TaxTMI 
TaxTMI 
2013 (9) TMI 802
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.... (L&T Infocity Ascendas Ltd.) on May 30, 2002. The assessee and M/s. LTIL each held 25,000 equity shares of Rs. 10 each and 9.88 lakhs preferential shares of Rs. 100 each in LTIAL. LTIAL thereafter pursued the business of developing information technology parks. On November 1, 2006, an agreement was entered by the assessee and LTIL with one M/s. Ascendas Property Fund India (APFI) selling their respective holdings in LTIAL to M/s. APFI. At this juncture it should be noted that the assessee and APFI were associated enterprises as defined in Chapter X of the Income-tax Act, 1961. Consideration received from M/s. APFI on sale of the shares, coming to Rs. 79 crores was split between the assessee and LTIL equally. The assessee had also incorporated another company called Ascendas (India) IT Park Ltd (AITPL) on November 3, 2003 along with Tamil Nadu Industrial Development Corporation Ltd. (TIDCO). The assessee had 84.97 per cent. of shares in the said company whereas TIDCO had 11 per cent. Ascendas Property Management Services (India) Private Ltd., another company falling within the group of the assessee held 4.02 per cent. M/s. AITPL was also into development of information technolog....
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....parable transaction. According to her, the relationship of the assessee with M/s. LTIL which was through common participation in LTIAL, automatically resulted in LTIL and the assessee becoming associated enterprises. Further, according to her, sale of shares effected by LTIL to APFI was intimately connected to the sale of shares by the assessee to APFI. Thus, she reached a prima facie opinion that internal comparable uncontrolled price adopted by the assessee was not in accordance with the spirit of Chapter X of the Act, in so far as pricing of the shares of LTIAL was concerned. As for the price of shares' AITPL sold to APFI, the Transfer Pricing Officer was of the opinion that share price as valued by the chartered accountant based on CCI valuation guidelines, could not be accepted. As per the Transfer Pricing Officer the price of Rs. 26.07 per share received by the assessee for selling the shares was computed based on a single year data. Again as per the Transfer Pricing Officer, the guidelines and rules for valuation of shares for CCI, were not relevant for the purpose of ascertaining the arm's length price under the Transfer Pricing Rules. The purpose of CCI valuation guideline....
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....in accordance with the report of the Transfer Pricing Officer, and forwarded to the assessee. The assessee, thereupon moved the Dispute Resolution Panel (DRP) objecting to the draft assessment order. Vis-a-vis sale of shares of LTIAL, argument of the assessee once again was that shares in the same company were also transferred by LTIL, which was not at all an associated enterprise and, therefore, comparable uncontrolled price method which was adopted by the assessee was unjustly rejected. In so far as the value of shares of AITPL was concerned, the assessee once again relied on the valuation certificate issued by the chartered accountant as per CCI valuation guidelines, for justifying the price. Further, as per the assessee the Transfer Pricing Officer had adopted certain erroneous parameters while working out the value of enterprise based on DCF method. The cost of debt of LTIAL was taken at 7.5 per cent. without considering the actual interest rate. Weighted average cost of capital (WACC) for applying the discount factor was worked out based on book value and not market value. The Transfer Pricing Officer had taken cost of equity at 11 per cent. without following the capital a....
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....ing out the future cash flows. The assessee's objections before the Dispute Resolution Panel on the quantum of future cash flows considered by the Transfer Pricing Officer based on increased lease rentals also did not find any favour with the Dispute Resolution Panel. As per the Dispute Resolution Panel income and expenses considered by the Transfer Pricing Officer for working out the future cash flows were both increasing in the same proportion and was realistic. In this view of the matter the Dispute Resolution Panel confirmed the draft assessment order. The Assessing Officer thereafter completed the assessment accordingly. Now, before us the authorised representative strongly assailing the orders of the lower authorities, has preferred two different lines of arguments. The first set of arguments are relevant for transfer of shares by LTIAL and the second set of arguments are relevant for transfer of shares of both AITPL as well as LTIAL. Adverting to the first line of argument, the authorised representative submitted that comparable uncontrolled price method was the most appropriate one since LTIL was not an interested party nor an associated enterprise. According to him, the....
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....rther, according to him, the cost of debt was considered at 7.5 per cent. by the Transfer Pricing Officer whereas the actual interest paid by the assessee was 11.50 per cent. as on the date of transaction, which thereafter increased to 12.75 per cent. Cost of equity, was considered at 11.5 per cent. based on the agreement entered by the assessee with TIDCO whereby TIDCO would have earned 11.5 per cent. return on its equity investment, if it exercised an option to divest its investments at a later date. However, according to the authorised representative, this was not a correct methodology since TIDCO as a general practice never divested the shares held by it. The shares issued to TIDCO were in lieu of the land received from them. Such land was given to AITPL for the particular purpose of developing software parts and could be used for nothing else. TIDCO therefore always ensured that they had a say in the management of AITPL. Continuing his arguments the learned authorised representative stated that lower authorities had committed a number of errors while working out the weighted average cost of capital. According to him the weighted average cost of capital would always lie between....
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....ear at the first blush appropriate for a transfer pricing analysis. The resale price method cannot be applied since the shares sold by the assessee were in turn not sold to nobody else. The cost plus method cannot be applied since the assessee had made no value addition to any item. The original cost per share was only its face value and the cost incurred, which resulted in increase of its intrinsic value cannot be correctly ascertained. Neither the profit split method nor transactional net marginal method can be used. Similarly, placed companies doing similar share transactions are hard to find. Even if we accept the stand of the assessee, comparable uncontrolled price method could at the best be adopted, for the sale of shares in LTIAL only and not for that of AITPL. No doubt in LTIAL, the assessee and LTIL were holding equal shares. Argument of the assessee that LTIAL was not an associated enterprise of the assessee is without doubt technically true. Hence, its contention that the price at which LTIL sold the shares to APFI is a perfectly comparable uncontrolled price, does appear at the first look very attractive. However, it is, in fact, not so. Sub-section (2) of section 9....
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....ns or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method ; (d) profit split method ; (e) transactional net margin method ; (f) such other method as may be prescribed by the Board." It thus appears that following one of the methods mentioned in (a) to (f) above are mandatory. However, in our opinion, the purpose of enactment of Chapter X, is to benchmark an international transaction with the fair market value of such transaction, so as to ensure that there are no profit transfers between parties in different jurisdictions effectually circumventing taxes. Thus, the purpose of transfer pricing rules, is to verify whether the prices at which an international transaction has been carried out are com- parable with the market value of the underlying asset or commodity or service. It may be true that difficulties might arise in ascertaining the fair market value, but such difficulties should not be a reason for not adopting the rules and methods prescribed in this regard. This might require some subtle adjustments in the methodology prescribed for evaluation of an in....
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....r valuation in a transfer pricing matter. Such rules were only intended for application of section 56 and never intended for arriving at a fair market value for comparing an international transaction. It is to be noted that learned counsel for the assessee, did submit that if the comparable uncontrolled price method and CCI guidelines method suggested by the assessee were not acceptable, DCF method could be adopted but with certain riders. His objections were with regard to the factors considered by the Transfer Pricing Officer for the DCF analysis. The discounted cash flow for valuation is an accepted international methodology for valuing an enterprises and for determining the value of the holding of an investor. Investors are interested in ascertaining the present value of their investments, considering the future earning potential of the underlying asset. In our opinion, ascertaining the net present value of future earnings is all the more appropriate where market value of an investment is not readily ascertainable by conventional methods. In the assessee's case both companies whose shares were sold were private limited companies which had no ready market for its equity share....
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....y risk premium Value of operating asset + Non operating asset = Value the enterprise Value of enterprise - Value of debt = Value of equity It is obvious that difficult parts are (i) determining the future cash flows, (ii) determining the cost of equity, (iii) determining the cost of debt, and (iv) determining the period of discounting. Here both parties have agreed that 20 years is an appropriate one and hence the last mentioned difficulty is not there. Future cash-in-flow also can be reasonably ascertained since major part of the earnings of the assessee are rental or lease income and these are predictable with reasonable accuracy. Similarly, cash-out-flow also can be reasonably ascertained by virtue of the very nature of the business of the assessee. Problem is with regard to determination of the cost of equity and debt. The Transfer Pricing Officer had adopted 7.5 per cent. as the cost of debt whereas as per the assessee it was 11.5 per cent. The Transfer Pricing Officer had determined the cost of equity at 11.5 per cent. on AITPL and 10 per cent. on LTIA....
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....ve some amount of objectivity it is imperative that errors in calculations are avoided and variables are considered within a reasonable limit so that acceptable values can be arrived at. Even a slight change in the discounting ratio will result in substantial change in the valuation of the company. If the arm's length price of the shares are worked out without considering a reasonable value for the enterprise, it will result in injustice. As already noted by us here, there is no dispute with regard to cash inflows and cash out-flows. Only dispute is only with regard to weighted average cost of capital and the figures adopted for working out the same. Might be it is true that there were other mistakes also in the working out of the Transfer Pricing Officer. We are, therefore, of the opinion that the issue of working out of value of the companies so as to ascertain the arm's length price of the shares requires a relook by the Assessing Officer and the Transfer Pricing Officer. With regard to the argument of the learned authorised representative that a discount for illiquidity of shares should be given, this cannot be accepted for the reason that when weighted average cost of capital ....