Draft Indirect Transfer Valuation Rules - Shifting of Burden on Indian cos?


CBDT has taken the next big step in clarifying the controversial ‘indirect transfer’ provisions that has, ever since the Vodafone saga, been causing anxiety in the foreign investor community. In a significant development, CBDT has proposed draft rules for determination of Fair Market Value (FMV) and reporting requirement for Indian concerns in respect of indirect transfer provisions u/s 9(1). Accepting Shome Committee recommendations, Finance Act, 2015 had come out with 50% threshold, based on FMV of assets, for the ‘word’ substantially arising in Sec 9(1). The draft rules now seek to clearly spell out the manner in which FMV will be computed and also specify the format of reporting for Indian concerns through or in which the foreign entity holds the assets in India.

Do you think the draft rules will provide much needed certainty in taxation of offshore transactions?  What are the practical problems associated with determination of FMV for various assets? Considering that information relating to a foreign entity is sought, is the Government right in assuming ‘availability of information with the Indian concern’ for complying with the reporting norms? Is it fair on part of Government to cast an onerous obligation on Indian concerns for reporting compliance for offshore transactions, when reporting may be undertaken by ‘either’ parties to the transaction?



Ketan Dalal
Managing Partner (West) and Sr. Tax Partner, PwC

The draft rules on indirect transfer announced on 23rd May 2016, are, in principle, a welcome move to bring clarity to the concept of taxing indirect transfers. However, one does get a feeling of over legislation and also, onerous burden of compliance; for example, when the Indian assets represent shares of an unlisted company, the need for a valuation report constitutes a significant burden and has issues of commercially sensitive information needed to be shared. Also, in relation to listed companies, the concept of shareholding conferring the right of management and control is highly subjective, and will create issues.

Section 285A requires that the relevant Indian concern in which or through which, the Indian assets are held shall furnish prescribed information to the Tax authorities; draft Rule 114DB deals with this situation, and requires that the Indian concern shall maintain the information required in accordance with the relevant rule, and shall furnish the relevant information to the AO within 90 days from the end of the year when the transfer of the overseas company had taken place. While the requirement to intimate the AO is after the year of the transfer, the requirement to maintain the information is quite onerous...

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Girish Vanvari
Partner & Head - Tax, KPMG in India

The draft rules are a progressive step to provide the much needed clarity on the taxation of ‘indirect transfer’ of shares.

There are areas in the proposed rules that would need further deliberation such as the proposed add back of liabilities to arrive at the valuation appears to be unusual and may be debated further. Also a plain reading of the rules suggests that ‘book value of liabilities’ would include reserves and convertible instruments to be added back. These are some of the areas that need to be ironed out in the final rules.

That’s correct the guidelines assume the availability of information with the Indian Concern for complying with the reporting norms which may be a challenge. Specially in cases where the Indian entity is required to maintain and produce information relating to decision or implementation process of the overall arrangement of the transfer, it would be onerous to collate such information since most of these transactions documents/discussion would be confidential in nature and may not be readily available with the Indian concern.

Rules in the present form do not deal with genuine case of impossibility of performance to produce the information sought and the...

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K. R. Sekar
(Partner, Deloitte Haskins & Sells)

·  Certainly the Government and CBDT should be appreciated for attempting to get clarity on valuation for the purpose of indirect transfer under section 9(1). Though the draft valuation rules makes an attempt yet the rules need to have more clarity for application and administration.

·  The draft guidelines prefers to follow guidelines issued by RBI on valuation in respect of transfer of shares, where under FEMA guidelines RBI chose internationally accepted valuation instead of DCF for unlisted companies.

·  In case of unlisted companies, the draft Rules require FMV determination by a merchant banker in accordance with any internationally accepted pricing methodology for valuation of arm’s length basis. NAV and DCF are also considered as internationally accepted methods for pricing purposes. In this connection, the issue arises if a transaction is undertaken at NAV, whether such valuation would be acceptable to the tax authorities. It is pertinent to note that Rule 11UA (in the context of Section 56) refers to NAV ie book value as a valuation methodology. Further as there has been a detailed rules on valuation under Rule 11UA, it is more important and advisable that this draft rules should also be aligned...

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Rajendra Nayak
(Partner, International Tax Services, Ernst & Young LLP)

Ever since the indirect transfer taxation provisions of the Indian tax law were amended in 2015, the rules relating to valuation, computation and reporting were keenly awaited. By not being prescriptive and accepting valuation based on internationally accepted valuation norms, the rules provide a fair degree of latitude to taxpayers. The rules can be expected to provide greater certainty to taxpayers while undertaking transactions that involve underlying Indian assets. However, the reporting and compliance burden which the draft rules prescribe does appear to be a bit onerous and may require a re-look.

While the overall tenor of the draft rules is to rely on the fair market value (FMV) concept, interestingly, Rule 11UB(3) of the draft rule refers to any “accepted pricing methodology for valuation of shares on an arm’s length basis” when it comes to valuing shares of an unlisted Indian company. Further, if the indirect transfer transaction occurs between Associated Enterprises, the same would need to be tested for compliance with the arm’s length standard under transfer pricing rules. This raises the question whether the concept of FMV and arm’s length price (ALP) converge or could there be a divergence?

The ALP standard and...

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Rakesh Dharawat
(Partner, Dhruva Advisors LLP)

The release of the long awaited draft valuation rules on indirect transfers is a welcome step that will help bring some certainty to the area of taxation of indirect transfers itself. Having said this, there are a few aspects which may warrant a modification to the Rules when they are finally notified.

For instance, in determining the FMV of assets of a foreign company in a transaction between non-associated enterprises, the draft rules provide that the consideration (i.e. the transaction value) can be used as the FMV provided it is determined based on a report prepared by an accountant/merchant banker of repute. This may pose practical difficulties as the consideration in unrelated party transactions is often a matter of commercial negotiation, rather than of valuation. Hence, it may be useful to drop the requirement of the consideration being determined based on the valuation of an accountant/merchant banker. The Rules should only provide that the FMV will be the transaction value.

The other area which could pose practical difficulties relates to the obligation of Indian concerns to maintain information/documents relating to indirect transfers. The list of information/documents is very exhaustive, and it may pose a very onerous...

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