Transfer pricing under DCF valuation: goodwill cannot be separately added, and section 234B interest was held not leviable.

Transfer pricing scrutiny under the India-Italy DTAA was held not to violate Article 25 merely because the taxpayer was a non-resident, as comparable scrutiny would apply to similarly placed resident taxpayers. In computing capital gains on share transfers, the arm's length price adjustment was treated as a transfer pricing adjustment under sections 92 and 92C, not as a substitution of actual consideration under the capital gains provisions. Where shares were valued under the DCF method by independent valuers, separate additions for goodwill and exchange-rate difference were deleted as unsupported and amounting to double counting. Interest under section 234B was held not leviable on the non-resident assessee where tax was deductible at source.

---

---

Issues: (i) Whether the transfer pricing adjustment offended the non-discrimination clause in Article 25 of the India-Italy DTAA. (ii) Whether, in computing capital gains on transfer of shares, the Assessing Officer could substitute actual consideration with notional consideration through arm's length price adjustment under the transfer pricing provisions. (iii) Whether the valuation adjustments made by the TPO, including addition towards goodwill and exchange-rate difference, were sustainable where the shares were valued under the DCF method by independent valuers. (iv) Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Issue (i): Whether the transfer pricing adjustment offended the non-discrimination clause in Article 25 of the India-Italy DTAA.

Analysis: Article 25 protects a national of one contracting state from being subjected in the other state to taxation that is more burdensome than that imposed on nationals of the other state in the same circumstances. The transfer pricing provisions apply where an Indian resident enters into international transactions with associated enterprises. The treatment of the assessee was not shown to be discriminatory merely because it was a non-resident company, since comparable transfer pricing scrutiny would also apply to similarly placed Indian taxpayers.

Conclusion: The challenge based on Article 25 failed and the transfer pricing proceedings were upheld.

Issue (ii): Whether, in computing capital gains on transfer of shares, the Assessing Officer could substitute actual consideration with notional consideration through arm's length price adjustment under the transfer pricing provisions.

Analysis: The computation of income from an international transaction is required to be made having regard to arm's length price under sections 92 and 92C. The adjustment was not treated as a substitution of actual consideration under section 45 or section 48 in the ordinary capital gains sense, but as a transfer pricing adjustment made after reference to the TPO and directions of the DRP.

Conclusion: The objection to substitution of actual consideration with notional consideration was rejected.

Issue (iii): Whether the valuation adjustments made by the TPO, including addition towards goodwill and exchange-rate difference, were sustainable where the shares were valued under the DCF method by independent valuers.

Analysis: The assessee's valuation was supported by independent DCF reports. The TPO did not undertake a proper counter-valuation and also failed to allow illiquidity discount while changing the market risk premium. Goodwill is inherently embedded in a DCF valuation because the method captures the business as a going concern and already reflects intangible value; separate addition of goodwill amounts to double counting. The exchange-rate adjustment was also unwarranted because the transaction was denominated in Indian currency and the TPO proceeded on an incorrect currency basis.

Conclusion: The valuation additions on account of goodwill, exchange rate and the related transfer pricing adjustments were deleted in favour of the assessee.

Issue (iv): Whether interest under section 234B of the Income-tax Act, 1961 was leviable on the non-resident assessee.

Analysis: The income had been received after tax deduction at source, and the co-ordinate bench precedent applied the principle that where tax was deductible at source, interest under section 234B was not leviable on the non-resident assessee for the relevant assessment year.

Conclusion: Interest under section 234B was held to be not leviable.

Final Conclusion: The appeal succeeded substantially on the merits of the transfer pricing additions and on interest under section 234B, while the treaty-based discrimination challenge was rejected; overall, the assessee obtained partial relief.

Ratio Decidendi: Where the DCF method is adopted for share valuation, goodwill is ordinarily embedded in the valuation and cannot be separately added again, and transfer pricing adjustments on an international transaction do not become discriminatory merely because the taxpayer is a non-resident.

---