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Rule 11UB of Income Tax Rules 1962: Fair Market Value of Assets in Certain Cases

Rule 11UB : Fair market value of assets in certain cases
(Chapter: II, Part I. - Determination of value of assets and apportionment of income in certain cases)


(1) The fair market value of asset, tangible or intangible, as on the specified date, held directly or indirectly by a company or an entity registered or incorporated outside India (hereafter referred to as "foreign company or entity"), for the purposes of clause (i) of sub-section (1) of section 9, shall be computed in accordance with the provisions of this rule.

(2) Where the asset is a share of an Indian company listed on a recognised stock exchange on the specified date, the fair market value of the share shall be the observable price of such share on the stock exchange :
  Provided that where the share is held as part of the shareholding which confers, directly or indirectly, any right of management or control in relation to the aforesaid company, the fair market value of the share shall be determined in accordance with the following formula, namely:—
  Fair market value = (A+B)/C
  Where;
  A = the market capitalisation of the company on the basis of observable price of its shares quoted on the recognised stock exchange;
  B = the book value of liabilities of the company as on the specified date;
  C = the total number of outstanding shares :
  Provided further that where, on the specified date, the share is listed on more than one recognised stock exchange, the observable price of the share shall be computed with reference to the recognised stock exchange which records the highest volume of trading in the share during the period considered for determining the price.

(3) Where the asset is a share of an Indian company not listed on a recognised stock exchange on the specified date, the fair market value of the share shall be its fair market value on such date as determined by a merchant banker or an accountant in accordance with any internationally accepted valuation methodology for valuation of shares on arm's length basis as increased by the liability, if any, considered in such determination.

(4) Where the asset is an interest in a partnership firm or an association of persons, its fair market value shall be determined in the following manner, namely:—
(i) the value on the specified date of such firm or association of persons, shall be determined by a merchant banker or an accountant in accordance with any internationally accepted valuation methodology as increased by the liability, if any, considered in such determination;
(ii) the portion of the value computed in clause (i) as is equal to the amount of its capital shall be allocated among its partners or members in the proportion in which capital has been contributed by them and the residue of the value shall be allocated among the partners or members in accordance with the agreement of partnership firm or association of persons for distribution of assets in the event of dissolution of the firm or association, or, in the absence of any such agreement, in the proportion in which the partners or members are entitled to share profits and the sum total of the amount so allocated to a partner or member shall be treated as the fair market value of the interest of that partner or member in the firm or the association of persons, as the case may be.
(5) The fair market value of the asset other than those referred to in sub-rules (2), (3) and (4) shall be the price it would fetch if sold in the open market on the specified date as determined by a merchant banker or an accountant as increased by the liability, if any, considered in such determination.

(6) The fair market value of all the assets of a foreign company or an entity shall be determined in the following manner, namely:—
(i) where the transfer of share of, or interest in, the foreign company or entity is between the persons who are not connected persons, the fair market value of all the assets owned by the foreign company or the entity as on the specified date, for the purpose of such transfer, shall be determined in accordance with the following formula, namely:—
  Fair market value of all assets = A+B
  Where;
  A = Market capitalisation of the foreign company or entity computed on the basis of the full value of consideration for transfer of the share or interest;
  B = Book value of the liabilities of the company or the entity as on the specified date as certified by a merchant banker or an accountant;
(ii) in any other case, if, —
(a) the share of the foreign company or entity is listed on a stock exchange on the specified date, the fair market value of all the assets owned by the foreign company or the entity shall be determined in accordance with the following formula, namely:—
  Fair market value of all the assets = A + B
  Where;
  A = Market capitalisation of the foreign company or entity computed on the basis of the observable price of the share on the stock exchange where the share of the foreign company or the entity is listed;
  B = book value of the liabilities of the company or the entity as on the specified date:
  Provided that where, as on the specified date, the share is listed on more than one stock exchange, the observable price in the aforesaid formula shall be in respect of the stock exchange which records the highest volume of trading in the share during the period considered for determining the price;
(b) the share in the foreign company or entity is not listed on a stock exchange on the specified date, the value of all the assets owned by the foreign company or the entity shall be determined in accordance with the following formula, namely:—
  Fair market value of all the assets = A+ B
  Where;
  A = fair market value of the foreign company or the entity as on the specified date as determined by a merchant banker or an accountant as per the internationally accepted valuation methodology;
  B = value of liabilities of the company or the entity if any, considered for the determination of fair market value in A.
(7) Where fair market value has been determined on the basis of any interim balance sheet referred to in the first proviso to clause (ix) of the Explanation, then the fair market value shall be appropriately modified after finalisation of the relevant financial statement in accordance with the applicable laws and all the provisions of this rule and rules 11UC and 114DB shall apply accordingly.

(8) For determining the fair market value of any asset located in India, being a share of an Indian company or interest in a partnership firm or association of persons, all the assets and business operations of the said company or partnership firm or association of persons shall be taken into account irrespective of whether the assets or business operations are located in India or outside.

(9) The rate of exchange for the calculation in foreign currency, of the value of assets located in India and expressed in rupees shall be the telegraphic transfer buying rate of such currency as on the specified date.

Explanation : For the purposes of this rule and rule 11UC,—

(i) "accountant" means an accountant referred to in the Explanation to sub-section (2) of section 288 and for the purposes of sub-rule (6) includes any valuer recognised for undertaking similar valuation by the Government of the country where the foreign company or the entity is registered or incorporated or any of its agencies, who fulfils the following conditions, namely:—
(a) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then,—
(i) the entity or its affiliates has presence in more than two countries; and
(ii) the annual receipt of the entity in the year preceding the year in which valuation is undertaken exceeds ten crore rupees;
(b) if he is pursuing the profession of accountancy individually or is a valuer then,—
(i) his annual receipt in the year preceding the year in which valuation is undertaken, from the exercise of profession, exceeds one crore rupees; and
(ii) he has professional experience of not less than ten years.
(ii) "connected person" shall have the meaning as assigned to it in clause (4) of section 102;
(iii) "right of management or control" shall include the right to appoint majority of the directors or to control the management or policy decision exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
(iv) "telegraphic transfer buying rate" shall have the meaning as assigned to it in the Explanation to rule 26;
(v) "observable price" in respect of a share quoted on a stock exchange shall be the higher of the following:—
(a) the average of the weekly high and low of the closing prices of the shares quoted on the said stock exchange during the six months period preceding the specified date; or
(b) the average of the weekly high and low of the closing price of the shares quoted on the said stock exchange during the two weeks preceding the specified date;
(vi) "book value of the liabilities" means the value of liabilities as shown in the balance-sheet of the company or the entity as the case may be, excluding the paid-up capital in respect of equity shares or members' interest and the general reserves and surplus and security premium related to the paid up capital;
(vii) "specified date" shall have the meaning as assigned to it in clause (d) of Explanation 6 to clause (i) of sub-section (1) of section 9;
(viii) the terms "merchant banker" and "recognised stock exchange" shall have the meaning as assigned to them in rule 11U;
(ix) "balance sheet",—
(a) in relation to an Indian company, means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the specified date which has been audited by the auditor of the company appointed under the laws relating to companies in force; and
(b) in any other case, means the balance-sheet of the company or the entity (including the notes annexed thereto and forming part of the accounts) as drawn up on the specified date and submitted to the relevant authority outside India under the laws in force of the country in which the foreign company or the entity is registered or incorporated:
  Provided that where the balance-sheet as on the specified date is not drawn up, pending finalisation of accounts, as mentioned in clauses (a) and (b), the balance-sheet shall mean an interim balance-sheet drawn up as on the specified date and approved by the board of directors of the company or an equivalent body in case of any other entity:
  Provided further that where the specified date is the date referred to in sub-clause (ii) of clause (d) of Explanation 6 to clause (i) of sub-section (1) of section 9, the balance-sheet means the balance-sheet as drawn up on the specified date and certified by an accountant.


Extra Notes for Readers:

- Rule 11UB was introduced by the Income Tax (19th Amendment) Rules, 2016 w.e.f. 28-6-2016



Reference/Source: Check at Income Tax site for latest version of the Rules - link

This page was last updated on 17th October 2016.
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