Tax rule to stall Vodafone-type row

New Delhi: Merchant banker or accountant will determine the fair value of an unlisted asset in the country for taxation purpose where foreign company derives its value substantially from the assets located in India,  as per the proposed draft rules for indirect transfer provisions under Section 9 of the Income-Tax Act.

The proposed rules will check Vodafone-like tax disputes in which the company acquired 67 per cent stake in Indian telecom service provider for $11 billion from Hutchison Whampoa. While Vodafone  said it doesn’t owe the Indian government any tax because the transaction was conducted offshore, the income-tax department sought to collect taxes on the deal because it involved the assets in the country.

Courts had also ruled in the favour of Vodafone saying that the transfer by a non-resident to another non-resident, of shares of a foreign company holding an Indian subsidiary company did not amount to transfer of any capital asset situated in India.

“Where the asset is the share of an Indian company not listed on a rec-ognised stock exchange on the specified date, the fair market value shall be the fair market value on such date as determined by a merchant banker or an accountant in accordance with any internationally accepted pricing methodology for valuation of shares on arm’s length basis and increased by the liability, if any, considered in such determination,” said the proposed draft rule.

Under Section 9 of the Income-Tax Act, income arising from indirect transfer of assets situated in India is deemed to accrue or arise in India. The provisions of this section provides that if any share of or interest in, a foreign company derives its value substantially from the assets located in India, then such share or interest is deemed to be situated in India. Any income arising from transfer of such share or interest is deemed to accrue or arise in India.

Further, the act mandates reporting requirement on the Indian concern through or in which the foreign company or entity holds the assets in India. Draft rules and forms to be incorporated in the income-tax rules have been formulated for comments from public.