Dividends declared or paid by a foreign company outside India in respect of shares that derived their value substantially from assets situated in India will not be "deemed" as income taxable in India.

The Central Board of Direct Taxes (CBDT) has issued a clarificatory circular to this effect, putting to rest all doubts about the taxability of such dividends in India.

This clarification would mean that Indian tax authorities cannot invoke the indirect transfer provisions enacted in Finance Act 2012 to bring to tax the dividend payouts of such foreign companies.

In its latest circular, CBDT has made it clear that declation of a dividend by a foreign company — whose shares derive value substantially from assets situated in India — does not have the effect of transfer of any underlying assets located in India.

Therefore, such dividends "will not be be deemed to be income accruing or arising in India" by virtue of Explanation 5 to Section 9(1)(i) of Income Tax Act (Indirect transfer of shares), according to the CBDT.