Source-Based Taxation Principles in Indirect Share Transfers

Under modern domestic tax law, particularly Section 9(1)(i) read with Explanations 4 and 5 of the Income Tax Act, 1961, income from the transfer of shares or interests in a foreign entity is deemed to accrue or arise in India if such foreign shares derive their value substantially, directly or indirectly, from assets located in India. This reflects the source-based principle of taxation, which accords the country where the underlying economic assets and economic nexus exist the primary sovereign right to tax resultant capital gains. Where an offshore transaction lacks specific treaty protection or involves abusive structures, the source State asserts its legitimate jurisdiction over the gain derived from its domestic wealth.(The authority for advance rulings Vs Tiger Global International II holdings) | 2026 INSC 60)