Background why clarity on Indirect transfer provisions required:

Section 9 of the Act deals with cases of income which are deemed to accrue or arise in India. Sub-section (1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India.Clause (i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. 

The Finance Act, 2012 inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter-alia, included insertion of Explanation 5 in section 9(1)(i) w.e.f. 1st April, 1962. The Explanation 5 clarified that an asset or 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. In response to various queries raised by stakeholders seeking clarification on the scope of indirect transfer provisions, the CBDT issued Circular No 41 of 2016. However, concerns have been raised by stakeholders that the provisions result in multiple taxation. It was important to provide Clarity on Indirect transfer provisions.

Clarity on Indirect transfer provisions given in Budget 2017:

In order to address these concerns and to provide Clarity on Indirect transfer provisions. it is proposed to amend the said section so as to clarify that the Explanation 5 shall not apply

-to any asset or capital asset mentioned therein

-being investment held by non-resident

– directly or indirectly,

-in a Foreign Institutional Investor, as referred to in clause (a) of the Explanation to section 115AD,

-and registered as Category-I or Category II Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992, as these entities are regulated and broad based. The proposed amendment is clarificatory in nature.

Retrospective effect for amendment on section 9 amendment for non residents: 

This amendment will take effect retrospectively from 1st April, 2012.  It will  accordingly, apply in relation to assessment year 2012-13 and subsequent years.