Transfer pricing valuation of unquoted shares must be commercially sound and company-specific, not driven by generic macro assumptions.

Valuation of unquoted shares for transfer pricing must rest on a rational, commercially sound basis reflecting profit-earning capacity and prospective earning potential, not on a single mechanical input. A generic macro-economic growth report cannot be applied without company-specific and industry-specific analysis, especially where the assessee supports its valuation with expert reports and market research. On the facts described, the higher adjustment lacked a sufficiently reliable foundation and the assessee's adopted valuation was accepted.

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Issues: Whether the transfer pricing adjustment made on sale of shares of an unquoted company, by substituting the assessee's valuation with a higher perpetuity growth rate and related valuation assumptions, was justified.

Analysis: The valuation of unquoted shares has to rest on a rational and commercially sound basis, with focus on profit-earning capacity and prospective earning potential rather than any single mechanical input. A generic external report on long-term economic growth could not safely be applied to a specific company without addressing company-specific and industry-specific circumstances. The valuation material filed by the assessee, including expert reports and market research, provided some evidentiary support for the adopted growth assumptions, whereas the departmental approach relied largely on a broad macro-economic report and did not adequately meet the assessee's objections regarding negative historical growth, industry conditions, and the relationship between growth rate, cost of equity, and final valuation. In these circumstances, the higher transfer pricing adjustment was not supported by a sufficiently reliable foundation.

Conclusion: The transfer pricing adjustment was unsustainable and the valuation adopted by the assessee was accepted; the issue was decided in favour of the assessee.

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