2018 (1) TMI 789 - AT - Income Tax

Assessee prevails in transfer pricing dispute, experts' valuation deemed reliable. Appeals allowed.

The Tribunal found in favor of the assessee, holding that the Transfer Pricing Officer and Dispute Resolution Panel's reliance on a generic report was ... Determining the price of shares of First Advantage Pvt. Ltd. - TPA - valuation of the shares sold - ALP determination - Held that:- In the case under appeal, estimate made by the assesse for determining PGR and the valuation of the shares is better and more convincing than the estimation made by the departmental authorities. The Hon’ble Bombay High Court in the case of Titan Time Products Limited (2015 (1) TMI 105 - BOMBAY HIGH COURT), has held that valuation reports of experts should not be rejected by the departmental authorities unless the assumption considered in the report are proved to grossly erroneous or another expert-opinion is obtained contradicting the earlier report. In the present matter the DRP has not given any cogent or valid reason for rejecting the four reports submitted by the assessee. We find that during the year under consideration there was buy back of shares of FAPL from FADV, Singapore, that the shares of FAPL were sold by the Singapore entity at the same rate at which they were sold by the assessee to the Singapore AE, that the TPO had examined the buyback agreement of the shares(i. e. sale of shares by Singapore entity to FAPL)and held that the transaction was at Arm’s length. If the subsequent transaction was found to be at fair market value then what was the justification for not treating the first transaction at arm’s length, is not coming out of the order of the TPO/DRP. It is one of the recognised principle of valuation that a high PGR would require a proportionate higher cost of equity. If the said theory is applied to the facts of the case under consideration, the cost of equity will have to be taken at minimum of 17.57% (for 7% PGR). Therefore, we agree with the argument advanced by the assessee that if cost of equity was taken at 17.57%, then the value of a share of FAPL would be lower than value determined by the independent valuer. In short the transaction i. e. valuation of shares of FAPL, was at Arm’s length. - Decided in favour of assessee Issues Involved:1. Determination of the Arm's Length Price (ALP) of shares sold by the assessee to its Associated Enterprise (AE).2. Validity of valuation methods and assumptions used by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).3. Consideration of Perpetuity Growth Rate (PGR) and Weighted Average Cost of Capital (WACC) in share valuation.4. Acceptance and rejection of valuation reports submitted by the assessee.Detailed Analysis:1. Determination of the Arm's Length Price (ALP) of shares sold by the assessee to its Associated Enterprise (AE):The primary issue involved was the determination of the price of shares of First Advantage Pvt. Ltd. (FAPL) sold by the assessee to its AE, First Advantage Pte Ltd. (FADV). The Assessing Officer (AO) and TPO found discrepancies in the valuation provided by the assessee and suggested an upward adjustment of Rs. 69.11 crores. The DRP upheld the AO/TPO’s decision, leading to the assessee filing an appeal.2. Validity of valuation methods and assumptions used by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP):During the transfer pricing proceedings, the TPO rejected the valuation report provided by the assessee from Shrenik & Associates, which was based on the methodology provided in the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulation 2000. The TPO instead relied on a report by PWC to adopt a PGR of 7%, which was later upheld by the DRP. The DRP questioned the assumptions made by the valuer based on management projections and the lack of independent audit or due diligence.3. Consideration of Perpetuity Growth Rate (PGR) and Weighted Average Cost of Capital (WACC) in share valuation:The TPO, initially suggesting a PGR of 4%, increased it to 7% based on the PWC report. The DRP supported this adjustment, arguing that the valuer did not factor in the inflation rate of the Indian economy. The assessee contended that the TPO did not provide cogent reasons for rejecting the lower PGR and did not consider the specific industry and company parameters. The assessee also provided an alternative valuation report from Duff and Phelps (D&P), which factored in appropriate perpetuity growth and weighted average cost of capital.4. Acceptance and rejection of valuation reports submitted by the assessee:The assessee submitted multiple valuation reports, including those from Shrenik & Associates, D&P, and IBIS World, which were rejected by the TPO/DRP without substantial justification. The Tribunal noted that the valuation by Shrenik & Associates was based on recognized methods and that the D&P report provided a detailed analysis of PGR and WACC. The Tribunal criticized the reliance on the generic PWC report, which did not specifically address the business carried out by the assessee.Conclusion:The Tribunal found that the TPO/DRP’s reliance on the PWC report was unjustified and that the valuation provided by the assessee’s experts was more reliable. The Tribunal held that the transaction of share valuation was at arm’s length and decided in favor of the assessee. The appeals filed by both the assessees were allowed.Order Pronounced:The order was pronounced in the open court on 05th January 2018.