TaxTMI 
TaxTMI 
2019 (3) TMI 677
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....at on the facts and circumstances of the case, the transfer pricing adjustment made qua capital gains arising on sale of shares by the appellant foreign company to another non resident associated enterprise, being violative of the non discrimination clause under Article 25(1) of the India-Italy Tax Treaty ["the Treaty"] calls for being deleted." 4. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. 5. The appellant company is a company incorporated under the laws of Italy and is engaged in the business of construction, design and engineering and implementation services to Oil & Gas, Power, Pharmaceuticals and Infrastructure industries. 6. Technip India Limited is a company incorporated in June 1998 under the Companies Act, 1956, as a joint venture between M/s Southern Petrochemical Industries Corporation Ltd (SPIC) and the appellant. Technip India is engaged in the business of executing lump sum turnkey and ....
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....7.08.2017, confirmed the addition proposed by the Assessing Officer. 14. Pursuant to the directions of the DRP, the AO framed final assessment order on 12.09.2017, wherein the income was assessed at Rs. 1,25,27,58,292/- as under: Adjustment proposed Amount Returned income of the appellant 43,71,22,520 Additions made by the AO in relation to the sale of shares of Technip India to Technip France 81,56,35,772 Total assessed income 1,25,27,58,292 15. Aggrieved by this, the assessee is before us. 16. We will first address to the additional ground mentioned elsewhere. 17. The ld. counsel for the assessee vehemently stated that the transfer pricing provisions under the Act do not apply to a transaction of transfer of shares entered into between two Indian companies. It is the say of the ld. counsel for the assessee that the capital gains arising to an Indian company upon transfer of shares to another Indian company is not subject to the rigors of transfer pricing. In support of his contention, the ld. counsel for the assessee placed reliance on Article 25 of India-Italy DTAA, which contains non-discrimination clause. In support of his contention, strong....
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....to persons not resident in that State any personal allowances, reliefs and reductions for taxation purposes which are by law available only to persons who are so resident. 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected in the same circumstances and under the same conditions. 5. In this Article, the term "taxation" means taxes which are the subject of this Convention." 20. Article 3 contains the general definition and in clause J, the term 'National' means any individual possessing the nationality of a contracting state and any legal person, partnership or association deriving its status from the law in force in the contracting state. 21. In the light of the aforementioned definition, let us now dissect Article 25(1). Nationals of a contracting ....
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....from transfer of capital asset and there is no power with the assessing officer to substitute such actual consideration with any notional consideration or fair market value of the asset transferred. In support of this contention, reliance was placed on several judicial decisions of the Hon'ble Supreme Court and the Hon'ble Delhi High Court. 26. In our considered opinion, on finding that there was an international transaction between the AEs, the Assessing Officer referred the matter to the TPO for determination of Arm's length Price. In our considered opinion, the Assessing Officer has not substituted actual consideration with notional consideration but has made adjustment as per the report of the TPO after receiving directions from the DRP. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. 27. Section 92C(4) provides "where an Arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income having regard to the ALP so determined. This means that after determining the ALP, the total income of the assessee ....
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.... 40.50 36.78 34.07 34.07 Add: Deferred Tax adjustment 1.19 1.68 -1.49 0.00 0.00 Add: (Increase)/ Decrease in WC 16.25 -27.38 -4.95 -3.87 -3.80 0.00 Less: Capital Expenditure -41.10 -24.36 -24.13 -24.13 -24.13 -34.07 Free Cash Flow to Firm 150.47 trl50.ll i 175.17 / 177.28 177.61 171.47 WACC 18.12% 0.85 0.72 0.61 0.51 ^0.43 0.43 127.90 108.08 106.85 90.41 76.37 Value of Explicit Period (A) 509.57 Value of Perpetuity (B) 471.85 [Free cash flow (1+growth rate) / (WACC - growth rate)] * Pv factor for 5th year) = [171.47 (1+0.02) / (18.12% - 2%)]*0.43 = 471.85. Total Enterprise Value (C = A+B) 981.41 Growth rate is 2 percent Add: Cash & Cash Equivalents (D) 371.08 Equity Value (E=C+D) ....
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....urn 8.54 Rate adopted by the appellant accepted by the TPO Market Risk Premium 4.63 Not accepted by the TPO and recomputed based on performance of the sensex since year of incorporation of the company i.e. from 1998 Specific Company Risk 1.3 Rate adopted by the appellant accepted by the TPO. Based on reported beta of selected listed companies providing engineering, procurement and construction services to Oil and gas, refinery industries Discounting rate 14.47 33. Two distinguishing features are vivid from the aforesaid share valuation charts. Firstly, share valuation as per the assessee is Rs. 396.42 whereas that of the TPO is 463.19 and, secondly, the market risk premium adopted by the assessee is 8.09, whereas the same has been taken by the TPO at 4.63. 34. In so far as afore said valuation per share is concerned, we find that the shares of the appellant company are highly ill-liquid and, therefore, independent valuers have allowed illiquidity discount @ 15%, which comes to 202.88. However, the TPO has not deducted any ill-liquidity discount. In our considered view, the TPO should have allowed rebate for illiquidity since the shares ....
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..... The next quarrel relates to the adjustment of goodwill of Rs. 61.74 crores. 40. It seems that the TPO has been carried away with the consolidated balance sheet of the parent company. As mentioned elsewhere, in March 2010, the appellant acquired 50% of the paid-up share capital of Technip India from SPIC for a total consideration of Rs. 80 crores. Technip SA France is the ultimate parent company of the group. In its consolidated financial statements for the year ended 31.12.2010, Technip SA France recognized 'Goodwill' of 9.8 million Euros, equivalent to Rs. 61.74 crores. Taking a leaf out of this, the TPO has alleged that goodwill amounting to 9.8 million Euros equivalent to Rs. 617,400,000 has been recognized by Technip SA, France, and, therefore, on sale of 100% of paid up share capital of Technip India by Technip Italy to Technip France, only goodwill of 50% shares has been considered in the share valuation. Accordingly, addition of Rs. 61.74 crores was made by the TPO to amount of sale consideration received by the assessee. 41. We are of the considered opinion that when the fair value is determined in accordance with the discounted cash flow [DCF] methodology, subsumes....
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....r the same has been accounted for separately or not. Therefore, any goodwill historically recognized pursuant to an accounting requirement cannot be separately added to the fair value of business determined in accordance with DCF methodology. In the Applicant's case, goodwill was not even appearing in the financial statements of Technip India and therefore, there is no question of including the same while determining the fair market value under DCF methodology. 46. Accordingly, fair valuation of Rs. 396.42 per share of Technip India undertaken by an independent Valuation Expert/ Chartered Accountant subsumes fair value of entire business of Technip India including all intangibles, including goodwill. Hence, there is no need to separately add the value of goodwill to the amount of sales consideration. 47. Last quarrel relates to adjustment on account of difference in exchange rate of Rs. 46,02,772/-. 48. As per the share purchase agreement placed at pages 217 to 218 of the paper book, the aggregate purchase price for all the shares is taken at 1,14,96,18,000/- equivalent to 16798439.41 Euros. The TPO has erroneously taken the value of share transaction in Euros whereas the ....
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....inds that no interest is leviable on the respondent assessees under Section 234B, even though they fled returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201 and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. " It may be pointed out that the Finance Act, 2012, w.e.f. 1.4.2012 added proviso below section 209(1)(d) of the Act. But the said proviso is applicable from assessment year 2013-14 and, therefore, prospective in operation. 28. In our understanding, the insertion of the proviso cannot be considered to have retrospective effect so as to expose a non-resident company to levy of interest u/s 234B of the Act for the assessment years prior to assessment year 2013-14. In the light of the above, we direct the Assessing Officer....