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CBDT issues draft rules to compute fair market value of foreign firms
May, 27th 2016

The Central Board of Direct Taxes (CBDT) has taken the next big step in implementing the controversial ‘indirect transfer’ provisions that dented India’s image among the foreign investor community and led to international companies such as Vodafone and Cairn face huge tax bills in the country.

It has now issued draft rules to specify the manner in which ‘fair market value’ (FMV) of assets of foreign company with underlying Indian assets be computed. The FMV calculation is critical as it forms the basis of trigger of ‘indirect transfer’ provisions under the income tax law, say tax experts.

Indirect transfer provisions are triggered on a ‘foreign company’ if that entity derives its value substantially from the assets located in India. Then a share or interest in that foreign company is deemed to be situated in India. Thereby, any income arising from transfer of such share or interest is deemed to accrue or arise in India.

A share or interest is said to derive its value substantially from assets located in India, if FMV of assets located In India comprise at least 50 per cent of the fair market value of total assets of the company or entity.

Stakeholders and general public have been given time till May 29 to electronically send in their comments and suggestions on the draft rules, an official release said.

The CBDT has also now specified the format of reporting for Indian concerns through or in which the foreign company or entity holds the assets in India. The information required to be furnished and the manner (a new form 49D) has also been specified.

Experts’ take
Reacting to the CBDT move, Vipul Jhaveri, Partner, Deloitte, Haskins & Sells LLP, a CA firm, said that the rules for determining FMV in the case of indirect transfers were long overdue, as the corresponding provisions in law were introduced in 2015.

“These rules essentially rely on fair valuation on arm’s length basis conducted by a Chartered Accountant or merchant banker, and do not adopt the ‘net asset value’ principle, which is applied in some situations under the income-tax rules,” Jhaveri told BusinessLine.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said that the reporting requirement for Indian companies seem to be quite onerous.

“Extensive documentation with sound underlying basis for valuation in case of unlisted shares would be necessary to substantiate the claim of taxpayers of being not covered under indirect transfer provisions (under Section 9),” he said.

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said that the said rules give objective criteria for determination of FMV and this should bring certainty in taxation of offshore transactions.

However, the rules gives an onerous prescription for a foreign company to comply with Indian taxation regime, he said. “A significant aspect to note that the rules makes a mandatory maintenance of prescribed information for eight years, which is at parity with domestic assessee,” he said.

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