Indirect Transfer Valuation: Rule 11UB to Rule 11 under the Income Tax Act 2025

When one foreign company sells shares of another foreign company, common sense suggests India has no claim on that transaction no Indian buyer, seller, or shares changing hands. Indian tax law disagrees in one specific situation: if that foreign company's value comes mostly from an Indian business underneath it, India can tax part of the gain anyway. This is called an indirect transfer, and how it's valued determines almost everything about whether tax applies, and how much.

Why This Rule Exists?

This provision goes back to the known Vodafone case. In that case an offshore sale took place. The sale involved a holding company. That company owned a telecom business. The ownership was through a structure. The sale was found not to be taxable, in India. The reason was simple. No rule existed to look through the structure. So the transaction fell outside India’s tax net. Parliament responded by writing that look-through rule directly into law: if a foreign company's value is substantially built on Indian assets, its shares are treated as Indian for tax purposes, regardless of where the sale actually takes place.

This matters most in classic private equity and cross-border M&A structures, where an Indian operating company sits several layers beneath an offshore holding entity, and a sale at the top is, in substance, a sale of the Indian business underneath.

The Two-Part Test That Decides Everything

A foreign company's shares are only treated as deriving substantial value from India if two conditions are both true on a specific reference date: the Indian assets exceed a fixed rupee threshold, and they make up at least half the company's total asset value. Both must be met together a large Indian business that's still a small fraction of a much bigger global group can fall outside the rule, just as easily as a smaller Indian business making up most of the group's value can fall squarely inside it.

The reference date isn't always the most recent balance sheet date, either. If a company's asset value jumps sharply just before a sale — a large funding round, a revaluation — the law shifts the reference date to the actual transfer date instead, specifically to stop a stale balance sheet from being used to dodge the test.

Why Valuation Sits at the Center of This Provision

Every question this rule asks is really a valuation question. Does the Indian portion clear the rupee threshold? Does it clear the 50% share of total value? And once the rule applies, how much of the actual gain gets attributed to India? Each depends completely on a fair market value decision. So making the valuation wrong doesn't just lead to the number it can decide if the tax is applied or not.

For an unlisted Indian company, this fair value is typically determined by a Chartered Accountant or a merchant banker, using standard approaches such as DCF or comparable company analysis. For listed shares, value is generally drawn from observable market prices over a defined window, though a controlling stake can require an adjustment beyond just the trading price.

How the Taxable Gain Actually Gets Calculated

Once the rule applies, India doesn't tax the entire offshore gain only the portion corresponding to the Indian share of the underlying business. In simple terms, if half the foreign company's total value sits in its Indian assets, roughly half the gain from selling that company's shares becomes taxable in India. The rest, tied to non-Indian assets, falls outside India's reach.

This is exactly why the underlying valuations matter so much: the same transaction can produce a very different Indian tax bill depending on how the Indian and worldwide asset values are determined — a number worth getting right before a deal closes, not after.

A Recent Change in Numbering, Not Substance

In India a major tax law overhaul will begin in April 2026. Because of that the rule numbers that govern this rule have changed. The rule that people used to refer to by one number is now assigned a number, in the updated framework. The underlying test, thresholds, and valuation principles carry forward largely unchanged; what's changed is the citation, not the substance. For any transaction structured before this transition, the earlier numbering may still apply, making it worth confirming which framework governs a given deal's timeline.

For any group with a foreign holding structure sitting above an Indian business, the sensible moment to test these thresholds is well before a sale is signed not after, when a valuation becomes purely defensive rather than a genuine input into deal structuring and pricing. A well-documented valuation, anchored to audited financials and prepared by the right professional, is often the strongest protection available if this provision is ever examined closely.