclear as to what amounted to “substantial” in case of offshore transfer of shares wherein a foreign entity (which holds shares of an Indian company through multi layered subsidiaries structure) transfers its shares to another foreign company as a result of which there is an indirect transfer of shares of the Indian subsidiary company.


Copal Partners Limited, Jersey (“Copal–Jersey”), had a wholly owned subsidiary namely Copal Research Limited, Mauritius (“Copal Mauritius 1”). Copal Mauritius further held 100% of the shares in Copal Market Research Limited (“CMRL Mauritius”) as well as Copal Research India Private Limited, India (“Copal India”).

CMRL Mauritius, in-turn, held 100% shares in Exevo Inc., USA, and Exevo Inc. US, in turn, held 100% of the shares in Exevo India Private Limited, India (“Exevo India”).

Pursuant to share purchase agreements entered into between the Moody’s Group and the Copal group companies, the Moody Group indirectly acquired the Copal subsidiaries including Copal India and Exevo India in the following manner:

Transaction I: 100% shares of Copal India were sold by Copal Mauritius to Moody’s Group Cyprus Limited (“Moody’s Cyprus”);

Transaction II: 100% shares of Exevo Inc. US were sold by CMRL Mauritius to Moody’s Analytics Inc., USA (“Moody’s–USA”); and –

Transaction III: 67% shares of Copal – Jersey were sold to Moody’s–UK.

Contentions of the Revenue (in brief)

Transaction I and Transaction II were structured in a manner so as to avoid capital gains tax because had the Copal Group transferred its entire shareholding by selling the shares of the ultimate holding company i.e. Copal-Jersey to Moody Group, there would have arisen incidence of tax in India since in that case, the value of shares of Copal-Jersey would have derived their value substantially from underlying subsidiaries in India in light of the provisions of section 9 of the Act. Contentions of the tax payer (in brief)

The taxpayer contended that Moody Group had insisted on acquiring the entire 100% capital of Copal India and Exevo Inc. USA. Accordingly, the Transaction I and Transaction II had to be undertaken for bona-fide reasons, since the sale of shares of the ultimate holding company i.e. Copal-Jersey under Transaction III could be effected only to the extent of 67% of the total shareholding which was held by the Copal Group Shareholders and not 100%.


The transaction structure as suggested by the Revenue, i.e., transfer of entire shareholding by selling the shares of the ultimate holding company i.e. Copal-Jersey to Moody Group, would not have given the same commercial results vis-à-vis the actual transaction, and therefore the allegation that the transaction at Mauritius level was made to avoid an incidence of tax in India was not correct.

The HC considered the meaning of the term ‘substantial’ as used in explanation 5 to Section 9(1)(i) of the Act. The HC opined that ‘substantially’ shall be interpreted to mean “principally”, “mainly” or atleast “majority and a restrictive approach should be employed while interpreting a legal fiction such as Explanation 5 and concluded that for the indirect transfer tax provisions to apply, the overseas company should derive at least 50% of its value from Indian assets.

The HC also considered the recommendations made in the Shome Committee Report and the Direct Tax Code Bill of 2010 both of which interpreted the term “substantially” to mean a threshold of 50% of the total value derived from Indian assets. A similar view was also derived from OECD and the UN Model Tax Convention which provides that for the source country to exercise taxing rights over the disposal of shares of a company, the company should derive 50% or more of its value from immovable property situated in the source country.

In light of the aforesaid available legal authorities, the Court observed that if only Transaction III had taken place, only 67% of the value would have been allocated to Copal India and ExevoIndia. The consideration payable in Transaction III was agreed at USD 93.51 million whereas the consideration for Transaction I and II in aggregate amounted to USD 42.58 million. Therefore, USD 93.51 million was the consideration allocable to assets situated outside India and only USD 28.53 million (i.e. 67% of USD 42.58 million) was allocable to the Indian assets and accordingly, Copal Jersey cannot be said to derive substantial value from Indian assets.


The judgment is the first judgment to provide the clarity on scope of the term “substantially” as mentioned under 5 to Section 9(1)(i) of the Act. It also shows the necessity of proving a commercial rationale and justification for undertaking a transaction involving indirect transfer of shares of Indian company.

In this judgment, the Court has evaluated the scope of the term “substantial” (50% of the total value derived from Indian assets) on the yardstick of the total consideration paid for the transaction of transfer of shares. Though the judgment is a welcome move for taxpayers undertaking such indirect transfer transactions, this yardstick of determining “substantiality” may be prone to misuse (particularly in absence of GAAR provisions) as a transaction may be structured and valued in such a manner that the consideration of the transfer of the shares of the Indian company is less than 50% of the total value of the offshore transfer which happens at the holding entity level.

About Bulwark Solicitors

Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.

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