#TaxmannPPT | Income Tax Implications on Issue of Securities by Taxmann

Income Tax Implications on Issue of Securities

Presentation Outline Sr. No.

Particulars

From Slide No.

To Slide No.

Applicability

Angel Tax Provisions- Section 56(2)(viib)

Cash Credit – Section 68

Transfer Pricing Applicability

Anti-abuse Provision- Section 56(2)(x)

Double Taxation Avoidance Agreement Implications

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Applicability of Tax Provisions Instrument’s

Section 56(2)(viib)

Section 68 – 2nd proviso

Transfer Pricing

Section 56(2)(x)

Equity Share



CCPS



OCPS / RPS



CCDs

OCDs

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions Section 56(2)(viib)

Angel Tax Provisions  Section 56(2)(viib) was introduced in the year 2012 to prevent generation and circulation of unaccounted money through share premium received from resident investors in a closely held company in excess of its fair market value.  Section 56(2)(viib) provide that where a closely held Indian company receives any consideration for issue of shares that exceeds the face value of such shares as well as the fair market value of the shares, then the excess consideration received over the fair market value of the shares would become chargeable to income-tax for the Indian company under the head ‘Income from other sources’.  Rule 11UA of the Income Tax Rules, 1962 provides the formula for computation of FMV of unquoted equity shares for the purposes of the Section 56(2)(viib).  Exemption from this section:  Investments made by Venture Capital Company or Venture Capital Fund or Category I & II AIFs regulated by SEBI / IFSC.  Start-ups registered with DPIIT and satisfying conditions such as total share capital and share premium after issuance < INR 25 crores; prohibition from making purchase of investment assets such as land/ building/ residential house/ jewellery, shares etc.  Finance Act 2023: “Being a Resident” omitted with effect from 01.04.2024 and extends the applicability to consideration received from non-resident shareholders too. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions  Thresholds for determining chargeability to tax: Issue of shares by Indian company

Result

At face value of shares

No angel tax

Between face value and fair market value (assuming FMV > FV)

Still no angel tax

Above fair market value (assuming FMV > FV)

Angel tax on difference between subscription price and FMV

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions Section 56 (2)(viib):  Where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person (resident or non-resident), any consideration for the issue of share that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares  However this clause has certain exceptions for companies where the consideration for the issue of shares is received by  A venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or  A company from a class or classes of persons as may be notified by the central government in this behalf Note: when such class or class of person as may be notified by the central government fails to comply with the conditions specified in the prescribed notification, the consequence referred to it in the next slide will be imposed upon if it does not meet the conditions. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions Both the Consequences will be imposed to such class or class of persons: When any consideration is received for the issue of a share that exceeds the fair market value of such shares it shall be deemed to be the income of that company chargeable to income tax for the previous year in which such failure has taken place

It shall also be deemed that the company has underreported, such income as the consequence of the misreporting referred to in the section 270A for the said previous year

Rule 11UA(2) of the Income Tax Rules, 1962 (“the rules”) provides the method for computation of the fair market value of unquoted equity shares for this section

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Notified Classes of Persons [Notification No. 29/2023/F. No. 370142/9/2023-TPL (Part-I) dated 24th May 2023]

 Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is seventy-five percent or more;  Banks/ Entities involved in insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident;  Resident of any country or specified territory (listed in next slide), and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:––  Entities registered with SEBI as Category-I FPI;  Endowment funds associated with a university, hospitals or charities;  Pension funds created or established under the law of the foreign country or specified territory;  Broad Based Pooled Investment Vehicle or fund where the number of investors in such vehicle or fund is more than fifty and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Notified Classes of Persons [Notification No. 29/2023/F. No. 370142/9/2023-TPL (Part-I) dated 24th May 2023]

List of Country/ Territory Australia

Italy

Austria

Japan

Belgium

Korea

Canada

New Zealand

Czech Republic

Norway

Denmark

Russia

Finland

Spain

France

Sweden

Germany

United Kingdom

Iceland

United States Israel

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Start-up Company Exemption [Notification No. 30/2023/F. No. 370142/9/2023-TPL (Part-I dated 24th May 2023]

 Provisions of Section 56(2)(viib) will not be applicable if:  consideration has been received from any person, by a company which fulfills the conditions specified in para 4 of the notification number G.S.R. 127(E), dated 19th Feb 2019 issued by the Ministry of Commerce and Industry, DPIIT.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Start-up Eligibility Conditions [Notification No. G.S.R. 127(E) dated 19th February 2019]

 Eligible for 56(2)(viib) exemption if (i) Recognised by DPIIT; (ii) Aggregate amount of paid-up share capital + share premium after issue or proposed issue < 25 crore rupees (shares issued to non-resident or VCC/ VCF or specified company not to be included in 25 crore limit)  Should not have invested in (if shares issued at a premium not to invest for 7 years):  Residential building or land appurtenant thereto, other than that used for renting or held as stock-in-trade;  Land/ building not being a residential house, other than occupied for business or used for renting or held as stock-in trade;  Loans & advances other than loans or advances extended in the ordinary course;  Capital contribution made to any other entity; Shares & securities;  Motor vehicle/ aircraft/ yacht/ any other mode of transport, the actual cost > 10 lakh INR, other than held for plying, hiring, leasing or as stock-in-trade;  Jewellery other than that held as stock-in-trade;  Any other asset – sub-clauses (iv) to (ix) of clause (d) of explanation to 56(2)(vii) 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions  Valuation exercise u/s 56(2)(viib) needs to be carried out at the time of issuance of equity shares or CCPS.  Does it need to carried out at the time of conversion of CCPS/CCDs into equity shares?  Further, valuation report would now be required under three different laws for investment received from non-residents and it would lead to disparity as shown below unless the shares are issued exactly at fair value arrived commonly under all laws: Sr. No. 1

Applicable Law Companies Act, 2013

Foreign Exchange Management Act, 1999 Income Tax Act, 1961

Specified Valuer Registered Valuer

Valuation Rule Issue price should be ≥ fair value CA/CMA/Merchant Issue price should be ≥ banker fair value Self-determination If issue price is > than fair or by a Merchant value, then difference Banker as applicable would be brought to tax.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(2) - Types of Methods applicable to Resident [Notification No. 81/2023/F.No. 37-142/9/2023-TPL Part (1)]

Net Asset Value

2 Discounted Free Cash Flow

Price Matching - Venture Capital Fund (‘VCF’) or a Venture Capital Company (‘VCC’) or a Specified Fund (‘SF’)

Price Matching - Notified Entity

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(2) - Types of Methods applicable to Non-resident [Notification No. 81/2023/F.No. 37-142/9/2023-TPL Part (1)]

Net Asset Value Discounted Free Cash Flow Price Matching - VCF or VCC or SF Comparable Company Multiple Probability Weighted Expected Return Option Pricing Milestone Analysis Replacement Cost Price Matching - Notified Entity

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Net Asset Value Method  The fair market value of unquoted equity share = (A-L) x ( PV/PE), where A = Book value of the assets in the balance sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—  the paid-up capital in respect of equity shares;  the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;  reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Net Asset Value Method  any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;  any amount representing provisions made for meeting liabilities, other than ascertained liabilities;  any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares PE= total amount of paid up equity share capital as shown in the balance sheet; PV= the paid up value of such equity shares

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Discounted Free Cash Flow Method (DCF)  The most popular method for valuing start-ups and emerging companies is the DCF method.  FMV is calculated by forecasting the company's future cash flows and using a discount rate to reduce them to their present value while accounting for investment risk and time value of money. DCF method requires a lot of estimation and assumptions.  This method gives a thorough understanding of the company's worth by taking its anticipated future performance into account.  The fair market value of unquoted equity shares as per the Discounted Free Cash Flow method should be determined by a merchant banker only.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

5 Optional Valuations Method available for NR investments  Valuation can also be conducted following below-mentioned methods only in case of investments received from non-resident investors;

Comparable Company Multiple Method

2 Probability Weighted Expected Return Method

3 Option Pricing Method

Milestone Analysis Method

5 Replacement Cost Method

20th December 2023 | Taxmann: IT Implications on Issue of Securities

5 Optional Valuations Method available for NR investments  Comparable Company Multiple Method (CCMM): The guideline publiclytraded technique uses information on publicly-traded comparables that are either similar to or equal to the subject asset in order to calculate an indication of value. The observable valuation metrics could include price multiples or enterprise value multiples which would applied to the financial parameters of the subject company. Few examples of common price multiples such as Price-to-earnings, Price-to-Book Value, Price-to-Sales, and Price-to-Cash Flow. Typically, enterprise multiples used are Enterprise Value-to-EBITDA, Enterprise Value-to-EBIT, Enterprise Value-toFree Cash Flow, and Enterprise Value-to-Sales.  Probability Weighted Expected Return Method (PWERM): By determining potential exit strategies, such as IPO, acquisition, or staying private, the PWERM determines a company’s FMV. Post which, it assigns probabilities to each scenario and estimates its expected future values. An expected return that is weighted average is calculated using these values and probabilities.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

5 Optional Valuations Method available for NR investments  Option Pricing Method (OPM): This method evaluates an option's value, or the right to purchase or sell something at a later time, like company shares. It does so by taking into account variables like the market price at the time of assessment, the exercise price, the time till maturity, volatility, and risk-free interest rates. Companies with complex capital structures and a variety of securities classes are valued using OPM.  Milestone Analysis Method (MAM): Company's FMV is determined based on the fulfillment of particular benchmarks or performance targets. This approach entails determining a series of benchmarks, such as product development, revenue targets, or regulatory approvals, that the business is anticipated to meet over a specific time frame. Company's estimated FMV is then determined using the expected values and probabilities for each milestone.  Replacement Cost Method (RCM): The cost of substituting equivalent assets for an asset is the basis of the RCM valuation method. It entails calculating the price of purchasing or building new assets while taking into account the labor, materials, technology, and resources required for duplication. This approach makes the assumption that a buyer won't pay more for a business than it would cost to replace it with a comparable business. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Price Matching- VCF or VCC or SF  Where any consideration is received by a VCC for the issue of unquoted equity shares, from a VCC/VCF/SF, the price of the equity shares corresponding to such consideration, may at the option of such undertaking, be taken as the FMV of the equity shares to the extent the consideration from such FMV does not exceed aggregate consideration that is received from a VCC/VCF/SF  If, within a period of 90 days before or after the date of issue of the shares subject to valuation, the undertaking has received the consideration from a VCF, VCC, or SF.  The terms VCF, VCC, and SF shall have the same meaning assigned to them in section 56. Illustration: If a VC undertaking receives a consideration of Rs. 80,000/from a VCC for the issue of 50 shares at the rate of Rs. 160/- per share, then such an undertaking can issue 50 shares at this rate to any other investor within a period of 90 days before or after the receipt of consideration from VCC.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Price Matching- Notified Entity  The price of the equity shares which correspond to any consideration received for the issuance of shares from any entity that the Central Government notifies may be regarded as the FMV of the equity shares for both resident and non-resident investors, subject to the following:

To the extent that the total consideration received from the notified entity is not greater than the consideration from such FMV,

20th December 2023 | Taxmann: IT Implications on Issue of Securities

If, within a period of 90 days before or after the date of issue of the shares subject to valuation, the business has received the consideration from the notified entity

Compulsory Convertible Preference Share Valuation Particulars

Resident

Non- Resident

Intrinsic Value

 Discounted Free Cash Flow  Price MatchingVCC/VCF/SF  Price Matching-Notified Entity

 Discounted Free Cash Flow  Price MatchingVCC/VCF/SF  5 Optional Valuation Methods  Price Matching-Notified Entity

Based on FMV  Net Asset Value of unquoted  Discounted Free Cash Flow equity shares  Price MatchingVCC/VCF/SF  Price Matching-Notified Entity

 Net Asset Value  Discounted Free Cash Flow  Price MatchingVCC/VCF/SF  5 Optional Valuation Methods  Price Matching-Notified Entity

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Date of Valuation Report The date of the valuation report as determined by the merchant banker (DCF or any of the 5 methods as applicable) can be considered the valuation date if it is within 90 days before the share issue date

However, the clause (j) of rule 11U shall not apply if the assessee exercises this option

Safe Harbour Resident

Non- resident

• 10% in case NAV or DCF method is • 10% if NAV or DCF or any of opted prescribed 5 optional valuation methods is opted

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Angel Tax Provisions Principles emerging from judicial decisions on Sec. 56/ Rule 11UA  AO has no right to change the method of valuation adopted by the assessee.  AO can scrutinize the valuation report and if not satisfied with assessee's explanation, AO has to record the reasons and basis for not accepting the valuation report. Only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee; though under the same valuation method.  For scrutinizing the valuation report, facts and data available only on the date of valuation to be considered and actual result of future cannot be a basis to decide about reliability of the projections.  The primary onus to prove the correctness of the valuation report is on the assessee.  Assessee has to satisfy about the correctness of the projections, discounting factor, terminal value, etc. with the help of empirical data or industry norms, if any, and/or scientific data, scientific method, scientific study and applicable guidelines regarding DCF method of valuation since assessee is privy to the facts of the company. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit - Section 68

Cash Credit Understanding the concept of unexplained cash credit

Section 68 of the Income Tax Act

The objective of Section 68

Unexplained cash credit

Provision to tax unexplained cash credits as income of the taxpayer

To discourage the use of unaccounted money in the economy

Cash Credit that cannot be explained by the taxpayer’s known sources of income

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit Section 68 - Cash Credit “Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year”

In essence, Section 68 aims to prevent the inclusion of unexplained or unaccounted money in an assessee’s books and ensures transparency in financial transactions by requiring a satisfactory explanation to the assessing officer for any sum credited. The primary onus of satisfactory explanation of such credits is on the assessee. 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit Finance Act 2012 inserted Proviso  The proviso applies specifically to closely held companies;  The credited sum includes share application money, share capital, share premium, or any similar amount;  The amendment establishes that any explanation offered by the assessee company regarding the sum credited shall be deemed to be not satisfactory unless either of the specified conditions are met. The following slide deals with the conditions for this.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit

Condition for Satisfactory Explanation

The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited

The Assessing Officer must find the explanation provided by the resident person to be satisfactory

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit  The aforementioned clause will not be applicable if the person, in whose name the sum is recorded is a venture capital fund or venture capital company as defined by section 10(23FB).  The term VCC/VCF is defined as under:

Venture Capital Fund” means such fund, operating under a trust deed registered under the provision of the Registration Act,1908 (16 of 1908), established to raise monies by the trustees for investments mainly by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines

Venture Capital company” means such company as has made investments by way of acquiring equity shares of venture capital undertakings in accordance with the prescribed guidelines

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit Tax treatment for the amount covered under section 68 :  Taxation of unexplained cash credits: If the assessing officer deems that the sum credited under section 68 represents undisclosed income or unexplained money, it will be added to the total income of the assessee and chargeable to tax under the head ‘Income from Other Sources’.

 Tax rate under section 115BBE:  The effective tax rate will be 78% (60% tax rate + 25% surcharge + 4% cess) on such income,  No deduction in respect of any expenditure/ allowance/ setoff of any loss shall be allowed to assessee against that specified income

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit Principles emerging from judicial decisions on Sec 68:

Identity Keeping track of documents like PAN, address, certificate of incorporation, that can help prove identity

Creditworthiness

Genuineness

Keeping track of records including ITR of share allottee, audited financial statements, proof of credits received through banking channel etc

Keeping a record of ITR of share allottee and may furnish confirmation from shareholder to prove that transactions are genuine.

 AO can ask to explain the ‘source of credit’ as well as ‘source of source’ of such sum credited.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Cash Credit Proviso also applicable for the Proviso also following following  Subscription to shares, etc. by a holding company.  Subscription to shares, etc. by widely held companies or government companies or insurance companies or banking companies or public sector companies, etc.  Subscription to rights shares etc. by the existing shareholder.  Subscription to shares etc. by private equity funds and similar bodies, where amount(s) is/ are received by account payee account.

not

applicable

for

the

 Where the amount by way of share capital etc. is received by a widely held company or a company in which public are substantially interested.  Where the amount by way of capital is received by partnership firm including LLP.  Where the amount by way of share capital etc. is received by a cooperative society.  Where the amount is received from a person who is not a resident.  Where the amount is received by a closely held company, which is not in the nature of share capital.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Transfer Pricing Applicability

Transfer Pricing Applicability  As per section 92 of the Income Tax Act, 1961, any income arising from an international transaction shall be computed having regard to the arm’s length price.  International transaction as defined in Section 92B inter alia include: “capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;”.  Under clause 16 of Form 3CEB, the Assessee has to furnish details about transactions that are in nature of purchase or sale or marketable securities.  However, the question here emerges whether upon issuance of shares, any income arises in the hands of the assessee and thus, reporting is required.  Decision of the High Court of Bombay in the case of Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300/228 Taxman 25/368 ITR 1 (Bom.) – The premium arising on the issue of shares is a capital account transaction and does not give rise to income and, hence not liable to transfer pricing adjustment.  Government of India, Ministry of Finance - Instruction No. 2/2015 dated 29.01.2015.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Transfer Pricing Applicability  Notable judgments that have followed the Vodafone judgment are: SKR BPO Services (P.) Ltd. v ITO [2015] 55 taxmann.com 84/230 Taxman 192 (Bom.); Equinox Business Parks (P.) Ltd. v. UOI [2015] 55 taxmann.com 222/230 Taxman 191 (Bom.).  The term income has been defined under section 2 to inter-alia include, any receipt of share consideration in excess of FMV under section 56(2)(viib) of the Act.  Since the provisions of section 56(2)(viib) of the Act did not apply to nonresident shareholders earlier, any share consideration received from them fell outside the ambit of the definition of income.  However, after amendment vide Finance Act, 2023, TP provisions could apply to the closely held company upon receipt of excess share consideration from non-resident shareholders as per section 92(1) r.w. section 2(24)(xvi) of the Act.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Anti Abuse Provisions Section 56(2)(x)

Anti Abuse Provisions  Section 56(2)(x)(c) provides situations where any person receives, any property other than any immovable property from any person or persons on or after 1st day of April 2017.  The term Property inter alia includes “Shares and securities”  In case of an inadequate consideration wherein the difference between FMV & consideration > Rs 50,000/-, then, FMV less consideration received will be treated as income for the recipient and chargeable under the head “ Income from other sources” .  This section will be applicable in certain situations like conversions of shares, bonus shares, Right shares etc.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Anti Abuse Provisions Sr. No.

Events

Applicability under section 56(2)(x)

Issues of equity shares, CCPS, CCDs, If the issue price is < FMV & the RPS, OCDs difference is > 50,000/-?

Issue of Bonus shares

Whether applicable?

Disproportionate Rights allotment

Whether applicable?

Issue of Right shares

If the rights issue price is < FMV & the difference is > 50,000/-?

Conversion of CCD into equity

If conversion price is < FMV & the difference is > 50,000/-?

Conversion of CCPS into equity

If conversion price is < FMV & the difference is > 50,000/-?

Conversion of CN into Equity

If issue price is < FMV & the difference is > 50,000/-?

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Anti Abuse Provisions  Few exemptions to any sum received in this section: From any relative; On the occasion of the marriage of the individual; Under a will or by way of inheritance; In contemplation of the death of the payer or donor; From any local authority; From any institution referred under Section 10; From or by any trust registered under section 12A; Transaction not referred as transfer Under Section 47; From class of person and subject to condition as prescribed under Rule 11UAC

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Class of person prescribed - Rule 11UAC If the tribunal, upon application by the CG, suspends the BOD of the company and appoints new directors Unquoted shares, of a company, its subsidiary, and that Share received by shareholders under a resolution plan approved by the tribunal, subsidiary’s subsidiary received after providing an OOBH to the by a shareholder wherejurisdictional commissioner or commissioner

Equity shares of the reconstructed bank

Investor or investor bank received shares that have been allotted by the reconstructed bank under the scheme at a price as prescribed

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Class of person prescribed - Rule 11UAC

Equity shares, of a public sector company or a company;

 Public sector company/ CG/ any state government received shares under strategic disinvestment as defined under section 72 A

Shares /unit/ Interest in the resultant fund

Shares/units/interest is received by the fund management entity Two conditions shown in the next slide must be met for the relocation to be valid

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Class of person prescribed - Rule 11UAC Conditions to be met for relocation to be valid for resultant fund:

90% ownership continuity in the fund management entity • Same entity or person • Same proportion as held in original fund

90% ownership continuity in the investment manager entity of the original fund • Same entity or person

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(1)(c)(a)  Valuation of quoted shares and securities

Circumstances

FMV

Received by way of transaction carried out through any recognized stock exchange

Transaction Value as recorded in such stock exchange

Received by way of transaction carried out other than through any recognized stock exchange

 The lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and;  In cases where there is no trading of those shares or securities in any recognized stock exchange on the valuation date, the lowest price for these shares and securities shall be on a date immediately preceding the valuation date.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(1)(c)(b)  The fair market value of unquoted equity share = (A+B+C+D-L) x (PV/PE), where; A =Book value of all the assets(other than jewellery, artistic work, shares, securities, and immovable property) in the balance sheet as reduced by  any amount of income tax paid if any is less the amount of income tax refund claimed, if any;  any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B=The price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C=Fair market value of shares and securities as determined in the manner provided in this rule D=The value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(1)(c)(b) L=Book value of liabilities shown in the balance sheet, but not including the following amounts, namely:—  the paid-up capital in respect of equity shares;  the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;  reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;  any amount representing provision for taxation, other than amount of tax paid, if any, less the amount of income tax claimed as refund, if any to the extent of the excess over the tax payable with reference to the book profit in accordance with the law applicable thereto;  any amount representing provisions made for meeting liabilities, other than ascertained liabilities;  any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares PE= Total amount of paid-up equity share capital as shown in the balance sheet; PV= The paid up value of such equity shares 20th December 2023 | Taxmann: IT Implications on Issue of Securities

Rule 11UA(1)(c)(c)  Valuation of unquoted shares and securities other than equity shares which are not listed in any recognized stock exchange:

FMV

Price it would fetch if sold in the open market on the valuation date

20th December 2023 | Taxmann: IT Implications on Issue of Securities

The assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation

Double Tax Avoidance Agreement Implications

DTAA Implications  Income taxed u/s 56(2)(x) taxable under other income article?  Other income article is a residuary article that provides for the allocation of taxing rights in relation to income not dealt with in any of the other articles of DTAA.

 Many of the DTAAs that India has signed provide for taxing rights allocation between the resident state as well as the source state.  Few DTAAs India have signed provide for taxing rights only to the resident state. E.g.:  India – Albania DTAA (barring gambling/ betting income);  India – UAE DTAA;  India – Nepal DTAA (barring gambling/ betting income);  India – Saudi Arabia DTAA;  India – Korea DTAA;

 India – Kuwait DTAA.

20th December 2023 | Taxmann: IT Implications on Issue of Securities

Credits – Naisar Shah, Laxmi Ahirwar, Eshita Tiwari Contact Information

Address

2-I, Jeevan Sahakar, 2nd Floor, Sir P. M. Road, Fort, Mumbai – 400001, India.

Telephone

+91 22 22660010/3427; 43471727

Mobile

+91 9930114418;

E-mail

harshal.bhuta@bhutaco.com

Website

www.bhutaco.com

https://in.linkedin.com/in/harshalbhuta

20th December 2023 | Taxmann: IT Implications on Issue of Securities

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