When to have Tax Valuation?
As per section 56(2) (vii), (viia) and (viib) of Income-Tax Act 1961, issue and transfer of shares of companies in which public is not substantially interested for nil / inadequate consideration is subjected to tax at fair value.
As per sec 92C of Income Tax Act, any international transaction between associated entities needs to be done at Arms Length Price. Now, even in case of Domestic related party transactions above INR 5 cr., applicability of Transfer Pricing provisions has got triggered In case where issue or transfer of shares, business or certain rights (intangibles) is involved in such a case, it requires Valuation.
ESOP Perquisite Tax Valuation (covered in our ESOP service page)
Indirect Tax of Assets From Foreign (Sec 95 of IT Act)
Why to Obtain Tax Valuation?
Tax Valuation is required to meet with the regulatory guidelines in this respect. In recent past we have seen Indian Income Tax Department challenging valuation of Vodafone in the Transfer Pricing Case. The Transfer Pricing Officer is questioning on the use of comparables, validation of Business Model, Actual achievement of projected results and what not. Tax valuation is critical in any Deal transaction as it could lead to huge tax outgo and frivolous litigation.
Approaches and Methodologies for Tax Valuation?
The fair value needs to be determined in accordance with Rule 11U and 11UA of Income Tax Rules, 1962. The rules have prescribed DFCF method for determination of maximum value for issue of shares and Adjusted Book Value method for issue and transfer of shares.
The following methods are used in determination of Arms length price namely comparable uncontrolled price method, profit split method and most importantly transactional net margin method. Courts have upheld use of DCF method while valuing Shares in Transfer Pricing matters.
Who can do Tax Valuation?
The fair value must be duly certified by a CA (FCA or SEBI registered category - 1 Merchant Banker in case of section 56(2) (viib) for determination of maximum price of shares). However in case of shares other than equity shares, the valuation shall be conducted only by a SEBI registered category - 1 Merchant Banker.
Challenges for Tax Valuer?
Challenge for a Tax Valuer is to understand the facts and arrive at a fair value.
Our Tax Valuation Practice
We are a SEBI Registered (Cat-I) Merchant Banker and our dedicated valuation team with extensive experience will help you in quantifying the value for Tax purposes. We do a detailed analysis of the Company history and its business and Comparable Companies multiples for arriving at value for Tax purposes. We have a specialized Tax team which comes in a league of one of the best Income Tax Valuation Consultants, Tax Consultancy Services in India.