Companies Get Tax Demands On ‘High’ Premiums In Fdi, M&A & Share Allotment Deals – The Economic Times

After issuing notices in foreign direct investment (FDI) situations, the taxman has now started raising tax demands that could run into hundreds of crores in various cross-border investment situations and in investments by Indian companies in their subsidiaries.

Several companies—that have received investments, invested in subsidiaries, issued preference shares or borrowed money— have in the last few days got tax demands, asking them to pay tax on premiums over fair market value in such investments by March end next year. In all the situations, the taxman has challenged valuations of these deals, claiming that investments were made at more than the fair market value, people familiar with the development told ET.

Tax demands were made even in cases where premium of Rs 1 was paid per share over the fair market value, they said.

Even in some cases where Indian companies invested in their 100% owned subsidiaries, valuations were challenged and tax demands put up, say experts.

“The tax department has started challenging valuations in almost all deals including capital infusion, FDIs and M&As,” said Jeenendra Bhandari, partner at chartered accountancy firm MGB.

ET had first reported on December 22 that MNC units and Indian companies had started receiving tax notices for receiving fresh investments. The taxman had challenged valuations, claiming that the premiums paid over and above the fair market value were ‘unexplained cash credits’.

Fair market value is the price point at which the tax department thinks the deal should have happened. Some industry experts say that the way the taxman arrives at fair market valuation may not be accurate.

“Generally, during the course of assessment, the tax department uses actual data, available post valuation, to arrive at fair market value of shares. But the projections applied while carrying DCF (discounted cash flow) valuation and actual data may vary

for various reasons,” said Paras Savla, partner at tax consultancy KPB & Associates.

Bhandari of MGB said, “Valuation is not an exact science wherein you can calculate valuation to an exact number. Hopefully, post February 1, 2019 when valuations can only be done by registered valuers, the department could accept it without litigating.”

In all cases where tax demands are made, companies will have to either pay up by the end of the financial year or litigate. Even if they opt for litigation, companies will have to deposit 20% of the tax and interest demanded before it approaches the first appellate authority, industry trackers said. They said notices were also issued in situations where preference share allotment was done in some companies.

In some cases, even when a company had borrowed money from another group company or any other borrower, tax demands have been made. According to several people in the know, the tax department is scrutinising these deals suspecting that some black money transactions may have taken place.

“Notices are also issued where companies have availed loans from other companies,” said Amit Singhania, partner at law firm Shardul Amarchand Mangaldas. “In most cases, the tax department suspects some black money transaction may have taken place. However, the taxman must investigate further.”