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Alerts:

Direct Tax Alert - CBDT notifies Rules on indirect transfer prior to 28 May 2012

11 October 2021

Background

The Taxation Laws (Amendment) Act, 2021 (2021 Act) nullified the retrospective effect of the amendment in section 9 of the Income-tax Act, 1961 (IT Act) made by the Finance Act, 2012 – taxation of indirect transfer. The 2021 Act also provides that the demand raised for such offshore indirect transfer shall be nullified on fulfilment of certain conditions. Recently, the CBDT has issued notification1 to insert Rule 11UE and Rule 11UF to the Income-tax Rules, 1962 (IT Rules).

We, at BDO in India, have analysed and summarised the said notification hereunder:

1. What was the change made by the 2021 Act?

The Finance Act, 2012 had inserted Explanation 5 in section 9(1)(i) of the IT Act 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 situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. This amendment was made effective retrospectively from 1 April 1962. The 2021 Act inserted two provisos to nullify this retrospective effect. It also provides that the amendment will be applicable to transaction executed on or after 28 May 2012 (i.e., the date when the Finance Act, 2012 received president’s assent). For detailed analysis of 2021 Act, please click here.

2. Are there any conditions prescribed?

Yes. Further to the conditions specified in Explanation to 5th and 6th proviso to Explanation 5 to section 9(1)(i) of the IT Act, as per Rule 11UE(2) of the IT Rules the declarant and all the interested parties shall:

  • Withdraw, terminate or discontinue without any recourse:
    • All the appeals or applications or petitions or proceedings against the relevant order or orders
    • All the proceedings for arbitration, conciliation or mediation or notices thereof against the relevant order or orders
    • All the proceedings to enforce or pursue attachments in respect of any award, order or judgement or any other relief against the Republic of India/ Indian affiliates2 with respect to the relevant order or orders
  • Terminate, release, discharge and forever waive all rights, whether direct or indirect, and any claims, and other demands of any nature against the Republic of India/ Indian affiliates in connection with the relevant order or orders.
  • Irrevocably waive any right to seek or pursue any claim issued in favour of the declarant or any of the interested parties.
  • Terminate, release, discharge and forever irrevocably waive any right, whether direct or indirect, any remedies, claims, demands, liens, actions, suits, causes of action, obligations, controversies, debts, costs, attorney’s fees, court’s fees expenses, damages, judgements, orders, compensation and liabilities of whatever kind or nature at law, in equity or otherwise, whether now known or unknown previously, suspected or unsuspected, and whether or not concealed or hidden, which have existed or may have existed, or do exist or which hereafter can, shall or may exist based on pursuit of any remedy or any and all claims, demands, damages, judgements, awards, costs, expenses, compensation or liabilities of any kind (whether asserted or unasserted), in relation to any facts, events or omissions occurring at any time in relation to taxation of income referred to in 5th and 6th proviso to Explanation 5 to section 9(1)(i) of the IT Act or relevant order/orders or related award, judgement or court order which may otherwise be available to the declarant/ interested parties.
  • Indemnify, defend and hold harmless the Republic of India and Indian affiliates from and against any and all costs, expenses at any time after the date of furnishing the undertaking in Form No. 1 by the declarant, and secures the Republic of India and Indian affiliates from any claim related to any relevant order or orders, or in relation to any award, order, judgment, or any other relief against the Republic of India and Indian affiliates in connection with any relevant order or orders.
  • Refrain from facilitating, procuring, encouraging or otherwise assisting any person (including but not limited to related party[3] or interested party) from bringing any proceedings or claim of any kind related to any relevant order(s) or any award/judgement/other relief against the Republic of India/Indian affiliates in connection with any relevant order(s).
  • Notify by a public notice or press release that by signing the undertaking in Form 1 or Part M of the Annexure to the undertaking in Form 1, as the case may be, any claims arising out of or relating to the relevant orders or any related award / judgement / court order, no longer subsist. Such person or entity issuing the public notice has signed an undertaking that includes an indemnity against any claims brought against Republic of India/Indian affiliates. Further copy of such public notice shall be furnished to Republic of India by that declarant and all interested parties.

3. Whether any undertaking or declaration is to be furnished for withdrawal of pending appeals / proceedings?

Yes. The declarant and all the interested parties shall furnish evidence of such withdrawal, termination and discontinuance and a declaration in the undertaking in Form No. 1 to the effect that it shall not, under any circumstances, reopen or file any such appeal, application, petition or proceeding in future against the relevant order or orders.

4. Who is required to fulfil the aforesaid conditions and in what the manner it needs to be done?

The declarant shall furnish an undertaking in Form 1 and shall append the undertakings from all the interested parties in Part M of the Annexure to the undertakings in Form 1 and furnish all the attachments required to be furnished under any clause or part thereof.

5. Who is a “declarant” and who are covered by “interested parties”?

“Declarant” is defined to mean the person in whose case a specified order has been passed or made, as the case may be.

“Interested parties” is defined to mean the following:

  • All the companies or entities in the entire chain of holding of the declarant till the ultimate holding company or entity;
  • Any person to whom the declarant has transferred any of its claims under any award, judgement, or court order pertaining to relevant orders or under the relevant orders or granted any rights;
  • Any person other than the person mentioned in sub-clauses (i) and (ii), in whose favour any interest has been created or assigned by the declarant or under any law or rules made thereunder with respect to any of the relevant order; and
  • Any person who has initiated any proceedings with respect to any of the relevant orders.

6. What is “relevant order”?

“Relevant order” means any specified order passed or made in respect of income accruing or arising through or from the transfer of an asset or a capital asset situated in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before 28 May 2012, particulars whereof are provided in Part A of the Annexure to the undertaking in Form 1.

7. What is “specified order”?

“Specified order” means:

  • An assessment or reassessment order under section 143, section 144, section 147 or section 153A or section 153C of the IT Act; or
  • An order passed for enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the taxpayer under section 154 of the IT Act; or
  • An order passed deeming a person to be a taxpayer in default under section 201(1) of the IT Act; or
  • An order passed imposing a penalty under Chapter XXI or under section 221 of the IT Act.

8. Is any authorisation required to execute Form 1?

The execution, delivery and performance of the undertaking in Form 1 submitted by the declarant, undertakings from all the interested parties in Part M of the annexure to the undertaking in Form 1 and indemnity bond by the declarant and interested parties in Part N of the annexure to the undertaking in Form 1 shall be duly authorised by all necessary corporate actions under the applicable law and a copy of such corporate actions shall be furnished by the declarant.

9. What are the timelines prescribed?‚Äč

Action

Rule

Form

Timeline

Reference

Declarant to submit undertaking to the jurisdictional Principal Commissioner or Commissioner

Rule 11UF(1) -

Form 1

T* + 45 days

T1

The jurisdictional Principal Commissioner or Commissioner shall,

  • Grant a certificate in Form 2 accepting such undertaking; or
  • Pass an order rejecting such undertaking after giving an opportunity of being heard

Rule 11UF(2)

Form 2

T1 + 15 days

T2

Declarant and interested parties to fulfil conditions specified in Rule 11UE(2) of the IT Rules and file an intimation to this effect with the jurisdictional Principal Commissioner or Commissioner

Rule 11UF(3) and Rule 11UF(4)

Form 3

T2 + 60 days

T3

After receipt of intimation in Form 3, the Principal Commissioner or Commissioner shall pass an order

Rule 11UF(9)

Form 4

(i)T3 + 30 days

or

(ii) T2 + 30 days

T4

 

*T- the date of commencement of Rule 11UE and Rule 11UF of the IT Rules (i.e., 1 October 2021)

Notes:

  • As per Rule 11UF(4) of the IT Rules, the jurisdictional Principal Commissioner or Commissioner may extend the period under Rule 11UF(3), upon receiving an application from declarant, by a further period not exceeding 60 days.
  • In case where Form 3 is filed beyond the timeline (or the extended timeline) then it shall be treated as invalid, and the provisions of this rule shall apply as if such person had never furnished the intimation in Form 3.

10. When can a jurisdictional Principal Commissioner or Commissioner reject the undertaking filed in Form 1?

The Principal Commissioner or Commissioner may pass an order rejecting the undertaking filed in Form 1, where such undertaking is incorrect or incomplete or any part thereof or any of the attachments or evidences or the indemnity bonds provided therein or any of the authorisations, as referred to in Rule 11UE(3) is incorrect or incomplete or not furnished. However, no such rejection order can be passed without the approval of the Chief Commissioner.

Further, the Principal Commissioner or Commissioner shall intimate the reasons thereof to the declarant and provide an opportunity of submitting a renewed undertaking in Form 1 within a further period not exceeding 30 days.

11. Are there any exceptions from submission of intimation in Form 3?

Rule 11UF(6) of the IT Rules provides that intimation in Form 3 shall not be required to be furnished by the declarant with respect to the relevant order or orders if the declarant and all interested parties has not filed :

  • An appeal or application or petition or proceeding;
  • An arbitration, conciliation or mediation and no notices have been given thereof; or
  • A proceeding to enforce or pursue attachments in respect of any award, order or judgement or any other relief against the Republic of India/Indian affiliates

However, where (i) or (ii) or (iii) has been filed,

  • The declarant and all interested parties have irrevocably withdrawn all such appeals, applications, petitions, proceeding, arbitration, conciliation and mediations and no further appeal or application or petition or proceeding or arbitration or conciliation or mediation has been filed by the declarant or any such interested party against the Republic of India or any of the Indian Affiliates before the withdrawal of such arbitration, conciliation or mediation and evidence thereof has been furnished at the time of furnishing the undertaking in Form No. 1 referred to in rule 11UE(1) of the IT Rules; or
  • Have been disposed of, no further appeal or application or petition or proceeding or arbitration or conciliation or mediation has been filed by the declarant or any such interested party against the Republic of India or any of the Indian Affiliates on or before the disposal of such arbitration, conciliation or mediation and evidence thereof has been furnished at the time of furnishing the undertaking in Form No. 1 referred to in rule 11UE(1) of the IT Rules.

12. When can the jurisdictional Commissioner or Commissioner decline to grant relief under Rule 11UF(7)?

As per Rule 11UF(8) of the IT Rules, the jurisdictional Principal Commissioner or Commissioner, after giving an opportunity of being heard to the declarant, can decline to grant relief where:

  • The declarant has not fulfilled any of the conditions stipulated under Rule 11UE(2) of the IT Rules;
  • The intimation in Form 3 or any part thereof is incorrect or incomplete;
  • The intimation in Form 3 has not been filed in a case other than that covered under rule 11UF(6) of the IT Rules;
  • Any of the attachments provided in Form 3 is incorrect or incomplete or has not been furnished;
  • Any of the evidences required to be furnished along with Form No. 3 is incorrect or incomplete or has not been furnished; or
  • The intimation in Form 3 submitted by the declarant is not duly authorised by all necessary corporate action or a copy of such corporate action is incorrect or incomplete or not furnished by the declarant.

However, no such rejection order can be passed without the approval of the Chief Commissioner.

Further, the Principal Commissioner or Commissioner shall intimate the reasons thereof to the declarant and provide an opportunity of submitting a renewed intimation in Form 3, as the case may be, within a further period not exceeding 30 days.

13. What will happen if the renewed undertaking in Form 1 or renewed intimation in Form 3 is not filed within 30 days?

If the renewed Form 1 or Form 3 is not filed within 30 days then such undertaking or intimation shall be treated as invalid and thereby it shall be construed as if such Form (i.e., Form 1 or Form 3, as the case may be) had never been furnished.

14. Whether the extended period allowed under Rule 11UF(11) shall be considered for computing the timeline?

The extended period allowed under Rule 11UF(11) for submitting a renewed undertaking in Form 1 or a renewed intimation in Form 3 shall be excluded from:

  • The period of 15 days for granting a certificate in Form 2 or passing an order rejecting such undertaking, as the case may be; or
  • 30 days under Rule 11UF(9) for passing an order granting relief under Rule 11UF(7) or declining relief under Rule 11UF(8), as the case may be.

15. What happens in case the Principal Commissioner or Commissioner has passed an order rejecting the undertaking in Form 1 under Rule 11UF(2) or declined to grant relief to the declarant under Rule 11UF(8)?

In such case, it shall be deemed as if the undertaking in Form 1 has never been filed.

16. What is the binding nature of the directions given by the Principal Commissioner or Commissioner?

Directions of the jurisdictional Principal Commissioner or Commissioner shall be binding on the tax officer who shall:

  • Give effect to such directions and pass an order and issue the refund and revoke attachments (if any) within 15 days from the date of receipt of such directions; and
  • File an application to withdraw any appeal or application or petition or proceeding filed by any Tax Authority or intimate the concerned person, where appeals or applications or petitions or proceeding has been filed by any other person representing the Republic of India, w.r.t specified orders covered under Form 4, within 60 days from the date of receipt of such directions.

17. What happens in case any dispute arises?

Any dispute under these rules or any direction or order issued thereunder shall be governed by the relevant Indian laws and be decided in accordance with the procedures specified under the IT Act.   

BDO Comments

The nullification of retrospective effect of indirect transfer taxation has been welcomed and well received by the investor community which seeks a certainty in the operation of law.  The concerned stakeholders were waiting for the Rules / procedures in order to put the past litigation to rest.  Before Rule 11UE and Rule 11UF was notified, in August 2021, the CBDT had kept draft Rules open for public comments. While draft Rules did not contain the provision for renewed undertaking, renewed intimation and extended period, the timelines in the final Rules have also been modified. The final Rules issued are quite extensive and cover several aspects. With the timeline for making application kept at 45 days, taxpayers who are wishing to opt for this amendment should initiate necessary steps so that the application is filed well within the time. Also, it is imperative to note that apart from filing the application, the taxpayer is also required to submit corporate action (i.e., Board Resolution) without which the application shall be regarded as incomplete.