Dividends declared by a foreign company, having assets in India, to another overseas arm will not be taxable in India. The Central Board of Direct Taxes (CBDT) has issued a direction to income-tax officials to clear the air on threeyear-old controversial retrospective amendment to tax indirect transfers.

This will also provide tax certainty to foreign investors. "Declaration of dividend by such a foreign company outside India does not have the effect of transfer of any underlying assets located in India," the CBDT said. It means that dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing in India.

The erstwhile UPA government had amended the tax laws in 2012 budget retrospectively, allowing tax authorities to tax overseas transactions involving indirect transfers of Indian assets to nullify the Supreme Court decision that said the British telecom operator Vodafone's $11.2 billion acquisition of Hutchison Essar in 2007 was not taxable in India.

The amendment was seen as one of the key reasons behind India falling out of favour with foreign investors. Finance minister Arun Jaitley has not repealed the controversial amendment but has sought to provide some relief through proposed amendments in the finance bill, 2015 including defining the threshold for taxation of indirect transfers by specifying "substantial value".

The directive follows Jaitley's assurance in Parliament that the CBDT will issue certain clarifications on the retro amendment to clear doubts as to income accruing or arising in India and bring stability in taxation.

Taxation of indirect transfers has again come in to lime light after tax authorities earlier this month issued demand notice to Cairn India and Cairn Energy Plc's Cairn UK Holdings Ltd for stake sale to Vedanta Group.

Foreign investors had raised the issue of retro tax amendment impacting dividends issued by their parent to another foreign arm if the asset was located in India.

"It has been pointed out that such an extended application of the provisions of the Explanation may result in taxation of dividend income declared by a foreign company outside India. This may cause unintended double...," the CBDT directive said.

Tax experts say this would clear the air on a crucial issue that had brought some uncertainty.