30 June 2016
EY Tax Alert
Indian Administration issues indirect transfer rules
Executive summary
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The Central Board of Direct taxes (CBDT), the apex administrative body for direct
taxes in India, has recently issued[1] rules and forms in relation to the indirect
transfer (IDT) provisions of the Indian Tax Laws (ITL). This is subsequent to the
draft indirect rules released on 23 May 2016 for public consultation[2].
The ITL provides for taxation of IDT in India. The IDT provisions provide for
taxation of gains arising from the transfer of share or interest in a foreign
company (FCo) or foreign entity (FE) whose value is derived, directly or
indirectly, “substantially” from assets located in India. The IDT provisions were
further amended in 2015 to deal with certain specific aspects like the
“substantiality” threshold of 50%, taxation on proportionate basis i.e., to the
extent of value of India assets, reporting obligation relating to IDT transactions,
small shareholder exemption etc.
Pursuant to the above, the CBDT has now issued rules and forms as required
under the ITL (IDT Rules). The IDT Rules provide for valuation mechanism,
determination of proportionate income, forms for reporting compliance and
details of documents to be maintained by the Indian concern in respect of IDT
transactions. These IDT Rules come into force from 28 June 2016.
This Tax Alert highlights key aspects of the IDT Rules.
[1]
[2]
Notification No. 55/2016 dated 28 June 2016
Refer EY Alert dated 24 May 2016 titled “Indian Tax Administration issues draft indirect transfer rules; invites
comments from stakeholders”
Background – IDT
provisions of the ITL
In 2012, the ITL was amended to introduce
the IDT provisions. The IDT provisions provide
for taxation of gains arising from transfer of
share or interest in an FCo or an FE whose
value is derived, directly or indirectly,
“substantially” from assets located in India.
IDT Rules
1. Rules on determination of
FMV of assets (Rule 11UB)
►
The IDT provisions were further amended in
2015 to clarify/provide for some specific
aspects like 50% threshold to ascertain
substantial value from assets in India,
taxation on proportionate basis i.e., to the
extent of value of India assets, reporting
obligation on Indian concerns to furnish
information/documents relating to IDT
transactions etc[3]. In terms of the IDT
provisions, the CBDT is empowered to
prescribe rules for determination of valuation
of assets, income which is attributable to
India-located assets and the reporting
mechanism.
The ITL provides that shares or interest
in FCo/ FE would derive its value
substantially from assets in India if the
value of such Indian assets represents
50% or more of the value of all assets of
the FCo/ FE[4]. Furthermore, the value of
the Indian asset shall be based on its
FMV on the SD, without reduction of
liabilities, if any, in respect of the assets.
Such FMV needs to be determined as per
the prescribed rules.
Pursuant to the above, the CBDT has now
issued the IDT Rules and forms which include:
►
►
►
[3]
Valuation norms, based on the fair
market value (FMV) of assets, without
reduction of liabilities in relation to these
assets in order to determine
substantiality threshold of 50%.
Determination of proportionate income
attributable to India assets based on FMV
of assets as on the specified date (SD).
Information/documents to be maintained
and furnished by Indian concerns in
relation to IDT transactions.
For details, refer EY Global Alert titled “India releases Budget
2015” dated 5 March 2015
[4]
This is in addition to condition of value of Indian assets to
exceed INR100m to trigger IDT provisions.
FMV of asset, tangible and intangible held, directly or indirectly, by an FCo/FE
►
Sr. No.
Type of asset
Method of determining FMV
Valuation by
1.
Asset being share of a listed Indian
company (without any, direct or
indirect, right of management or control
in the company)
Observable price[5] on stock exchange
N.A.
2.
Asset being share of a listed Indian
company (which is part of holding which
confers direct or indirect right of
management or control in the company)
(Market capitalization based on observable price[5]
+ Book value of liabilities[6] on SD)
N.A.
Asset being share of an Indian company
which is not listed on a recognized
stock exchange, as on the SD
FMV as on the SD determined in accordance with
any internationally accepted valuation
methodology for valuation of shares on arm’s
length basis
3.
Total number of outstanding shares
Merchant
banker[7] or an
accountant[8]
+
Liability, if any, considered in such determination
4.
Interest in a partnership firm[9] or
association of persons (AOP)
Step 1:
Determine the value of firm or AOP as on the SD in
accordance with any internationally accepted
valuation methodology
+
Liability, if any, considered in such determination
Merchant
banker[7] or an
accountant[8]
Step 2: Value determined in Step (1) above is
allocated among partners or members in following
proportion:
(a)First, capital contribution amount;
(b)Residual [remaining post part (a) allocation] –
-Distribution of assets upon dissolution
of the firm or AOP, in accordance with
the agreement;
-Profit sharing ratio, in absence of an
agreement
FMV of the interest of a partner/member in the
firm/AOP = (a) + (b)
5.
Any assets other than the above
Price if sold in the open market on the SD
+
Liability, if any, considered in such determination
FMV of all the assets of FCo/FE:
►
Sr.
No.
Type of asset of F Co/FE
Method of determining FMV
Valuation by
1.
Asset being share/interest in F
Co/FE and transfer is between
not connected parties[10]
Market capitalization based on full value of
consideration for transfer of the share or
interest
+
Book value of liabilities[6] on SD as certified
by a merchant banker[7] or an
accountant[8] or a foreign
accountant/valuer[8]
N.A.
2.
In any other case (i.e. when transfer is between connected parties) [10]
Merchant
banker[7] or an
accountant[8]
(a)
Asset being share of FCo/FE,
listed as on the SD
(Market capitalization based on observable
price[5]
+
Book value of liabilities[6] on the SD)
N.A.
(b)
Share of FCo/ FE, are not listed
on a recognized stock exchange
as on the SD
FMV of FCo/ FE as on the SD, determined
as per the internationally accepted
valuation methodology
+
Value of liabilities of FCo/FE considered for
the determination of FMV
Merchant banker[7] or an
accountant[8] or a foreign
accountant/valuer[8]
Note
•For determining the FMV of any asset located in India, being a share of an Indian company or
interest in a partnership firm or AOP, all the assets and business operations of the said entity shall
be taken into account irrespective of whether the assets or business operations are located in India
or outside.
•Value of assets located in India and expressed in rupees shall be calculated in foreign currency
using TT buying rate[11] of such currency as on SD.
►
2. Rules to determine
income attributable to
assets in India (Rule 11
UC)
B
Under the IDT provisions of the ITL, only
that income of a non-resident transferor
which is reasonably attributable to the
assets located in India, shall be taxable in
India. Such reasonably attributable
income is to be determined as may be
prescribed
►
A
x
C
Where:
A = Income from the transfer of the
share or interest in FCo/FE in
accordance with the ITL as if such
share or interest is located in India
B = FMV of assets located in India as on
the SD, determined as per Rule 11UB
C =FMV of all assets of FCo/FE as on
the SD, determined as per Rule 11UB
►
If transferor fails to provide the
information required for application of
aforesaid formula, the income
attributable to assets located in India
shall be determined by the Tax Officer in
a suitable manner.
►
Transferor is required to furnish an audit
report (in Form 3CT) along with the
return of income, providing the basis of
apportionment of income.
[5]
Refer Note (i) below.
[6]
Refer Note (ii) below.
[7]
Refer Note (vi) below.
[8]
Refer Note (vii) below.
[9]
As per the notified rule, reasonably
attributable income is the proportionate
amount of such income from transfer of
shares or interest in FCo/FE, basis the
FMV of India assets and global assets of
the FCo/FE as on the SD, in accordance
with the following formula:
Includes limited liability partnerships (LLP)
[10]
Refer Note (iv) below.
[11]
TT buying rate in relation to a foreign currency, means the
rate or rates of exchange adopted by the State Bank of India .
►
In Form 3CT, an accountant[8] is required
to verify the following details (company/
entity wise) in relation to the transfer and
the income attributable to India:
►
►
►
►
►
►
Details of transfer like date of
transaction, quantum of share or
interest transferred, cost of acquisition
of share or interest, the consideration
amount etc.
Income derived from transfer of share or
interest of an FCo/FE, calculated in
accordance with the ITL provisions.
Value of India assets and global assets of
FCo/FE (including details of valuation
report and the valuation method
employed).
Income attributable and details of the
method employed for computation.
Details of the documents and valuation
report, if any, relied upon.
Remarks, including any assumptions
made.
The accountant is required to state the
reasons for any negative remarks or any
qualification in respect of any matter in
the report
3. Rules regarding
reporting of information
and documents by the
Indian concern
►
Under the ITL, where a share or interest
in an FCo FE derives its substantial value
from assets located in India and such
FCo/FE holds, directly or indirectly, such
assets in India through or in an Indian
concern, then, such Indian concern shall
furnish information or documents, as
prescribed by the CBDT, for the purposes
of determination of any income accruing
or arising in India under the ITL
provisions.
►
IDT rules provide for the following:
►
Applicability: An Indian concern through or in which the FCo/FE derives, directly or indirectly, its
value substantially.
Where there are more than one Indian concerns that are constituent entities of a group [12], the
information may be furnished by any one Indian concern, if:
The group has designated such Indian concern to furnish information on behalf of all other
Indian concerns.
The information regarding the designated Indian concern has been conveyed in writing on
behalf of the group to the Tax officer[13].
►
►
►
Mode of furnishing: The information is to be furnished in Form 49D electronically under digital
signature.
Whom to furnish: The Tax Officer having jurisdiction over the Indian concern.
Due dates:
Nature of Transfer
Time limit
Penalty in case of failure[14]
Transfer has effect of,
directly or indirectly,
transferring the rights of
management or control in
relation to the Indian
concern
90 days from the date of transfer
2% of the transaction value
Other cases
90 days from the end of the financial year
(FY) in which transfer takes place
INR 5,00,000
►
Information to be furnished
The following particulars are required to be furnished in Form 49D, which can be divided into
three parts as follows:
Part
Nature of information
Particulars
Part A
Basic details
-Name, status, residential status, Permanent Account
Number of the designated Indian concern and other
constituent Indian concerns
-Details of immediate, intermediate as well as ultimate
holding entity,
Part B
Information in respect of transfer
if it results in transfer of right of
management or control
-Name of FCo/ FE, its Financial and accounting statements
-Details of the transactions including consideration, details
of transferor/ transferee
-% share/interest transferred including % holding of
transferor during the period of 12 months preceding the
transfer
-Holding structure in respect of shares/ interest before and
after the transfer
-Basis of determining the location of share/ interest being
transferred
-Value and break-up of assets of the Indian concern
immediately before the date of transfer
-Basis of valuation of assets of the FCo/FE
Part C
Information in respect of transfer
of share/interest during the
previous year
-Name of FCo/ FE
-Details of the transactions , transferor, transferee
-% share/interest transferred including % holding of
transferor during the period of 12 months preceding the
transfer
-Value of total assets of FCo/ FE
-Value and breakup of assets of the Indian concern, (i) At the beginning of the year
(ii) At the end of the year
-Basis of valuation of assets
Also, where transfer has effect of transferring right of
management/ control over Indian concern, following
additional information is required:
-Details of reporting compliance or reasons for
non-compliance
-Holding structure in respect of shares/ interest
before and after the transfer
-Financial and accounting statements of FCo/ FE
-Basis of determining the location of share/
interest being transferred
-Value and break-up of assets of the Indian
concern immediately before the date of transfer
►
Documents to be maintained by Indian
concern [for eight years from the end of
the relevant assessment year (AY) in
which transfer takes place]:
►
►
►
►
►
►
►
►
►
►
►
Details of the immediate, intermediate,
as well as the ultimate holding
company/entity of the Indian concern.
Details of other Indian group entities.
Holding structure of the shares/interest
in FCo/FE before and after the transfer.
Transfer contract or agreement.
Financial and accounting statements of
FCo/FE for two years prior to the date of
transfer of the share or interest.
Information relating to the decision or
implementation process of the overall
arrangement of the transfer.
Information in respect of the FCo/FE and
its subsidiaries relating to the business
operation, personnel, finance and
properties, internal and external audit
or the valuation report.
Asset valuation report and other
supporting evidence to determine the
place of location of the share /interest
being transferred.
Details of payment of tax outside India in
respect of transfer of the share/interest.
Valuation report in respect of Indian
asset and total assets duly certified by a
merchant banker[7] or an accountant[8],
with supporting evidence.
Documents which are issued in
connection with the transactions under
the accounting practice followed.
[12]
Definition of “constituent entity” and “group” is as per
provisions in ITL on Country-by-Country Reporting
[13]
If the designated Indian concern fails to furnish the
information, this sub-rule (allowing any of the Indian concerns to
furnish information) shall not apply
[14]
As per ITL provisions.
4. Notes:
(i)
Meaning of “observable price”:
► In respect of a share quoted on a stock
exchange shall be the higher of the
following:►
►
The average of the weekly high and low
of the closing prices of the shares
quoted on the said exchange during the
six-month period preceding the SD; or
the average of the weekly high and low
of the closing price of the shares quoted
on the said exchange during the two
weeks preceding the SD;
► In cases where the share is listed on
more than one recognized stock
exchange, the observable price of the
share shall be computed with reference
to the recognized stock exchange which
records the highest volume of trading in
the share during the period which is
considered for determining the price.
(ii) Book value of liabilities means value
shown in the balance sheet (BS),
excluding paid-up capital of equity share
or member’s interest and the general
reserves and surplus and security
premium related to the paid-up capital.
(iii) Definition of BS:
►
►
In relation to an Indian company: Audited
BS (including notes) as drawn up on the
SD.
In other cases: BS (including notes)
drawn up as on the SD and submitted to
the relevant authority in which the
FCo/FE is registered or incorporated.
In the above cases, if on the SD, the BS is
not drawn up and is pending finalization,
then the BS shall mean the interim BS as
approved by the Board of Directors of the
company or an equivalent body in case of
any other entity. Where FMV has been
determined on the basis of any interim
BS, then the FMV shall be appropriately
modified after finalization of the relevant
financial statement, in accordance with
the applicable laws and all the provisions
of the rules shall apply accordingly.
of a company, also excludes persons who
are not eligible to be appointed as an
auditor of said company, in accordance
with the Indian Corporate Laws.
For valuation of shares of unlisted
FCo/FE and/or certification of liabilities
of the FCo/FE, the term ”accountant”, in
addition to Indian CA, also includes
foreign accountant/valuer who fulfils the
following conditions:
Such accountant/valuer should be
recognized by the Government (or
its agencies) of the country where
such FCo/FE is
registered/incorporated for
undertaking similar valuation.
(iv) "Connected person" is defined as per the
provisions in the General Anti-avoidance
Rules (GAAR)
If such accountant/valuer is a
member or partner of an entity
rendering accountancy or
valuation services, then such
entity (or its affiliates) should
have presence in more than two
countries and the annual receipt
of such entity preceding the year
in which the valuation is
undertaken should exceed
INR100m (approximately
USD1.48m)
(v) "Right of management or control" is
defined to include the right to appoint
the majority of the Directors or to control
the management or policy decision
exercisable by a person or persons acting
individually or in concert, directly or
indirectly, including by virtue of
shareholding or management rights or
shareholders agreements or voting
agreements or in any other manner.
If such accountant is individually
pursuing accountancy profession
or is a valuer, then his annual
professional receipts in the year
preceding the year in which the
valuation is undertaken should
exceed INR10m (approximately
USD0.148m) and he should have
professional experience of not
less than 10 years.
Also, where the SD is the date of
transfer, the BS shall mean the BS drawn
up on such an SD and certified by an
accountant.
(vi) The term “merchant banker” refers to
Category I Merchant Banker registered
with the Securities and Exchange Board
of India
(vii) Meaning of “accountant”:
The term ”accountant” refers to a
Chartered Accountant holding a
Certificate of Practice from the Institute
of Chartered Accountants of India
(Indian CA), but excludes such persons
who are related to and/or have business
relationship with the taxpayer, as
prescribed under the ITL and in the case
Comments
The IDT Rules were keenly
awaited to provide much required
clarity and certainty in taxation
of IDT transactions in India. The
detailed Rules cover the aspects
of valuation, reporting and
computation of taxable income in
India. Keeping with the
consultative approach adopted by
the present Government,
comments were invited from
stakeholders on the draft IDT
Rules.
The final Rules make certain
welcome amendments, such as
accepting the transfer value as
the basis for determining value of
share /interest in FCo/ FE, when
the transfer is between nonconnected parties; reporting
compliance by a designated
Indian concern to relieve other
Indian concerns etc.
The final Rules, however,
continue to have a fair share of
challenges. Illustratively, while
the taxation is directed to be in
proportion to assets located in
India, the Rules provide that, in
case of valuation of a share of an
Indian company or interest in a
firm or AOP, all assets and
business operations of the
company/entity (whether located
in India or outside India) are
required to be taken into account;
the obligation on the Indian
concern to maintain and furnish
prescribed information is far too
onerous and is not relieved even
when the IDT may be exempt by
virtue of the tax treaty
applicability or small shareholder
exemption provided under the
ITL. The final Rules continue to
require add-back of liabilities in
determination of FMV, which, in
most cases creates an anomaly,
as the commercial valuation
would be after considering the
liabilities. Furthermore, the
absence of clarity about the
treatment of preference share
capital or operating liabilities in
this regard will add to complexity
and litigation.
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