Direct Tax Alert

BACKGROUND

The taxation of indirect transfers, where shares of a foreign company are sold which derive their value substantially from assets in India, has long been contested. The indirect transfer provisions were introduced retrospectively by the Finance Act, 2012. The core dispute since then has been whether India can tax the transfer of shares of a foreign company, outside India, by a non-resident seller. Taxpayers have relied on treaty protection and the commercial substance of their holding structures, while the tax authorities have relied on source-based taxation and anti-avoidance principles.

In January 2026, the Supreme Court in Tiger Global¹ denied treaty protection to the Mauritius entities on sale of shares of Flipkart Singapore and held that treaty benefits are available only for direct transfers, and that a tax residency certificate does not bar scrutiny of the true nature of an arrangement. The ruling has reopened the debate on treaty protection for indirect transfers. Against this backdrop, the Delhi Bench of Income Tax Appellate Tribunal (‘Delhi Tribunal’), in its ruling², dated 30 September 2026, examined whether gains from the alienation of shares of a foreign company holding shares of an Indian company can be taxed in India under Article 13(5) of tax treaty as gains from alienation of shares of a company resident in India by applying the meaning of ‘transfer’ under section 2(47) of the Income-tax Act, 1961 (‘the Act’).

We, at BDO India, have analysed and summarised the key aspects of this judgement and provided our comments on its impact hereunder.

FACTS OF THE CASE

• FireEye Ireland Limited (‘the taxpayer’) is a company incorporated in Ireland and a tax resident of Ireland under the India-Ireland Double Taxation Avoidance Agreement (‘DTAA’ or ‘Tax treaty’). It has a valid tax residency certificate. It is part of the FireEye Group which offers cybersecurity solutions to customers in India, comprising standard software, consulting services, and related accessories and appliances.

• The taxpayer operated with more than 150 employees and claimed to have no physical presence or permanent establishment in India.

• In fiscal year (‘FY’) 2021-22, as a part of internal group restructuring, along with various other entities, the taxpayer transferred its ownership in FireEye International LLC (‘US group entity’) which in turn held shares in Mandiant Cybersecurity Private Limited, an Indian company, to another Ireland-based group company.

• The taxpayer, in its return of income, had offered income from consulting services to income-tax in India while it claimed that consideration received from sale of software and related services as also the gain on sale of shares as non-taxable by virtue of provisions of the DTAA. The gains from alienation of shares/ ownership in the US group entity were not taxable in the hands of the taxpayer as per the domestic laws of Ireland.

• The tax authority made the following additions to the income in the final assessment order:

  • Amounts received from sale of software and related services treated taxable as Fees for technical services (FTS'); and

  • Capital gains from transfer of ownership in a US group entity held to be taxable in India as capital gains under Article 13(5) of the DTAA.

• The tax authority invoked Article 6 of Multilateral Instrument (‘MLI’) and held that section 90³ of the Act is meant to avoid double taxation and not to allow double non-taxation. The tax authority relied on the definition of 'transfer' in section 2(47) of the Act for interpretation of the word 'alienation' as used in Article 13(5) of the DTAA and held that the alienation of shares/ ownership in the US group entity is liable to capital gains tax under Article 13(5) of the DTAA.  

• Aggrieved, the taxpayer appealed to the Delhi Tribunal.

• Before the Delhi Tribunal, the tax authorities contended that the transfer of ownership in the US group entity is an indirect transfer under Explanation 5 to section 9(1)(i) of the Act and hence covered under Article 13(5) and not Article 13(6) of the DTAA. Consequently, it is taxable in India.

DELHI TRIBUNAL RULING

The Delhi Tribunal placed reliance on the Apex Court decision in case of Engineering Analysis Centre of Excellence⁴ and taxpayer’s own cases in previous years and held that software receipts are not taxable as FTS. It further held that the transfer of shares in the US group entity would not be taxable in India and made the following key observations:

• Taxability of Capital gains on transfer of ownership in the US group entity
  • Article 13 of the DTAA allocates the right to tax gains from the alienation of property between India and Ireland. Clause 5 of Article 13 covers gains from the alienation of shares of a company that is a resident of a contracting state. Clause 6 of Article 13 is a residuary clause covering gains from any other property, taxable only in the country where the seller is resident.

  • The taxpayer in the given case sold shares of a US entity which is not resident in India. Therefore, clause 5 does not apply. The gains fall under clause 6 and do not trigger any income tax liability in India.

  • The term ‘alienation’ in Article 13 cannot be equated with ‘transfer’ as defined under section 2(47) of the Act. Treaty terms must be interpreted by their ordinary meaning, in context and in light of the treaty’s object and purpose. A departure from plain meaning is permissible only for the purpose of avoiding absurdity. Article 3(2) can be used to import domestic law meaning of ‘transfer’ only to resolve a genuine ambiguity and not to widen the scope of the treaty.

  • Therefore, the inclusive and expansive definition of ‘transfer’ under the Act, cannot be imported to enlarge the scope of ‘alienation’ under Article 13 of the DTAA. There is no legal basis for treating the two terms as synonyms.

  • Mumbai Bench of Tax Tribunal, in its ruling in Sofina SA⁵, in the context of India-Belgium DTAA, held that Article 13(5) does not use the words ‘directly or indirectly’ and does not permit a look-through approach. Andhra Pradesh High Court, in the case of Sanofi Pasteur Holding SA⁶, held that the deeming fiction in Explanation 5 to section 9(1)(i) is a unilateral domestic amendment and cannot be read into the DTAA.

  • In the present case, the MLI provisions have been invoked on the premise that the taxpayer structured the transfer of shares of an Indian company indirectly outside India, allegedly resulting in double non-taxation and, consequently, abuse of the Tax Treaty. Such an allegation, particularly when used to deny the taxpayer the benefit of the Treaty, must be supported by cogent facts and evidence demonstrating the alleged abuse. No case of treaty abuse has been established on the basis of any specific inquiry, factual finding or allegation supported by evidence. On the contrary, it is observed that the taxpayer is an entity established in 2013 with substantial business operations, employees, and investments. The transaction was undertaken under a global restructuring activity and the taxpayer had transferred its ownership in seventeen entities. The invocation of Article 6(1) of the MLI (purpose of the covered tax agreement) was incorrect.

  • Therefore, the DTAA benefit could not be denied and the gains were held not to be taxable in India.

 

BDO INDIA COMMENTS

Key takeaway from this ruling is the Tribunal’s interpretation of Article 13 dealing with capital gains taxation. As in case of indirect transfer, subject matter is transfer of capital asset of shares of foreign entity (and not Indian entity), Article 13(5) does not cover such transactions.

This ruling reaffirms the principle that Explanation 5 to section 9(1)(i) and definition of ‘transfer’ under section 2(47) of the Act being deeming fiction under the domestic law and cannot, by themselves, create a taxing right under a DTAA. Where a DTAA covers only gains on alienation of shares of a company resident in a contracting state, it would not cover, in absence of the words ‘directly or indirectly’, gains on the sale of shares of a holding company in different jurisdiction, deriving its value substantially from its investments in India.

Also, that merely because income is not taxable/ exempt in home country (leading to double non-taxation), treaty abuse cannot be alleged by tax authorities in absence of specific enquiry. A possible interpretation of a treaty provision, merely because it may be favourable to the Revenue, cannot, by itself, justify reliance on Article 6(1) of the MLI, which modifies the preamble of the Tax Treaty. In the absence of any evidence or specific finding establishing treaty abuse, the invocation of Article 6(1) of the MLI is unjustified and unsustainable. This finding reinforces the need for taxpayers to be in a state of readiness to establish substance during tax assessments.

This ruling reiterates that the critical question for applying meaning under the domestic law for an ‘undefined’ term in the DTAA is whether that term is genuinely undefined and ambiguous, and whether the domestic meaning is consistent with the context and allocation of taxing rights under the DTAA. Until there is clearer guidance on this issue, similar disputes over other undefined treaty terms may continue.

Although this ruling does not deliberate about DTAA applicability in case of indirect transfer, the requirement of substance even when TRC is produced and the application of General Anti Avoidance Rules (‘GAAR’) it is still significant, considering that the DTAA benefits are granted after the Supreme Court's ruling in Tiger Global⁷ where DTAA benefits in case of indirect transfer were questioned.