Fair Market Valuation & Determination of Income Taxable on Indirect Transfer of Indian Assets
- Posted by kalyani
- On 02/12/2024
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Indian taxation applies to a non-resident in respect of income arising in, accruing in, or deemed to arise in India. It is, however, a concern for many developing countries, including India, that non-residents were circumventing capital gains taxation on assets located in a source country by transferring them indirectly, i.e., by transferring their interests in the entity in an overseas jurisdiction rather than transferring the assets themselves in the source country. Typically, this occurs when global businesses are held through multi-tiered structures with intermediate holding companies outside India generating substantial value from Indian assets/business.
India, by virtue of a specific provision in the Indian Income Tax Act, has deemed such indirect transfers of Indian businesses/assets/entities deriving its value substantially from Indian assets as accruing in India for tax purposes subject to certain prescribed exemptions.
A summary of Rules notified by The Central Board of Direct Taxes (CBDT) for taxing such indirect transfer in India are as follows –
Table 1: Assessing Fair Market Value of assets (tangible or intangible) held directly/indirectly by a foreign company or entity on a specified date[1]
| Particulars | Computation of FMV | Remarks |
Listed Indian company shares
|
Observable price of such shares on Stock Exchange FMV = (market capitalization of the company + book value of the liability of the company)/total number of outstanding shares
|
In scenarios where the share is listed on more than one exchange, the observable price will be computed considering the Stock Exchange where highest volume of trading of the share took place. |
| Share of an unlisted Indian company | A calculation by an accountant or merchant banker using any internationally accepted valuation method for determining the value of shares on an arm’s length basis, as increased by the liability, if any, considered in the calculation. | |
| Interest in Partnership firm or an Association of Person (AOP) | A calculation by an accountant or merchant banker using any internationally accepted valuation method for determining the value of shares on an arm’s length basis, as increased by the liability, if any, considered in the calculation.
The portion of the value computed above as is equal to the capital contributions will be allocated among partners or members in proportion of their capital contribution. The residual value shall be allocated amongst the partners or members in accordance with the agreement for distribution of assets in the event of dissolution of a partnership firm or association. Alternatively, if such an agreement does not exist, in the proportion in which partners or members are entitled to share profits. The total of the amounts allocated to a partner or member shall be considered as fair market value of the interest of that partner or member in the firm or association, whichever is applicable. |
|
| Others | In case of assets not covered above, the fair market value shall be calculated by an accountant or merchant banker using any internationally accepted valuation method for determining the value of shares on an arm’s length basis as increased by liability, if any, considered for such calculation. |
Table 2: Calculation of Fair Market Value of all these assets of a foreign company or entity
| Particulars | Computation of FMV | Remarks |
| When shares or interests in a foreign company or entity are transferred between non-connected individuals | FMV of all assets= Market capitalization of the foreign entity based on the full value of the consideration for transfer of such share or interest + The book value of the company’s or entity’s liabilities on the specified date, certified by the merchant banker or accountant) | |
| Shares listed on stock exchange on specified date | FMV of all assets = Market capitalization of the foreign company or entity is calculated based on the observable price of its shares on the stock exchange + The book value of a company or entity’s liabilities as of the specified date) | If on the specified date the shares are listed on more than one stock exchange, the observable price shall be determined basis the stock exchange that records the highest volume of trading in said shares. |
| Unlisted shares on the specified date | FMV of all assets= Internationally accepted valuation methodology for determining the fair market value of a foreign company or entity and its subsidiaries on a consolidated basis by a merchant banker or accountant + A company’s liabilities, if any, considered while determining fair market value. |
Table 3: Calculation of income attributable to Indian assets
| Particulars | Computation of FMV | Remarks |
| Income attributable to assets located in India from transfer outside India of shares of or interest in an entity | FMV= (i) Income from transfer of shares or interest in a company or entity is computed according to the provisions of the Act as if the shares or interest were located in India.
(ii) The amount calculated in (i) above is multiplied with an amount that is calculated by dividing the FMV of assets located in India as of a specified date with the FMV of all the assets of a company or entity as of a specific date
|
The income derived from the transfer of share or interest in the company or entity attributable to the assets located in India shall be determined by the Assessing officer in a manner deemed fit if transferor does not provide the information necessary for the application of the formula. |
Further Points
- The transferor of the share or interest in an entity that derives its value substantially from India shall be required to obtain and furnish Form 3CT along with the return of income. The Form 3CT shall be duly certified by an accountant and shall provide basis of apportionment based on the formula and certify that income attributable to assets located in India has been calculated correctly.
- The fair market value of a company that has been determined based on an interim balance sheet, the fair market value shall be appropriately adjusted after the financial statement has been finalized in accordance with applicable laws and all provisions of these Rules shall apply accordingly.
- For determining the fair value of any asset located in India, being a share in an Indian company or an interest in a partnership, firm, or association shall be considered regardless of whether the assets or business operations are located in India or abroad.
- On the date specified, the telegraphic transfer bank rates of such currency shall be used to calculate the value in foreign currency of assets located in India.
[1] Specified date means (i) date on which the accounting period of the company or entity ends proceeding the date of transfer of a share or an interest or (ii) date of transfer, if the book value of the assets of the company or entity exceeds the book value of the assets as on the date referred in clause (i) by fifteen per cent.
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