CBDT ISSUES DRAFT RULES FOR VALUATION OF INDIRECT TRANSFERS
25 May 2016
But there is a catch. "The draft rules propose that if transferor fails to provide necessary information for application of prescribed formulae, the whole income from transfer of shares shall be deemed to be attributable to assets located in India. A question arises — Can the rules define or alter the taxability of income arising from indirect transfer of shares (in the absence of backup documentation)?" asks Jiger Saiya, tax partner, BDO India.
It may be recalled that the Finance Act, 2012, via a retrospective amendment dating back to April 1, 1962, had brought indirect transfers of a capital asset situated in India, within the ambit of Indian tax laws. Vodafone and a few other companies are still battling their tax liabilities. Subsequently, the Finance Act, 2015 had sought to remove the subjectivity in the tax provisions by prescribing that indirect transfer of shares of an Indian company or entity would be subject to tax in India, if the value of the Indian assets exceeded Rs10 crore and these represented at least 50% of the value of the global assets of the foreign company being transferred (such foreign company being one which directly or indirectly holds the Indian company).
Now draft rules for valuation have been issued. "The draft rules prescribe common principles of valuation. To illustrate: For listed companies, it is based on market price and for unlisted companies it is based on an expert's valuation report. However, the valuation norms contain an unheard of requirement of adding back the liabilities of the Indian company to arrive at the final figure. This requirement needs a relook," says Girish Vanvari, partner and tax leader at KPMG India.
The transferor company has to furnish a report in Form 3CT, certifying that the income attributable to assets in India has been correctly computed. Further, a plethora of information and documents are required to be maintained and furnished to the tax authorities by an Indian entity whose shares are indirectly transferred. Information is to be submitted in form 49D within 90 days from the end of the relevant financial year.
Key areas of documentation relate to the decision or implementation process of the overall arrangement of transfer, information relating to the business operation, personnel, finance and properties, internal and external audit or valuation report of the foreign company being transferred and its subsidiaries, which directly or indirectly hold the Indian assets.
"It will be challenging for the Indian entity to maintain and produce information relating to decision or implementation process of the overall arrangement of transfer (one of the many requirements). Some may not even have knowledge of such process or of the overall arrangement, which is most likely to be kept confidential at the top level of structure," adds Saiya.