Question 8

"Indirect Transfers" in the Indian context became a prominent discussion point due to the Vodafone tax case. It refers to a situation where the ownership of assets located in India is transferred indirectly through the sale or transfer of shares of an overseas company. Specifically, if a foreign company holds shares in another foreign company, and these underlying shares derive their substantial value from assets located in India, then the transfer of shares of the *first* foreign company (outside India) is considered an "indirect transfer" of assets located in India. The Indian Income Tax Act was amended in 2012 (with retrospective effect) to tax such indirect transfers, aiming to assert India's right to tax capital gains arising from the transfer of Indian assets, even if the transaction takes place overseas between two foreign entities.

Option D precisely describes this scenario: A foreign company transfers shares (e.g., of another foreign entity) and such shares derive their substantial value from assets located in India. This is the essence of an indirect transfer as defined and targeted by Indian tax laws.