DETERMINATION OF FAIR MARKET VALUE
NOTIFICATION NO. 81/2023 DATED SEPTEMBER 25, 2023
Background
◾
Section 56(2)(viib) of the Income Tax Act,
1961 (“the Act”) provides that if a Company receives consideration for issue of
shares, which exceeds the Fair Market
Value (FMV) of such shares, then such excess
differential consideration shall be chargeable
to tax as ‘Income from Other Sources’
in hands of the Company
◾
Accordingly, following
are stipulations for applicability of Section 56(2)(viib) of the Act:
◾
There should
be issue of shares;
◾
The shares should be issued at a premium;
◾
The shares
to be issued by a Company in which public are not substantially interest;
◾
The consideration received by Company from issue of shares should
be in excess of FMV of such shares.
◾
Rule 11UA of Income Tax Rules, 1962 (“the Rules”)
prescribes the manner
for computation of FMV of the shares
Amendment in Budget 2023.
·
Prior
to Finance Act, 2023, Section 56(2)(viib) provisions were applicable only when consideration
for issue of shares was received by a Company from a ‘Resident’ person
·
The
Finance Act, 2023 amended Section 56(2)(viib) to bring into its ambit consideration
received by Company from ‘Non- Resident’ persons as well, in addition to ‘Resident’
person [amendment effective from 1 April 2024]
Notification No. 81/2023 dated September 25, 2023
◾
Pursuant to Finance Act, 2023 amendment, Central
Board of Direct Taxes (CBDT) vide Notification dated May 26, 2023 released the draft
of amendments to Rule 11UA for public consultation
◾
Now, CBDT vide Notification No. 81/2023 [GSR
685(E)] dated September 25, 2023 has released the Income-Tax (Twenty first Amendment),
Rules 2023, thereby amending the provisions of Rule 11UA
The
amended rules are effective from the date of the aforesaid Notification i.e. immediately.
Snapshot
of Amendment.
Equity
share value for resident investor.
◾
Rule
11UA(2)(A)
The FMV of Unquoted Equity shares for purpose of Section 56(2)(viib) of the Act
shall be the value as determined
under sub-clauses (a), (b), (c) and (e),
at the option of the taxpayer, as on valuation date, where consideration is received from a RESIDENT
person
◾
Sub-clauses (a) and (b) deal with valuation methods
under generic circumstances i.e. without any stipulation on recipient or payer, being as under:
◾
Sub-clause (a) Adjusted
Net Asset Value Method, basis the value of assets and liabilities in the balance sheet of the Company
[retained from erstwhile Rule 11UA]
[Refer Annexure A]
◾
Sub-clause (b) Discounted
Free Cash Flow Method, as determined by Merchant Banker
[retained from erstwhile Rule 11UA]
◾
Sub-clauses (c) and (e) deal with valuation methods for specific circumstances,
as discussed below
◾
Sub-clause (c) Venture Capital
Undertaking transaction value
◾
Where consideration is received by Venture
Capital Undertaking (VCU) from a Venture Capital Fund (VCF) or Venture Capital Company (VCC) or a Specified Fund (SF),
the price of equity shares, at the option of VCU, may be taken as FMV of the
equity shares to the extent
it does not exceed
the aggregate consideration that is received
◾
The above FMV is acceptable if the
consideration is received by the VCU from VCF/ VCC/ SF, within 90 days, either
before or after, from the date of issue of shares which are subject
matter of valuation
◾
For instance, if VCU received INR 50,000
from VCC for issue of 100 equity shares at INR 500 per share on September 30,
2024, then such VCU can issue 100
shares at rate of INR 500 per share (as above) to any other investor within a
period of 90 days before or after receipt of such consideration amount from the VCC
i.e. in duration of July 2, 2024 to December
30, 2024
◾
Definition of ‘Venture Capital
Undertaking’, ‘Venture Capital
Fund’, ‘Venture Capital
Company’ and ‘Specified Fund’ to be adopted
from Explanation to Section 56(2)(viib) of the Act [Refer Annexure B]
◾
Sub-clauses (c) and (e) deal with valuation methods for specific circumstances,
as discussed below
◾
Sub-clause (e) Notified entity transaction value
◾
Where consideration is received by Company
from any entity notified under clause (ii) of First proviso to Section
56(2)(viib) (Notified Entity), the
price of equity shares, at the option of Company, may be taken as FMV of the
equity shares to the extent it does not exceed the aggregate consideration that is received from Notified Entity
◾
The above FMV is acceptable if the
consideration is received by the Company from the Notified Entity, within 90
days, either before or after,
from the date of issue of shares
which are subject
matter of valuation
◾
The list of entities
notified under clause (ii) of First proviso
to section 56(2)(viib) is available at following link – Notified Entities
◾
It
may be noted that sub-clauses (c) and
(e) are parallel in operation
Equity
share value for non-resident investor.
◾
Rule
11UA(2)(A)
The FMV of Unquoted Equity shares for purpose of Section 56(2)(viib) of the Act
shall be the value as determined
under sub-clauses (a), (b), (c), (d) and (e), at the option of the taxpayer, as
on valuation date, where the consideration is received
from a NON-RESIDENT person
◾
Accordingly, where consideration is
received from a Non-Resident person, apart from the methods and circumstances discussed in previous slides under
sub-clauses (a), (b), (c) and (e) relating to receipt of consideration from
Resident person, an additional method
as per sub-clause (d) is also available
◾
Sub-clause (d) Other Methods
◾
The FMV as
determined by the merchant
banker in accordance with any of the following
methods:
◾
Comparable Company
Multiple Method
◾
Probability Weighted
Expected Return Method
◾
Option Pricing
Method
◾
Milestone Analysis Method
◾
Replacement Cost Methods
◾
It may be noted that the Rules
neither define any of
the ‘Other Methods’ nor provide
any guidance or reference towards
adopting
the same
◾
Accordingly, in absence of specific guidelines, principles of interpretation may suggest to adopt the meaning of the
methods from generally acceptable parlance, as applied universally
◾
Interestingly, Institute of Chartered Accountants of India
(ICAI) Valuation Standards
(2018) provide guidance
on following methods:
◾
Comparable Company
Multiple Method
◾
Option Pricing
Method
◾
Replacement Cost Methods
◾
The International Private Equity and Venture Capital
Valuation Guidelines (December
2018) provide certain
guidance
on ‘Milestone Analysis
Method’
Snapshot
of Preference share value provision.
Resident
Investor
◾
Rule
11UA(2)(B)(i) The FMV
of Compulsorily Convertible
Preference Shares (CCPS) for purpose of Section 56(2)(viib) of the Act shall be the value as determined
according to sub-clauses (b), (c), and
(e) of Rule 2(A) at the option of
the taxpayer, as on valuation date OR based
on FMV of unquoted equity shares determined under Rule 2(A), at option
of taxpayer
◾
Accordingly, where consideration is received from a RESIDENT, the FMV of CCPS, at the option
of taxpayer, can be:
◾
Based on value of CCPS determined as per Discounted Free Cashflow Method [sub-clause (b)], VCU transaction value [sub-clause (c)]
or Notified entity
transaction value [ sub-clause (e)]; OR
◾
Based on FMV of unquoted equity
shares of taxpayer
determined as per Rule 11UA(2)(A) of Rules [discussed in previous slides]
Non-Resident
Investor
◾
Rule
11UA(2)(B)(ii) The FMV of Compulsorily Convertible
Preference Shares (CCPS) for purpose of Section 56(2)(viib) of the Act shall be the value as determined
according to sub-clauses (b), (c), (d) and (e) of Rule 2(A) at the option of the taxpayer, as on valuation
date OR based on FMV of unquoted
equity shares determined under Rule 2(A), at option of
taxpayer
◾
Accordingly, where the consideration is
received from a NON-RESIDENT, the FMV of CCPS, at the option of taxpayer, can be:
◾
Based on value of CCPS determined as per
Discounted Free Cashflow Method [sub-clause (b)], VCU transaction value
[sub-clause (c)], Other Methods
[sub-clause (d)], or Notified entity
transaction value [ sub-clause (e)]; OR
◾
Based on FMV of unquoted equity
shares of taxpayer
determined as per Rule 11UA(2)(A) of Rules [discussed in previous slides]
Deemed
valuation date
◾
The FMV of
the shares for purpose of Section 56(2)(viib) is to be determined as at the ‘valuation date’
◾
For purpose
of Rule 11UA, the ‘valuation date’ is defined
under Rule 11U(j) of the Rules as under:
"valuation date" means the date on which the property
or consideration, as the case may be, is received
by the assessee.
◾
The newly inserted Rule 11UA(3) provides that if
the date of merchant banker’s valuation
report, as required under Rule
11UA(2), is not more than 90 days prior to
the date of issue of shares under valuation, then at the option of the taxpayer,
such date shall be deemed to be the valuation date
◾
If the taxpayer adopts the option provided under Rule 11UA(3),
the provisions of Rule 11U(j) are not applicable
◾
It may be noted that the provisions of
deemed valuation date are applicable
only for valuation reports issued
under Rule 11UA(2) and not under
rule 11UA(1) of the Rules
Safe
harbour rule
◾
Under Section
56(2)(viib) read with erstwhile Rule 11UA, if the consideration received for the shares exceeded
the FMV of
such shares
as determined under Rule 11UA, then the entire excess
consideration was chargeable to tax
◾
The newly inserted
Rule 11UA(4) provides some respite
in form of safe harbour
rules towards consideration received upon issue
of Unquoted Equity
shares or CCPS
◾
Where consideration is received from a RESIDENT
◾
As per Rule 11UA(4)(i) if the issue
price of shares exceeds
the FMV determined according to the Adjusted Net Asset Value Method [Rule 11UA(2)(A)(a)] or Discounted Free
Cashflow Method [Rule 11UA(2)(A)(b)] by
10% of such FMV determined, then such
issue price shall be deemed to be FMV of shares for purpose of Section 56(2)(viib)
◾
Where consideration is received from a NON-RESIDENT
◾
As per Rule 11UA(4)(ii) if the
issue price of shares exceeds the FMV determined according to the Adjusted
Net Asset Value Method [Rule
11UA(2)(A)(a)] or Discounted Free Cashflow Method [Rule 11UA(2)(A)(b)] or Other Methods [Rule 11UA(2)(A)(d)] by 10% of such FMV determined, then such issue price shall be deemed to be FMV of shares for
purpose of Section 56(2)(viib)
◾
Issue price is
defined to mean consideration received by Company (taxpayer) for one share
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