Furnishing of information or documents by an Indian concern in certain cases.

506

Where,––

• (a) any share of, or interest in, a company or an entity registered or incorporated outside India, derives, directly or indirectly, its value substantially from the assets located in India, as referred to in section 9(9)(a); and
• (b) such company or, entity, holds, directly or indirectly, such assets in India through, or in, an Indian concern, then, such Indian concern shall, for the determination of any income accruing or arising in India under the said clause, furnish within such period, the information or documents in such manner, as prescribed, to the prescribed income-tax authority.

Explanation

Section Summary:

Section 506 of the new income tax law requires Indian entities (referred to as "Indian concerns") to provide information or documents to the tax authorities in cases where a foreign company or entity derives significant value from assets located in India. This provision ensures that the Indian tax authorities can accurately determine income that accrues or arises in India from such assets.

Key Changes:

• New Reporting Obligation: This section introduces a new requirement for Indian concerns to furnish information or documents related to foreign entities that derive substantial value from Indian assets. Previously, such reporting obligations were not explicitly outlined in the Income Tax Act.
• Link to Section 9(9)(a): The section ties directly to Section 9(9)(a), which deals with income deemed to accrue or arise in India from indirect transfers of assets located in India.

Practical Implications:

• For Indian Concerns: Indian entities that act as intermediaries or hold assets on behalf of foreign companies or entities must now comply with this reporting requirement. Failure to do so could result in penalties or scrutiny by tax authorities.
• For Tax Authorities: This provision enhances the ability of tax authorities to track and tax income generated from Indian assets, even if the ownership structure involves foreign entities.
• For Foreign Entities: Foreign companies or entities with significant Indian assets held through Indian concerns may face increased transparency and potential tax liabilities in India.

Critical Concepts:

• Substantial Value from Indian Assets: This refers to situations where a significant portion of the value of a foreign entity's shares or interests is derived from assets located in India. The exact threshold for "substantial" is not defined in this section but is likely to be clarified through rules or guidelines.
• Indian Concern: This term refers to any entity registered or operating in India, such as a company, partnership, or other legal entity.
• Prescribed Manner and Authority: The specific details about how and to whom the information must be furnished will be outlined in rules or notifications issued by the tax authorities.

Compliance Steps:

1. Identify Relevant Cases: Indian concerns must identify situations where a foreign entity derives substantial value from Indian assets held through them.
2. Gather Required Information: Collect all necessary documents and information related to the foreign entity and its Indian assets.
3. Submit to Tax Authorities: Furnish the information or documents to the prescribed income-tax authority within the specified timeframe and in the prescribed format.

Example:

Suppose a foreign company, XYZ Ltd., owns a 60% stake in an Indian manufacturing company, ABC Pvt. Ltd. XYZ Ltd.'s shares derive a significant portion of their value from the assets owned by ABC Pvt. Ltd. in India. Under Section 506, ABC Pvt. Ltd. (the Indian concern) must provide detailed information about XYZ Ltd. and the Indian assets to the tax authorities. This ensures that any income generated from these assets is properly accounted for and taxed in India.

This section strengthens the Indian tax framework by ensuring that income derived from Indian assets, even through complex international structures, is transparent and subject to taxation.