CA, merchant bankers to determine FMV in indirect transfers

Chartered accountants or merchant bankers will compute the fair market value (FMV) of assets in case of indirect transfer of assets by overseas companies on arm's length basis, the revenue department today proposed with an aim to bring in transparency in taxation matters.
Under the draft rules, FMV in case of listed companies will be determined in relation to market capitalisation, book value of liabilities and number of shares held.
However, in case of unlisted companies, the FMV would be calculated by a merchant banker, chartered accountant in accordance with internationally accepted pricing methodology for valuation of shares on arm's length basis.

"Where the asset is the share of an Indian company not listed...The FMV shall be the fair market value on such date as determined by a merchant banker or an accountant in accordance with any internationally accepted pricing methodology for valuation of shares on arm's length basis...," the draft rules said.
The department has sought comments and suggestions on draft rules and forms prepared for determination of FMV of Indian and global assets and the manner for reporting requirement on the Indian concern in which the foreign company or entity holds the assets in India till May 29.
Commenting on the draft, Vipul Jhaveri, Partner, Deloitte Haskins & Sells LLP said they 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," he said.

As per the Income-Tax Act if any share of or interest in, a foreign company or entity derives its value substantially from the assets located in India, then such share or interest 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.
The share or interest is said to derive it value substantially from assets located in India, if FMV of assets located in India comprise at least 50 per cent of the FMV of total assets of the company or entity, the Revenue Department said.

"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 in (provision)," said Amit Maheshwari Partner Ashok Maheshwary and Associates.
Maheshwari added that as per the draft, if the Indian concern fails to produced documents or information for computation of value of assets attributable to India, "it will be deemed that the whole of the income would be deemed to be attributable to assets located in india".
The draft introduced 11 areas of reporting by Indian company.