Dear All,
I need your expert opinion on the following query:
Facts of the Case:
ABC India Private Limited (Indian Company) is Joint Venture between ABC Foreign Limited (Foreign Company) having 55% shareholding and PQR India Private Limited (Indian Company) having 45% shareholding.
The audited balance sheet of ABC India as at 31-3-2015 is as under:
Share Capital 2.00 Cr.
Reserves (2.67 Cr.)
Provisions 0.36 Cr.
Liabilities* 15.82 Cr.
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Total 15.51 Cr.
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Non-Current Assets 0.66 Cr.
Current Assets 14.85 Cr.
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Total 15.51 Cr.
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* Liability of ABC India includes Rs.8.00 Cr. towards amount payable to holding Company ABC Foreign.
During the year, ABC Foreign has gone into major restructuring and as a result is planning to sale its investment in ABC India to PQR India or to the Director of PQR India Mr. X (Indian Resident) at very concessional price of Rs.1.00 Lac only and also agreed to settle its dues of Rs.8.00 Cr for Rs.1.00 Lac only.
Additional Information:
As per FEMA Guidelines, the transfer of shares from Non-Resident to Resident has to be at a value lower than value determined as per Discounted Cash Flow (DCF) Method only and no other method is allowed.
Queries:
Option 1 : Shares bought by Director Mr.X
1. What will be tax implications in the hands of Mr. X, whether the difference between Fair Market Value (FMV) and Sale Price will be taxable?
2. If yes, how to determine the FMV of the shares. Whether DCF is acceptable or any other method needs to be followed. Please clarify the method and date of valuation.
3. Is there any option / wayout to ignore / reduce the tax burden, if any.
Option 2 : Shares bought by PQR India
1. What will be tax implications in the hands of PQR India, whether the difference between Fair Market Value (FMV) and Sale Price will be taxable?
2. If yes, how to determine the FMV of the shares. Whether DCF is acceptable or any other method needs to be followed. Please clarify the method and date of valuation.
3. Is there any option / wayout to ignore / reduce the tax burden, if any.
Further, what will be the implications in the following circumstances, if the valuation method for taxation purpose is other than DCF Method
1. The Valuation as per DCF Method is more than the Value as per other method
2. The Valuation as per DCF Method is less than the Value as per other method
Kindly reply to the above query along with justification with relevant sections, rules and case laws.
CAclubindia
