Tax Insights

from India Tax & Regulatory Services

Computation of Income
attributable to Indirect Transfer of
Assets and reporting thereon

July 1, 2016

In brief
The Central Board of Direct Taxes (CBDT), the apex administrative body for income-tax in India, has
issued the final rules4 for determination of the fair market value (FMV) of assets (tangible or
intangible) and the income attributable to assets located in India for the purpose of taxation of
indirect transfer of assets under section 9(1)(i) of the Income-tax Act, 1961 (the Act). The final rules
also deal with related reporting requirements and document maintenance obligations in relation to
the same. The final rules will be effective from the date of their publication in the Official Gazette.

In detail entity through/in which the Computation of income

Background
Income arising from transfer of
share or interest in a company
or entity incorporated or
registered outside India
(“Transferred Asset”), is taxable
in India if such share or interest
derives substantial value from
assets located in India1 (such
company/ entity is referred to
as “Foreign Company” and such
transfer is referred to as
“indirect transfer of assets”).
The Transferred Asset is
considered to derive its value
substantially from assets
located India if the FMV of the
assets, of the Foreign Company,
located in India exceeds Rs.100
Million, and constitutes at least
50% of the FMV of the total
assets of the Foreign
Company2.
Further, section 285A of the Act
requires an Indian company/
Foreign Company holds assets
in India (“Indian Concern”), to
furnish information in the
prescribed manner.
The CBDT had issued draft
rules in this regard on 23rd May
20163 inviting public comments
on the same.
The CBDT has now issued the
final rules4 covering the
following broad areas:
 Computation of the fair
market value (FMV) of the
various classes of assets
(Rule 11UB)
 Computation of income
attributable to assets in
India (Rule 11UC)
 Information and documents
that are required to be
furnished by an Indian
Concern (Rule 114DB)
attributable to assets in
India (Rule 11UC)
The income attributable to
indirect transfer of assets shall
be determined on the basis of
the following formula:
𝑩
𝑨 × where:
𝑪
A= Income from indirect
transfer of assets
B= FMV of the Indian assets
on the Specified Date (as
defined in Explanation 6 to
Section 9(1)(i) of the Act
which means (i) date on
which the accounting
period preceding the date
of transfer ends or (ii) date
of transfer if the book value
of assets has increased by
>15% as compared to such
value as on date referred to
in (i)) (computed in terms
of Rule 11UB; as elucidated
hereunder)

1 3 4
Section 9(1)(i) of the Act F No 142/26/2015-TPL dated 23 Notification S.O. 2226(E) dated 28th
2
Explanation 6 to section 9(1)(i) of May, 2016 June 2016
the Act

www.pwc.in
Tax Insights

C= FMV of all the assets of the
company or entity as on the
Specified Date (computed in
terms of Rule 11UB; as
elucidated hereunder)
If the transferor fails to provide
information to apply the
abovementioned formula, then
such income would be taken as
Computation of FMV (Rule 11UB)
determined by the Assessing contains information like details
Officer as he deems fit. of consideration received, cost of
acquisition, date of transfer,
The transferor needs to obtain
value of assets located in India
an accountant’s certificate in
and value of global assets as well
Form 3CT, providing the basis of
as method used to compute the
apportionment in accordance
same, income attributable to
with the aforementioned
assets located in India,
formula, and certifying that
documents and valuation report
income attributable to assets
(if any) relied upon, assumptions
located in India is correctly
(if any), etc..
computed. Form 3CT

Rule Nature of Asset Manner of Computation of FMV

B = FMV of Indian Assets (for Rule 11UC)
Proviso Shares of a listed Indian company held as a FMV = (A+B)/C, where
to part of the shareholding, conferring A= market capitalisation of the Indian Company based
11UB(2) directly or indirectly any right of on the Observable Price (Refer Note i);
management or control B= book value of liabilities (Refer Note ii) of the
company on the Specified Date;
C= the total number of outstanding shares

11UB(2) Shares of a listed Indian Company which is FMV = Observable Price (Refer Note i)
listed as on the Specified Date (other than
shares those covered in proviso above)
11UB(3) Unlisted shares FMV as determined by a valuation report (Refer Note iii)
as increased by the value of the liability, if any, considered
in such determination
11UB(4) Interest in a partnership firm or in an AOP Step 1 - Computation of value of partnership firm on the
basis of a valuation report (Refer Note iii) as increased by
the value of the liability, if any, considered in such
determination
Step 2 - Value determined Step 1 to be apportioned to the
extent of capital of partnership firm or AOP in the ratio of
partner's capital contribution
Step 3 - Balance value to be apportioned on the basis of
asset distribution ratio on dissolution of partnership firm/
AOP or in absence thereof, in the profit sharing ratio
Step 4 - FMV on interest in partnership firm/ AOP =
Value as per Step 2 + Value as per Step 3
11UB(5) Any other asset Value as determined on the basis of valuation report
(Refer Note iii) as increased by the value of the liability, if
any, considered in such determination

It is clarified that for determining FMV of shares of Indian company or interest in partnership firm/ AOP, all the assets/
business operations of the company/ partnership firm / AOP shall be taken into account, even if such assets/ business
operations are located outside India.

PwC Page 2
Tax Insights

Rule Nature of Asset Manner of Computation of FMV

C = FMV of All the Assets of the Foreign Company (for Rule 11UC)
11UB(6)(i) In case of transfer between persons who FMV = A+B, where
are not Connected Persons (as defined A= market capitalisation of the Foreign Company
in section 102(4) of the Act for the computed on the basis of the full value of
purpose of application of General Anti- consideration;
Avoidance Rule) B= book value of liabilities (Refer Note ii) as certified
by a merchant banker/ accountant (Refer Note iv)

11UB(6)(ii)(a) In case of transfer of shares of a Foreign FMV = A+B, where

Company listed on the stock exchange A= market capitalisation of the Foreign Company
between Connected Persons based on the Observable Price (Refer note i)
B= book value of liabilities (Refer note ii) of the
company or the entity on the Specified Date

11UB(6)(ii)(b) In case of transfer of shares of a Foreign FMV = A+B, where

Company not listed on any stock A= FMV of the Foreign Company as on the Specified
exchange between Connected Persons Date based on valuation report (Refer Note iii)
B= value of liabilities of the company or the entity
considered for determination of FMV in A above

Notes:
i. “Observable Price” shall be
higher of the average of the
weekly high and low of the
closing prices for 6 months
preceding the Specified Date,
or two weeks preceding the
Specified Date quoted on the
stock exchange where highest
volume is traded.
ii. “Book Value of the Liabilities”
= Value of liabilities as shown
in the balance-sheet excluding
the paid-up equity capital or
members’ interest and the
general reserves and surplus
and security premium related
to the equity shares;
For this purpose, balance-
sheet means:
(a) In relation to an Indian
Company, audited
balance-sheet as drawn
up on the Specified Date;
(b) In any other case,
balance-sheet as drawn
up on the Specified Date
and submitted to the
relevant authority outside
India under the
applicable law(s)
However, in both the
above cases, if a balance-
sheet as on the Specified
Date is not drawn up and
it is pending finalisation of
accounts, the balance-
sheet would mean the
interim balance sheet as
on the Specified Date and
which is approved by the
Board of the company/
equivalent body in case of
any other entity. If the
interim balance sheet is
used for computing FMV,
then the FMV shall be
appropriately modified
after its finalization.
Further, in case of
Specified Date is date of
transfer, it means balance
sheet as on that date as
certified by an accountant.
iii. Valuation Report means
report of a merchant banker or
an accountant determining
value of assets in accordance
with any internationally
accepted valuation
methodology;
iv. Accountant means accountant
defined u/s. 288 of the Act and
for the purpose of valuation of
foreign assets includes any
valuer recognised by the
foreign government, and who
fulfills the following criteria :
(a) if he is a member/ partner
in any entity engaged in
rendering accountancy/
valuation services -
(i) the entity or its
affiliates has presence
in more than two
countries; and
(ii) its annual receipts in
the year preceding the
year in which valuation
is undertaken exceeds
INR 100 million;
(a) if the person is an
individual accountant/
valuer:
(i) his annual receipt
(from the exercise of
such profession) in
the year preceding
the year in which
valuation is
undertaken exceeds
INR 10 million; and
(ii) he has professional
experience of not less
than 10 years.

PwC Page 3
Tax Insights
Reporting requirements of
an Indian Concern under
Rule 114DB
 Rule 114DB provides that the
Indian Concern shall
electronically furnish
relevant information in Form
49D within 90 days from the
end of the financial year in
which any indirect transfer of
asset has taken place.
However, when such transfer
has the effect of transferring
the right of management or
control in relation to the
Indian Concern, the Form
has to be furnished within 90
days from the date of
transaction.
 Rule 114DB broadly
envisages reporting details of
immediate holdings
company/ intermediate
holding company/ ultimate
holding company, holding
structure, contract/
agreement for transfer of
asset, financial statements of
the Foreign Company/
entity, information of
business operations,
personnel, finance/
properties, audit reports,
valuation report, etc. of the
foreign entity, details of
payment of tax outside India,
etc.
 Further, it is also provided
that where there are more
than one Indian Concerns of
a group, any one Indian
PwC
Concern designated by the
group and informed to the
Assessing Officer in writing
can report on behalf of all the
other Indian Concerns.
The takeaways
 The much awaited final rules
in relation to indirect
transfer of assets have now
been notified by the CBDT
providing some degree of
certainty on computation of
income chargeable to tax in
India. However, there is no
clarity in relation to
computation of income and
reporting thereon for
transactions concluded prior
to the date of applicability of
the rules.
 In the final rules, the CBDT
has accepted some
suggestions on the Draft
Rules, like change in
definition of Balance Sheet,
single compliance by one
entity on behalf of another
group entity, etc.. However,
the CBDT has not considered
some other suggestions like
using equity value instead of
enterprise value, not grossing
up liabilities, etc..
 With the notification of the
final rules, Indian Concerns
would be burdened with the
onerous responsibility to
report various details in
relation to the indirect
transfer. Rule 114DB
provides for reporting of
certain details of the Foreign
Company by the Indian
Concern, which the Indian
Concerns cannot genuinely
provide. The final rules do
not provide for any
relaxation for such a
scenario.
 In case of multi-layered
structure in India involving
unlisted holding company
above a listed company or
vice versa, there is no clarity
whether computation should
be based on method
applicable to listed company
or unlisted company.
 The definition of book value
of liabilities does not
specifically exclude
preference share capital
(including securities premium
thereon) and reserves other
than free reserves, such as
revaluation reserve, capital
reserves, etc.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact:
Tax & Regulatory Services –
Mergers and Acquisitions
Gautam Mehra, Mumbai
+91-22 6689 1154
gautam.mehra@in.pwc.com
Hiten Kotak, Mumbai
+91-22 6689 1288
hiten.kotak@in.pwc.com
Page 3
Tax Insights

Our Offices

Ahmedabad Bengaluru Chennai

1701, 17th Floor, Shapath V, 6th Floor 8th Floor
Opp. Karnavati Club, Millenia Tower ‘D’ Prestige Palladium Bayan
S G Highway, 1 & 2, Murphy Road, Ulsoor, 129-140 Greams Road
Ahmedabad – 380051 Bengaluru – 560 008 Chennai – 600 006
Gujarat Karnataka Tamil Nadu
+91-79 3091 7000 +91-80 4079 7000 +91 44 4228 5000

Hyderabad Kolkata Mumbai

Plot no. 77/A, 8-2-624/A/1, 4th 56 & 57, Block DN. PwC House
Floor, Road No. 10, Banjara Hills, Ground Floor, A- Wing Plot No. 18A,
Hyderabad – 500034 Sector - V, Salt Lake Guru Nanak Road(Station Road),
Telangana Kolkata – 700 091 Bandra (West), Mumbai – 400 050
+91-40 44246000 West Bengal Maharashtra
+91-033 2357 9101/ +91-22 6689 1000
4400 1111

Gurgaon Pune For more information

Building No. 10, Tower - C 7th Floor, Tower A - Wing 1, Contact us at
17th & 18th Floor, Business Bay, Airport Road, pwctrs.knowledgemanagement@in.pwc.com
DLF Cyber City, Yerwada, Pune – 411 006
Gurgaon – 122002 Maharashtra
Haryana +91-20 4100 4444
+91-124 330 6000

About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157
countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax
services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR (Gurgaon), Hyderabad, Kolkata,
Mumbai and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in

PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate,
independent and distinct legal entity in separate lines of service. Please see www.pwc.com/structure for further
details.

©2016 PwC. All rights reserved

Follow us on:

For private circulation only

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness
of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all
responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based
on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.

© 2016 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company
in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each
member firm of which is a separate legal entity.